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Turnaround? Downturn? Oh, What a Mess!

Neha Chamaria
November 3, 2011

Whoa! When was the last time you saw a chain of battered homebuilder stocks zoom up by 10% or more? Just one data release sent the stocks into a tizzy yesterday and must have left many of you wondering what to make of it.

The National Association of Home Builders/Wells Fargo Housing Market Index rose four points, to 18, in October, the highest one-month gain in more than a year. The index, which gauges buyer perceptions and sentiments, is now indicating more buoyant consumer confidence, which is why the stocks shot up.

So now, my dear Fools, are your fingers tickling to get into one of these bashed-up stocks? Are things really turning around for the sector?

Some positive signs
Homebuyers are slowly trickling back into the market. How do we know that? Higher orders and healthier backlogs.

Most companies are showing improvement in these two areas. Take the last-reported quarters, for instance. Lennar (NYSE: LEN  ) reported an 11% rise in new home orders in its third quarter, while Hovnanian Enterprises' (NYSE: HOV  ) net contracts rose by 33% in the quarter. Beazer Homes' (NYSE: BZH  ) third-quarter net new orders were up by 24%, and the company has recently announced a 33% jump for its fourth quarter. Not too shabby.

Backlogs are an important indicator of future revenues for homebuilders. KB Home's (NYSE: KBH  ) and Toll Brothers' (NYSE: TOL  ) third-quarter backlogs were up a good 22% and 9%, respectively, while Pulte Group's (NYSE: PHM  ) second-quarter backlog rose by 2%. To know that these companies are now having more work in hand is indeed a positive sign.

Hello, buyer, are you there?
Poor homebuilders! They've been trying all kinds of things to stay ahead. Beazer's trying the buying-and-renting-foreclosed-homes strategy, and Lennar is keen to follow suit.

D.R. Horton (NYSE: DHI  ) is rolling out new solar roof shingles, and builders like Standard Pacific (NYSE: SPF  ) and KB are coming up with innovative architectural designs and energy-efficient homes.

But where are the buyers?

Consumer spending is in the doldrums. August new house sales fell 2.3% sequentially, with only 295,000 homes being sold -- the weakest in six months. Almost 80% has been chewed off from the 2005 new homes sal