House Prices and a Bailout: What Gives?

Suppose we were to suddenly receive news that Treasury Secretary Paulson and his helpers in the Congress had dotted the last "i" on the financial bailout that's consumed the attention of most market minions during the past week. Would the housing market recover in a flash?

Unfortunately, the answer is a resounding "nope." For the U.S. housing market to regain its old strength -- other than in a few unusual markets -- prices will have to hit a definable bottom, lending must regain a semblance of orderliness, foreclosures have to slow, the inventory of homes on the market -- occupied or otherwise -- must begin to shrink, builders' write-downs have to come virtually to a screeching halt, and consumer confidence will have to climb out of its current doldrums.

Getting everything aligned
It'll be a tall order to get all those moving parts headed in the same direction, sort of like herding cats or overseeing a faculty of Ph.D.'s, as I once had the pleasure of doing. It's not impossible, however. It'll just take a little longer than the flip of a switch.

But before any of this can happen, we'll need to get the bailout built, painted, and placed happily in a display case. In the meantime, however, there's little reason to expect that housing news will improve rapidly over what we've had of late:

  • August housing starts dropped to a seasonally adjusted annual rate of 895,000. That's the lowest it's been since back in early 1991. For perspective, you'll recall that before the current slowdown kicked off, we were cranking out new haciendas at a rate near two million units each year. It's important to distinguish, however, that the single-family decline rate was 1.9%, while multi-family units slid by 15.1% last month. Meanwhile, building permits for the month were down 8.9% to an annual rate of just 854,000 units.
  • Home prices fell 5.3% in July from a year ago. Frankly, as one who formerly graced the West Coast of Florida, that rate doesn't seem too severe. But until the slide ceases across the board, housing's negative effects on the economy will continue.
  • Mortgage difficulties climbed significantly last month, as 6.6% of all loans were at least a month past due. That figure compared to 4.5% a year ago. And as The Wall Street Journal noted in a recent feature article, an increasing number of homes valued in excess of $1 million are the subject of lending delinquencies.
  • Sales of pre-owned (I refuse to use the redundant term "existing") homes fell by 2.2% in August to an annual pace of 4.91 million units, according to the rose-colored-glasses-wearing National Association of Realtors. The good news was that that the total inventory of unsold homes slid to a 10.4-month supply, down from 10.9 months worth in July.
  • Miami-based Lennar (NYSE: LEN  ) has managed to trim its losses from the comparable 2007 quarter. The company reported a loss of $89 million, or $0.56 a share in its third quarter, compared to $513.9 million, or $3.25 per share, a year ago. Revenues were down 53% to $1.11 billion in the quarter.

With that quick glance at the most recent housing news, let's take a gander at how our representative group of homebuilders has performed thus far in 2008:

 

12/31/07

09/22/08

Change

Beazer (NYSE: BZH  )

$7.43

$6.00

(19.2%)

KB Home (NYSE: KBH  )

$21.60

$20.04

(7.2%)

Pulte (NYSE: PHM  )

$10.54

$15.21

44.3%

Ryland (NYSE: RYL  )

$27.55

$25.33

(8.1%)

Toll Brothers (NYSE: TOL  )

$20.06

$24.62

22.7%

Unweighted average

 

 

6.5%

 Source: Yahoo! Finance and TMF calculations.

You'll notice what economists would call the "bifurcation" among the companies in the table. Beazer, of course, has had a tough year and is undergoing a couple of investigations, and so it's not surprising that it's leading the parade downhill. And then there's Pulte, which, were the year to end tomorrow, would have chalked up an awfully nice annual score. Looking at the group as a whole, in the past month, the average year-to-date change has improved from a loss of 3% to a gain of 6.5%.

What to do?
I'll keep this simple: It's still premature to load the boat with homebuilding stocks. We don't know what shape the bailout will ultimately take, although there almost certainly will be some form of Washington-led treatment. But it's important that anyone building or adding to positions in the homebuilding sector be blessed with enough patience to carry them well beyond the typical investment time horizon.

With that in mind, my favorite names in the sector continue to be Toll and Meritage (NYSE: MTH  ) . Both are well managed, and Toll stands to benefit from its luxury builder status, while more than half of Meritage's homes are constructed in Texas, which, for a host of reasons, has been more immune to economic softness than most other areas of the country.

For related Foolishness:

Fool contributor David Lee Smith doesn't own shares in any of the builders mentioned in this piece. He does welcome your questions or comments. The Fool has a solidly constructed disclosure policy.


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  • Report this Comment On September 25, 2008, at 9:01 PM, harpf wrote:

    I for one will vote every last one of them out in six weeks. If, a bill passes that gives a free ride for those that got in over thier heads or wall steet 6.5 figure brokers.

    I have lived in a fixer upper for years to ensur I stay solvent. Now I should get to buy a nice house for cash on the court house steps as a reward not being part of the problem.

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