Home Builders Weaker Than They Look (XHB, KBH, LEN, TOL)

Defying all logic, shares in some home builders jumped in 2009. The government incentives to home buyers and the low mortgage interest rates certainly contributed most to that rise. The SPDR S&P Homebuilders ETF (XHB) gained 27.7% in 2009. The growth so far in 2010 is about 21%.

Individual builders are having some troubles though. KB Home (KBH) reported a loss in the first quarter of 2010 nearly equal to its loss in the first quarter of 2009. Lennar Homes (LEN) reduced its year-over-year losses in the quarter by nearly 90%, putting a little glow back in the industry.

Another builder with headaches is Toll Brothers Inc. (TOL). According to an analyst at Ticonderoga Securities, the company owns too much expensive land, has too much debt to service, and competes in a high-cost business. Ticonderoga initiated coverage of Toll Brothers today with a ‘neutral’ rating.

Toll Brothers builds large, expensive luxury homes and the market for these homes has not benefitted from government incentives. Last year the average price for a new Toll Brothers house was $590,000, compared with an industry average of $256,000. But they’re getting the message.

Toll Brothers is building homes in Las Vegas with a selling price in the low $200,000s. The houses contain less than half the square footage of a typical Toll Brothers McMansion and don’t have all the luxury appointments like granite counter tops and maple floors.

Still, the number of houses climbs that Toll Brothers must sell at less than half the company’s usual selling price. And while there has been a small increase in interest from buyers, the numbers are not all that great.

The U.S. Commerce Department reported that new home sales in February fell 2.2% to a seasonally adjusted annual rate of 308,000. That’s the fourth month in a row that sales have fallen and the worst showing since 1963.

Worse for the builders, new homes coming on the market in February increased to 236,000. At the rate sales are going, it will take more than 9 months to sell all those houses.

Sustained recovery in U.S. home sales is still not in sight. If interest rates begin to rise, home sales could dry up even more.

Consumer confidence is rising somewhat, but it’s still weak. Housing prices rose slightly in January, but by just 0.3%. The housing price indexs remains 30% below its peak in May 2006. And unemployment concerns still weigh heavily on consumer confidence.

The rise in share prices of the home builders may only be a sign that there is still a lot of money chasing returns in the equity markets. Any other reason for the run-up in share prices is even more dubious.

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Article printed from InvestorPlace Media, https://investorplace.com/2010/03/housing-stocks-toll-brothers-tol-lennar-len-kb-homes-kbh/.

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