The Housing Chronicles Blog: The Motley Fool reviews housing stocks

Thursday, February 28, 2008

The Motley Fool reviews housing stocks

I've always liked The Motley Fool for objective advice on investing in securities, and in this post they review the housing market and, more specifically, whether or not it's time to buy shares of large, public homebuilders:

Let's start with a recap of the most recent news:

  • As you know, housing starts have been sliding like kids in the playground, with the January figure down 27.9% from the revised January 2007 rate.
  • On Tuesday, Standard & Poor's announced -- in a release that became a Wall Street Journal lead article the following day -- that, according to its S&P/Case-Shiller indices, U.S. home prices dropped by a sobering 8.9% in the final quarter of 2007.
  • California-based RealtyTrac said earlier in the week that the number of homes facing foreclosure jumped 57% in January from the year-earlier month.
  • According to the National Association of Realtors, sales of existing homes slid to a nine-year low in January. You'll notice that this item and the two preceding it can only serve to inflate the already sizable inventory of homes available for sale across the nation.
  • Not to be outdone by the existing homes set, the Commerce Department said that new home sales dropped in January to the slowest rate in nearly 13 years.
  • The Conference Board said Wednesday that the Consumer Confidence Index, which has a direct bearing on home sales, fell to 75 in February, from 87.3 in January.
  • At midweek, the Bush administration rejected the notion of instituting a program of big-money bailouts for those unable to make their mortgage payments. This position runs directly counter to the approach advocated by, for one, Sen. Hillary Clinton, who, in her presidential campaign, has called for a five-year moratorium on home foreclosures....
But Fools, not all the housing news is on the negative side. Mercifully, the ceiling on conforming loans for Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM) will be raised in the not-to-distant future from $417,000 to nearly $730,000. I've long felt that such a step would help housing recover at the top end, a trend that could then filter down to lower levels.

And Wednesday, closely watched luxury homebuilder Toll Brothers (NYSE: TOL) told us that its latest quarter had resulted in a loss of $96 million, or $0.61 a share, compared to a $0.33-per-share profit a year earlier. But without $245.5 in pre-tax write-downs, Toll said it would have earned $0.35 a share in its latest quarter.

Regardless of the makeup of housing news, investors seem determined to dive in to the group in progressively larger numbers. Let's look at how some big builders have fared so far in 2008:

Price 12/31/07

Price 02/27/08


Lennar (NYSE: LEN)




Pulte (NYSE: PHM)




Ryland (NYSE: RYL)




Toll Brothers




Unweighted Average


Clearly, the few rays of improving news about the sector tend to evaporate in the presence of the bad news.

But keep in mind that economic signs point to a U.S. recession; energy prices show few indications of retreating; mortgage lending remains unsettled; and the consumer, as is indicated above, is feeling under the weather.

Further, any moratorium on foreclosures would be disastrous for the homebuilding sector. While such a proposal remains on the table, it should give all investors pause.

So Fools, nibble away at the builders if you must. Just be sure you're working with a longer-than-normal investment time horizon, and that you stick to the companies with the strongest track records and the most robust balance sheets.

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