Home Builders May Miss Out On Blossoming Recovery
Sales are picking up, but earnings power won't pick up without price gains.
Factory orders are rising, consumers are spending more money, and pending home sales rose 5.3% in March, reinforcing the notion that the economic recovery is real. Even so, the data couldn't calm the market's worry that home prices aren't going to rise, as home builders saw their shares tumble.
On Tuesday the Commerce Department reported orders to U.S. factories jumped 1.3% in March, surprising Wall Street which had forecast a drop of 0.1%. What's more, orders rose 3.1% when the temperamental transportation sector is excluded. The report comes as MasterCard announced a 24% jump in earnings thanks to heightened consumer spending. Furthermore, Wall Street learned Monday that consumer spending rose by 0.6% in March. (See "Wallets Open Across America.")
All this data came as the National Association of Realtors said its index of buyers who signed contracts to purchase a home rose to a reading of 102.9. The level was above the 101.5 anticipated by The Street, and represented a 21% increase from March 2009. The market though wasn't impressed.
"Home builder [stocks] are very moody and tend to trade not simply on volume but on price," says Merrill Ross, an analyst at BGB Securities. And price has been a problem. Despite the jump in pending sales, the public is still having a tough time obtaining financing, keeping a lid on prices and, consequently, profitability for builders. Beyond financing issues, home prices are also still being held down by the amount of foreclosures still working through the housing market.
"It continues to be extremely difficult for home builders to show real value creation, or in other words, selling homes at levels that can sustain profitability," Ross continues, noting that the one builder that produced break-out earnings in its latest report was D.R. Horton ( DHI - news - people ), "and it made four cents--the earnings aren't enough to provide price support."
D.R. Horton shares fell 2.3%, or 34 cents, to $14.63, Tuesday, a dip echoed among its peers. Lennar ( LEN - news - people ) slid 3.3%, PulteGroup ( PHM - news - people ) dropped 2.2%, KB Home ( KBH - news - people ) fell 3.9% and Hovnanian Enterprises ( HOV - news - people ) sunk 12.6%. To be sure, these names are also being influenced by the broader market, as the S&P 500 index slid 2.4% and the Dow Jones industrial average dropped 2% on a day when European debt woes rocked markets around the world.
The sector as a whole, as measured by the SPDR S&P Homebuilders ( XHB - news - people ) exchange-traded fund, slumped 3.3%, or 65 cents, to $18.86. The fund has risen 24.8% since the beginning of the year, but over the past two weeks things have become choppy.
Further complicating the issue is the market's loss of government incentives. Until April 30, Uncle Sam had been supporting sales with a first-time buyer tax credit of 10% of the purchase price, up to $8,000, along with a 10% credit, or up to $6,500, for those homeowners who buy and move. With only one monthly sales report left on deck before the impact of those incentives disappears, analysts fear substantial decreases that won't be overcome by the typical seasonal pop in buying.
"Strength in the spring was all but certain," says Dan Greenhaus, chief economic strategist at Miller Tabak. "A slump following the credit's expiration is likely although the exact timing is difficult to predict."
source: http://www.forbes.com/2010/05/04/homebuilder-housing-sales-markets-equities-dr-horton-hovnarian.html?boxes=Homepagechannels