Housing Recovery Still Far Off

This article originally appeared on Traders Reserve.

Homebuilder stocks were hit with a double whammy this week, as two separate independent reports told a tale of continued woe for the wounded housing sector. The first report came from real estate information company Zillow, which reported data showing that home prices are falling at their fastest rate since 2008. According to Zillow, average home prices are down 8% from a year ago, and 3% over the quarter. The company also said the percentage of homeowners in negative equity positions has surged to 28%, a new crisis high.

The second negative housing report came from HSBC Holdings (NYSE: HBC), which said that the widespread halt in home foreclosures following regulators’ concerns over problems with the foreclosure process at some banks is putting direct downward pressure on property prices. The bank said that tying up the flow of foreclosed homes coming onto the market has delayed recovery of prices, and adds to buyer uncertainty.

Taken together, the two reports paint a blurry picture of a housing market that everyone wants to see recover, but which is still far from coming back into full focus. For investors, this means you’ll want to avoid homebuilder stocks in general, and particularly the following five housing stocks:

Homebuilder to Sell #1 – The Ryland Group (RYL)

California-based homebuilder The Ryland Group Inc. (NYSE: RYL) has struggled throughout the downturn. The company recently reported a wider-than-expected first-quarter loss, as both new home orders and closings fell significantly versus the same quarter last year. The reason for last-year’s gains was largely due to the federal tax credit that helped spur home sales.

This temporary government-induced bounce and subsequent pullback in Ryland is typical of homebuilders, and it’s yet another reason to avoid the sector’s biggest names.

Homebuilder to Sell #2 – Lennar (LEN)

South Florida was one of the areas hardest hit by the housing downturn, and no company knows that better than Miami-based Lennar Corp. (NYSE: LEN). The Zillow report showed that South Florida home values shed another 1.8% in the first quarter, and are down 55.4% from their 2006 highs.

In March, Lennar reported a surprise profit, but that profit was due to an ancillary business and a legal settlement. Fundamentally, revenues were down and new orders fell.

Homebuilder to Sell #3 – PulteGroup (PHM)

On first look, Michigan-based homebuilder PulteGroup Inc. (NYSE: PHM) actually saw a slight 1% uptick in new home orders in its most-recent quarter. Yet when you adjust for the company’s new order reporting process, that number would have been about 9% lower. The company saw a wider loss and sold fewer homes than it did a year ago. Here again, we have a case of poor past metrics going into a very cloudy future for housing in general, and particularly for the most vulnerable sector of the housing market — homebuilding stocks.

Homebuilder to Sell #4 – D.R. Horton (DHI)

Texas-based D.R. Horton Inc. (NYSE: DHI) is another homebuilder whose recent quarterly earnings looked good on the surface. Yet when you extract a non-cash tax benefit of $59.2 million and charges of $14.3 million for inventory impairments and land option cost write-offs, D.R. Horton actually realized a net loss of $17.1 million in the quarter.

The company’s real metrics showed an 18% decline in revenues, an 18% drop in home sales and a 17.5% decline in home closings over the previous year.

Homebuilder to Sell #5 – KB Home (KBH)

Los Angeles-based KB Home (NYSE: KBH) is yet another homebuilder that reported declining metrics in its most-recent quarter. The company saw a sharp 32% drop in new home orders for the December-to-February quarter versus the same quarter last year. Revenue in the first quarter fell 25%, and that came after net home orders fell to 1,302 from 1,913, while homes delivered dropped to 949 from 1,326 in the prior-year quarter.

As buyers remain hesitant to sign on the dotted line largely for fear of more declines in the home prices, KB Home and its fellow homebuilders will likely remain stocks to avoid.

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