Homebuilder Snapshot: They're Down but Not Out

This article is part of our Subprime Survival Guide.

The homebuilders rank second only to the mortgage lenders in being maligned by the marketplace today. The two-stage nature of the current housing weakness clearly has been manifested in the recent share price history of many of the major builders: Early last year, when it became apparent that housing's almost dizzying run was about to slow -- perhaps precipitously -- the builders' stock prices dropped dramatically. But in about July, it appeared to some that better housing times might be on the horizon. As a result, the share prices of most builders stopped their slide and began to strengthen.

With the incessant media drumbeat surrounding subprime and Alt-A mortgage foreclosures during the past 90 days, however, the homebuilders' values have declined yet again. Today, a vision of the timing of a recovery is very much in the eye of the beholder, and likely will be dependent upon a political or regulatory response to the mortgage mess, a diversion of the media's attention to other sectors, and such non-housing economic phenomena as energy prices and the Federal Reserve's approach to interest rates. At this juncture, the only certainty is that 2007 -- and perhaps part of 2008 -- will remain challenging for the industry.

Let's take a look at five of the main players, their CAPS ratings, and their future outlooks.

Toll Brothers

• CAPS rating: one star
• Strategy: Builds luxury homes and communities of the highest quality on both coasts and in key internal states. Also develops golf courses, country clubs, and communities for empty nesters and active adults. 
• Key markets: East Coast, Northwest, California, Arizona, Midwest, Texas
• Outlook: Although Toll has seen its share price dip about 20% since February following a 60% improvement after July, it appears that this luxury builder will be among the first U.S. homebuilders to recover from the current soft housing and mortgage conditions. As with other builders, however, purchase of Toll shares should be predicated upon a long-term investment time horizon.

Pulte

• CAPS rating: one star
• Strategy: The large builder targets products primarily to first-time buyers, first and second move-ups, and active adults. Through its Del Webb unit, it is the nation's largest builder for active adults, who accounted for 44% of its closing last year.
• Key markets: With more than 41,000 homes delivered last year, it operates essentially across the nation, with the exception of some Southeastern and Plains states and the Northwest.
• Outlook: Pulte's shares are now below their June-July lows. The company likely will continue to struggle in the first-time buyer and move-up markets until the mortgage lending malaise begins to subside. Conversely, its active adult orientation should benefit it meaningfully going forward.  

Centex

• CAPS rating: one star
• Strategy: Centex has now returned closer to its historical homebuilding roots with the recent sale of its large general construction operation. The homebuilder builds to a variety of price points, while also providing financing, insurance, title services, and pest control. 
• Key markets: Builds along the East Coast from New Jersey to Florida, through much of the Midwest, and around the horn from Texas west to California and north to Washington state.
• Outlook: Centex shares also have moved below their July levels. The company has wielded a sharp ax in rationalizing its land positions and is working to reduce inventories in depressed markets like southwest Florida. Now a leaner company, it appears positioned for a recovery when housing turns.

Lennar

• CAPS rating: one star
• Strategy: Builds single-family attached and detached homes for first-time and move-up buyers and for active adults. Also provides mortgage, insurance, and related services.
• Key markets: Builds from New York to South Carolina on the East Coast, along the nation's south from Florida to California, and in three key Midwest states.
• Outlook: Lennar's shares are flirting with their July lows. As with other builders for whom first-time buyers are important, an improved performance at the company will be closely tied to a strong general recovery in housing. 

Ryland

• CAPS rating: one star
• Strategy: California-based Ryland builds single-family detached and attached (including townhouses and mid-rise) homes and provides mortgage and related services. It targets the mid-level market. 
• Key markets: Other than its operations in four Midwestern states and Colorado, Ryland generally builds in the southern part of the U.S., from Maryland south to Florida, and in Texas, Arizona, and California.
• Outlook: The company's shares remain more than 25% above their July lows. Once a general housing recovery begins, Ryland should benefit from its Sun Belt orientation and its uncomplicated market targeting. In the meantime, the company, like the other large builders, will find the going difficult.

All of the above companies differ from one another. And yet, few sectors generally trade in lockstep to the extent of the nation's homebuilders. For any of these companies to do well by its shareholders will require a generalized improvement in the U.S. housing and mortgage finance markets, or at least solid prospects for a clearing in those markets' stormy conditions.    

Related Foolishness:

• Pulte My Finger
• Real Estate's 7-Year Glitch 

MDC is a Motley Fool Hidden Gems pick. Fool contributor David Lee Smith does own shares in Centex, but not in the other companies mentioned. He welcomes your questions or comments. The Fool has a disclosure policy.