Still Looking for the Housing Turn

It's time to review last week's housing news and see whether we can dredge up any newly positive trends. We have to be careful here, because like someone who's been trudging through the desert in search of water, we're prone to gulping down anything we find, because we think it'll be great for us. So with that caveat in mind, let's examine the most recent news to see whether we can elicit any new trends in the ol' housing mix.

  • The National Association of Realtors -- which tends to be so Pollyannaish that I'm forced to take its pronouncements with at least half a shaker of salt -- said late last week that existing-home sales improved by about 2% to 4.99 million units in May. That was up from 4.89 million in April. But the real bit of news was that it was 15.9% lower than the 5.93 million units that moved in May 2007. Monthly movements don't really matter.
  • Of more importance, the day after the Realtors gave us their pitch, the University of Michigan said that on a survey that was born way back in 1946, more respondents than ever before indicated that their financial situation had worsened. The 57% of those who noted a deteriorating plight cited increasing prices for food and fuel as their major difficulty.

Richard Curtin, the director of the Reuters/University of Michigan Surveys of Consumers, said that 90% of consumers judged the economy to be in recession in June, and two-thirds said they thought the current slump would last for several years. Fools who are eager to jump on the homebuilders' bandwagon should keep in mind that these are hardly the sentiments of folks likely to sign on the dotted line for the purchase of a new home.

Lennar's results
And then we heard from both coasts late in the week, as Miami-based Lennar (NYSE: LEN  ) and Southern California's KB Home (NYSE: KBH  ) told us about their quarterly results. Lennar managed to cut in half its loss from a year ago. For the quarter, the company reported a loss of "just" $120.9 million, or $0.76 a share, versus $244.2 million, or $1.55 per share.

But lest you think the somewhat improved results -- the cancellation rate for the quarter slipped to 22% from 29% a year ago -- are signaling a turnaround for housing, you need to know what Lennar CEO Stuart Miller thinks. Miller believes that housing's bottom is still to come and that a turnaround is unlikely this year, and he urged the federal government to act to slow the rising tide of foreclosures, declining home sales, and skidding house prices.

And KB's
Unlike Lennar, KB Home saw its numbers worsen from a year ago, with a loss that came in at $255.9 million, or $3.30 per share, versus $148.7 million, or $1.93 a share, in the same quarter of 2007. The culprits in the company's quarter included yet another $176.5 million charge related to cuts in the value of homes and land-option contracts, along with a 55% decline in sales. But like Lennar, KB's cancellation rate -- a metric I view as crucial to a housing recovery -- fell during the quarter, both sequentially and year over year.

During his conference call with analysts, KB CEO Jeffrey Mezger, like his Lennar counterpart, offered that a "meaningful improvement" in housing will have to be preceded by lower inventories, decreased levels of foreclosures, and improved confidence among would-be buyers. I'm betting that, given the information from that University of Michigan survey, the latter may be the most difficult to achieve.

Share performances
Let's look at how a representative sampling of builders has fared during the first half of this year:

Company

12/31/07

6/27/08

Change

Beazer (NYSE: BZH  )

$7.43

$5.90

(20.6%)

KB Home (NYSE: KBH  )

$21.60

$17.72

(18%)

Pulte (NYSE: PHM  )

$10.54

$10.07

(4.5%)

Ryland (NYSE: RYL  )

$27.55

$22.95

(16.7%)

Toll Brothers (NYSE: TOL  )

$20.06

$19.16

(4.5%)

Unweighted average

 

 

(12.9%)

Sources: Yahoo! Finance and TMF calculations.

For those of you who missed the last issue of our housing overview, the 12.9% decline for the first half of 2008 represents a further slide from an 8.5% decline through the middle of June.

Conclusion
At least three metrics must improve before the builders become even moderately safe investments: First, writedowns must fall appreciably (Miller called Lennar's most recent cuts a "clean-up," so we may start to see some progress there). Next, the foreclosure rate will have to at least level off -- and don't hold you breath on that one. And finally, the number of cancellations -- the rate of buyers who write contracts and then either change their minds or can't sell their existing homes -- will have to continue to fall.

Until we achieve positive direction in those metrics, I'd urge my Foolish friends to watch the builders, but don't commit your hard-earned investment dollars to their shares.

For related Foolishness:  

Can't make heads or tails of this crazy, volatile market? Enlist some help with a free 30-day trial subscription to one of The Motley Fool's proven newsletter services.

Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned. He does, however, solicit your questions or comments. The Fool's disclosure policy raises the confidence of Foolish readers everywhere.


Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 30, 2008, at 5:16 PM, moon32 wrote:

    I feel like a soothsayer, when I saw FHA jump on the first time home buyers bandwagon and cover mortgates with $0.00 down and leveraged 4 and 5 times annual income I predicted disaster. ARMs with interest only leveraged in the same manner and the media harping recession I diverted my housing investments to energy.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 675731, ~/Articles/ArticleHandler.aspx, 10/23/2014 2:51:17 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement