What’s up with housing stocks and homebuilders right now? With the governments homebuyer tax credit now expired and the economic recovery hitting something of a soft spot, many are worried what’s next for the beleaguered housing market. And as a consequence, homebuilder stocks like Lennar (LEN) and Toll Brothers (TOL) have come under some selling pressure lately. As a group, the homebuilders are among the weakest stocks on the board: The iShares Home Construction ETF (ITB) is down 4.4% from its Wednesday high while the broad market continues to push ahead.
There is good reason for this. Recent data from the housing market has been disappointing. Housing starts came in well under expectations for May, falling 10% led by a whopping 17% fall in single-family starts. The NAHB Housing Index fell from 22 in May to 17 in June as traffic of prospective buyers slow. It appears that the much feared double-dip in housing activity and home prices is upon us.
But has the bad news already been priced into the housing stocks sector? Megan McGrath at Barclays Capital thanks it has. Credit Suisse analyst Daniel Oppenheim is less optimistic and doesn’t see a material rebound in prices developing until the underlying demand trend shows some improvement. Let’s take a closer look.
Oppenheim’s latest survey of real estate agents shows his traffic index falling to 25 in June from 31.5 in May — capping the largest two-month decline in the history of the survey. So while improvement in activity from 2009’s dismal levels is probably still assured, the recovery will be slower than previously expected. New home sales are expected to total 400,000 this year (up 7% from 2009) before increasing to 465,000 in 2011 and 545,000 in 2012. Despite this growth, the level of sales would still be the lowest since 1991 — apart from the low levels reached in the current downtrend.
As a result of this slowdown, builders will likely be forced to turn to incentives and price cuts to encourage buyers — which will eat into profit margins. Whereas Oppenheim had expected four homebuilders
to achieve profitability in 2010, he now only sees DR Horton (DHI) and NVR (NVR) generating profits. Next week, we’ll get more visibility on the situation when existing and new home sales numbers for May are reported. Stay tuned.
Given that builders are now trading at a significant discount of 1.3 times book value, McGrath believes that the days following the release of the new home sales data will “provide an attractive entry point.” Her favorites are Lennar, DR Horton, and Ryland Group (RYL).
