While the feds have lately pulled a host of items from their bag of tricks -- including a massive $700 billion mortgage-related bank bailout program -- as they try to return the crumbling U.S. housing market to at least a semi-even keel, Friday brought a couple of major indications that anything approaching good news for the sector likely is a ways away.
- Probably the most obvious negative was the Commerce Department's report that building activity continues to plummet, with the level of housing and apartment building activity now heading for World War II levels. The September rate of construction of new homes and apartments slid by 6.3%, far more than the decline of just above 1.5% that had been expected. The pullback in activity pretty much spread across all regions of the nation. Even worse, applications for building permits, the metric that twists us from looking backward to viewing future activity, fell by 8.3% to an annual rate of just 786,000 units. Keep in mind that, prior to the current downturn, construction levels were running at a couple of million units annually.
- The other bit of less-than-optimistic news that arrived Friday was the Reuters/University of Michigan Survey of Consumers. The respected survey, which measures the confidence levels among folks like you and me, plummeted to 57.5 in October, down from 70.3 in September. That represents the largest monthly decline since 1952, when the survey was started. But should you be in search of some relatively good news -- and aren't we all? -- the newest level still exceeds the 51.7 recorded in May 1980. Folks who are less than optimistic are generally unlikely to consider signing on for big-ticket items -- like houses.
- And rank-and-file citizens aren't alone down in the dumps. On Thursday, the National Association of Home Builders told us that builder sentiment had fallen three points to 14, its lowest in history by a couple of points. Anything below 50 on the survey indicates that the builders are less than optimistic.
How have the builders done?
In past articles on housing, I've endeavored to keep investors abreast of the builders' fortunes with tables that tracked the 2008 share price movements of five representative builders: Beazer (NYSE: BZH ) , KB Home (NYSE: KBH ) , Pulte (NYSE: PHM ) , Ryland (NYSE: RYL ) , and Toll Brothers (NYSE: TOL ) . Since the beginning of the year, the group has experienced its ups and downs, but of late, its fortunes have plummeted.
Therefore, rather than break out the performance of each, let me just tell you that all are now down since New Year's, with the average decline through Friday now at 23.8%, a major slide from our last reckoning, when the group was at an average 6.5% improvement for 2008 less than a month ago.
Cash is king
Clearly, with the builders having deteriorated of late, the big concern for the group must shift to that of staying power. On that basis, we'll need to move from income statement metrics to balance sheets considerations. And while there are numerous metrics we could use to predict which companies are most likely to survive, let's look at the builders' cash positions versus their debt levels. In doing so, we can simply take a look at the numbers for the five companies whose share prices we usually consider, and add in Centex (NYSE: CTX ) and Meritage (NYSE: MTH ) for good measure:
|
Company
|
Cash
|
Debt
|
Cash/Debt
|
|
Beazer
|
$314.2M
|
$1.76B
|
17.8%
|
|
Centex
|
$1.23B
|
$3.65B
|
33.7%
|
|
KB Home
|
$942.5M
|
$1.88B
|
50.1%
|
|
Meritage
|
$115.2M
|
$635M
|
18.1%
|
|
Pulte
|
$988.3M
|
$3.58B
|
27.6%
|
|
Ryland
|
$199.4M
|
$791.6M
|
25.2%
|
|
Toll Brothers
|
$1.5B
|
$2.26B
|
66.4%
|
Source: Yahoo! Finance and TMF calculations.
Obviously, the clear leader of the pack is Toll Brothers, which could cover about two-thirds of its current debt with its existing cash. Beyond that, I've felt for some time that the housing market will heal from the top down, making Toll's position as the nation's leading luxury builder meaningful. I suppose it's also important that, unlike the other builders whose share prices we typically track, Toll and Pulte are the only two that have slid less than 2% on the year.
Another vote for Toll
One obvious solution to our nation's housing glut and steady price declines would be for some of the builders to take a hiatus and stop building for a time. But since they can't and won't, and since some Fools remain determined to build small positions in the group, the table above only reinforces my prior contention that Toll is your best bet for ultimate profits. And as always, I'd emphasize that patience -- along with careful study -- is the key virtue for Foolish investors with a yen to dabble in the group.
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