Home Builder Shares Up Again Despite Weak Sales Data
Shares of home builders rose Wednesday, continuing Tuesday's pattern of gaining following weaker-than-expected sales figures, as investors speculate the data may signal a bottom.
The Commerce Department reported Wednesday that new-home buying dropped in July to a record low as inventories increased. Sales decreased 12.4% from the previous month to a seasonally adjusted annual rate of 276,000, while economists surveyed by Dow Jones Newswires had estimated sales would climb by 0.9% to 333,000. The steep decline reverses a pickup in sales registered in June.
But shares of home builders, which mostly hovered around the flatline prior to the data, climbed firmly into positive territory.
M.D.C. Holdings Inc. (MDC) recently traded 2.7% higher to $27.08, Ryland Group Inc. (RYL) rose 1.6% to $16.34 and KB Home (KBH) climbed 2.9% to $10.33. All three companies have lost more than a quarter of their value in the past year.
Wednesday's rise adds onto gains most of the sector saw Tuesday, despite the National Association of Realtors having reported existing-home sales fell to their lowest level in 15 years in July.
Jim Wilson, of JMP Securities, said it is a reasonable bet that given the current environment, "somewhere here we would hit a number that was so bad that the market would say it can't get any worse and that appears to be what we hit in the past two days."
The worse-than-expected housing data follow the expiration of a government tax credit program that offered certain buyers up to $8,000 to sign a contract by April 30, pulling demand forward. Deals originally needed to close by June 30, but lawmakers pushed that deadline to Sept. 30.
Susquehanna Financial Group analyst Jack Micenko said investors buying shares Wednesday likely believe there will be a U-shaped recovery--that if the worst news is past, things will get better. But he said the timeframe for improvement will likely be much longer than people think.
Micenko added that looking at the fundamentals of the market, including the supply/demand picture, restrictive mortgage financing and unemployment, there's a good chance the recovery could be L-shaped, bouncing along the bottom in terms of home sales for several quarters.
Meanwhile, also likely boosting sentiment in the sector Wednesday were results from luxury builder Toll Brothers Inc. (TOL).
Toll Brothers posted a surprise fiscal third-quarter profit, its first in nearly three years. The home builder's revenue fell far less than analysts expected although the company also saw a drop in contract signings. Toll's shares were recently up 4.8% to $16.97.
The company is the first builder to report a full quarter of results since the tax credit expired.
D.R. Horton Inc. (DHI) also got a boost of its own Wednesday as Ticonderoga Securities raised its stock-investment rating on the shares to buy from hold. "The home building industry has always been a bit rough and tumble, but the horrendous downturn has made it an even tougher down and dirty business," the firm said. "Horton's determination has resulted in clear improvement in operating metrics that, generally speaking, far surpass competitors."
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