The final doubters must now be at home with the notion of a widespread housing decline. That would seem to be the case following the release Friday of surprisingly weak housing-start and building-permit numbers for October.
Starts had been expected to come in at an adjusted annual rate approaching 1.7 million units. Instead, the reported number was below 1.5 million. And permits, typically viewed as a good barometer of builder confidence, came in at an annual rate of 1.54 million, the lowest level since the last month of 1997.
How, then, should we view the homebuilders now? I'm referring to the likes of Centex (NYSE: CTX ) , Pulte (NYSE: PHM ) , Ryland (NYSE: RYL ) , D.R. Horton (NYSE: DHI ) , and Toll Brothers (NYSE: TOL ) . Do we buy them, sell them, or simply pretend they don't exist? This group travels in a pack, so let's look specifically at Centex as a representative.
Actually, Centex may be somewhat more diversified than most of its peers. In addition to building homes from the Seattle area to South Florida, and from California to New Hampshire, its commercial construction subsidiaries have erected noteworthy structures such as the CIA headquarters in Langley, Virginia, and Cinderella's Castle at Disney World. Centex also provides an array of mortgage, title, and insurance products for its own and others' customers.
And yet, the company's share price movement is representative of the homebuilding group, especially for 2006. After nearly tickling $80 in January, Centex fell 45% to below $43 in July, only to climb back to near $54 now. What, you say? It's come back 25% from its 52-week low? Should I buy at this level?
My best advice would be to bide your time. Clearly, the last of the bad news for the builders may be yet to come. For all we know, November's start and permit numbers may make October's appear robust. And Centex's forward P/E is 17.65, versus a trailing P/E of just 6.75. That's quite a difference, and it relates in part to analysts' expectations that earnings for the current quarter will plummet to about $0.76, compared with $2.52 in the December 2005 quarter.
Finally, homebuilders' share prices have always correlated inversely to interest rate movements. No one knows when the Federal Reserve will reverse its recent string of rate increases. Given these imponderables, I'd advise Foolish investors to avoid the group until the picture turns brighter.
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Fool contributor David Lee Smith owns share in Centex. He welcomes your comments or questions.
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