Recent Housing Data Pushing Homebuilders Higher?

If you've recently invested in homebuilders, you may want to grab a hard hat for safety's sake. Recent housing data has been optimistic, but are current valuations in the sector warranted?

Housing data bonanza
The housing rebound appears to still be intact, according to a recent report from Lender Processing Services (NYSE: LPS  ) and an S&P/Case-Shiller index update. Lender Processing Services is the leader in loan processing services and compiles home mortgage data based upon its business, which represents 70% of home loans. The S&P/Case-Shiller index measures home sale price changes in 20 metropolitan areas and is the industry standard for gauging home-value appreciation. But what do these reports mean to homebuilders like Lennar (NYSE: LEN  ) and KB Homes (NYSE: KBH  ) ?

LPS monthly mortgage data
LPS released its monthly mortgage servicing data on Monday, and it included some rosy and not-so-rosy data. Let's look at the specifics, though.

Home loan delinquencies -- loans 30 or more days past due and not in foreclosure -- declined to 6.87% of loan volume, down from 7.03% the month prior. This is halfway to the natural delinquency rate of 4.5%-5% from the peak of 10.6% back in January of 2010.

Total properties in foreclosure remain historically high at 2.02 million, down from 2.12 million the month prior. To put this in perspective, foreclosures accounted for 0.44% of loans pre-housing-bubble and now account for 4%.

While it appears people are starting to pay on time, there are still a large number of homes in foreclosure pre-sale and continuing to go into foreclosure. With homebuilders currently constructing at a rate of 750,000 units per year, investors have to wonder if new-home sales will be affected by this large inventory of foreclosed homes.

Standard & Poor's Case-Shiller Index
Also, Standard & Poor's released the Case-Shiller Home Price Indices yesterday morning, which indicated that home prices have continued to rebound from their lows. The index revealed that home prices increased at an average rate of 1.2% in July, increasing in 18 of 20 cities and in line with analyst estimates. Investors will want to see continued increases in home prices so home buyers will have the confidence to buy new homes. If the market continues to see good data for housing prices, it should translate into increased home sales.

Zillow's negative home equity report
Investors also don't want to forget about the housing landscape as it pertains to underwater homeowners. A recent report from real estate expert Zillow (Nasdaq: Z  ) notes, "48% of borrowers under the age of 40 are underwater on their mortgages." Zillow compiles mortgage loan data from TransUnion, a credit reporting agency, and compares the data to its extensive database on estimated home values. The real question investors have to ask is: How likely is it that these young borrowers are going to sell their existing homes and purchase new ones?

Homebuilders off to the races
The abundance of positive housing data over the past year has driven Bloomberg's S&P Supercomposite Index -- an index composed of 11 different homebuilders weighted by market cap -- up 85% year to date. This run-up and Mr. Market's expectations are the likely culprits behind Lennar's tepid share price performance yesterday.

Earnings surprise from Lennar?
If you were looking at Lennar yesterday, you're probably wondering why the stock wasn't off to the races after big earnings like KB Homes'. KB Homes is up 12% since breakout earnings on Friday. Meanwhile, Lennar shares ended the day down 1.9% yesterday. Why the mixed reactions? Let's get out our shovels and hard hats, and dig into Lennar's earnings:

Analysts were expecting earnings of $0.29 a share and Lennar reported GAAP earnings of $0.40 a share. So why didn't the stock take off?

The culprit here is normalized earnings, which were actually $0.28 per share. GAAP earnings included a nonrecurring tax benefit of $12.8 million and $15.7 million of income from a Minority Interest. After backing out these two items, the earnings were just average.

Price-to-book value comparison
Below is a chart reflecting the price-to-book ratios for KB Homes and Lennar since 2006. As you can see, we've already surpassed levels seen back before the housing bust, and each company is at multiyear highs in terms of price-to-book valuation.

KBH Price / Book Value Chart

KBH Price / Book Value data by YCharts


With such large expectations built into the market right now for homebuilders, it will take big earnings surprises and large growth in the balance sheet to significantly move any companies in this sector. I'd keep those hard hats on and proceed with caution when thinking about investing in this overheated sector, fellow Fools.

While homebuilders may be too risky for your average investor today, recent housing data does point to very exciting opportunities in the banking sector. Reputable value investors like Warren Buffett have already invested heavily in well-known banks like Wells Fargo and Bank of America, but find out what bank Buffet really wishes he could invest in. A recent Motley Fool special report highlights this great opportunity -- and it can be yours today; click here to learn more.

Fool contributor Blake Bos currently holds no securities positions mentioned in this article. The Motley Fool owns shares of Zillow, Wells Fargo, and Bank of America. Motley Fool newsletter services have recommended buying shares of Zillow and Wells Fargo. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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