The Housing Chronicles Blog: Homebuilder CEOs still wary despite stock bounce

Saturday, March 1, 2008

Homebuilder CEOs still wary despite stock bounce

Despite the rise in many homebuilding stocks since the beginning of 2008, many CEOs remain unconvinced that a market rebound is yet in the cards. From a MarketWatch story that also quotes many CEOs at this week's Wachovia Home Building & Building Products Manufacturers Conference:

Housing-sector stocks -- left for dead just a couple months ago -- have been on a surpising tear recently.
An exchange-traded fund tracking the group, iShares Dow Jones U.S. Home Construction closed Thursday up more than 20% over the previous three months.

So why are so many market watchers, and even executives in the business, still so glum? Despite the recent run-up in builder shares, a number of imposing hurdles remain for the industry at the epicenter of the economy's mortgage-related earthquake.
Industry insiders are holding back from proclaiming a housing bottom until the market works its way through the huge overhang of unsold homes -- and until buyers feel more confident that a new house won't end up being worth less a month after they purchase it...

Even Toll Bros., which caters to affluent home buyers and enjoys one of the most recognizable brands in the industry, hasn't been immune to the housing downturn. This week the Horsham, Pa.-based company said it swung to a quarterly loss of nearly $100 million. Like other builders, Toll booked large write-downs on inventory and depreciating land assets.
Even though some markets are showing limited signs of recovery, "I'm not willing to say as of this call that we're back," Toll said this week...

More ominously, Toll's closely watched results for the January quarter suggest the key sales period that unofficially runs from Super Bowl Sunday to Memorial Day is off to another lackluster start this year...

Indeed, other observers have been baffled by the recent surge in home-builder stocks.
"There is no sign yet that the bottom is near; we look at the rally in home-builders' stocks in utter bewilderment," said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd...

To be sure, in housing downturns of the recent past, the builder sector has rallied before the housing market bottomed, most notably coming out of the correction in the late 1980s and early 1990s. The stocks have posted gains so far in 2008, even though new-home sales continue to sink.
Some argue that interest-rate cuts and the government's efforts to stimulate housing have for the moment overshadowed problems in the mortgage and credit markets, not to mention recession talk and surging oil prices.
Along with the inventory glut, builder CEOs say one of the biggest challenges is weak buyer confidence.
"Buyers are hesitant now. They're waiting on the sidelines for great incentives and further price reductions," Toll said this past week at an industry conference in Las Vegas sponsored by Wachovia. "What we have to overcome is the feeling among consumers that to buy a house today is to catch a falling knife," the CEO said. "We need to restore the feeling that this is not a depreciating asset."
When asked what leading indicator to watch to signal a housing recovery, Toll said cancellation levels, which he pegged at between 30% and 35% for the industry, need to stabilize and come down.

Although home-builder stocks have been knocked down to bargain-basement valuations, it's not clear if they've bottomed yet. Some analysts who've recommended dipping a toe in the shares over the past year have been burned as the stocks continued to fall before their recent snapback.
The question, of course, is whether this is a suckers rally or that a legitimate bottom has yet to be reached.
Those who worry that there's more pain to come cite the length and euphoria of the decade-long housing boom that ended with the bubble popping in 2005.
Paul Puryear, a respected industry analyst at Raymond James & Associates, urges caution.
"We don't see anything fundamentally that gives us encouragement," Puryear told CNBC.
He said inventory data, which are the key metric in the outlook for housing, are getting worse. The recent rally in home-builder stocks was driven in part by efforts in Washington to rouse the housing market, and also short-covering by hedge funds and other traders that have bet heavily against the sector, he said.
"There is no fundamental reason to be a buyer [of builder stocks]," Puryear said. "It's for high-risk players only right now ... and a very tricky environment for these stocks."

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