This week in real estate will offer several key data points for investor review. We have three major economic reports on the slate and an important corporate earnings report to color the view. The data is as important as ever with so much good news and high expectations built into industry relative shares now.
The National Association of Homebuilders (NAHB) reported its Housing Market Index Tuesday morning. The report for February showed deterioration against January's account and fell short of economists' expectations as well. The HMI fell by a point to 46, down from 47, disappointing economists with a consensus expectation for an improvement to 48 this month. The HMI had been heading toward 50 until now, which is the demarcation point between general optimism and pessimism. The news was bad for homebuilder shares this morning, as you can see by the movement of the majors we've listed here.
Security & Ticker
Change Thru Midday Tuesday
SPDR Homebuilders ETF (XHB)
Toll Brothers (TOL)
D.R. Horton (DHI)
KB Home (KBH)
The CEO of Weyerhaeuser (WY), Daniel Fulton, expressed surprise about the report when he appeared on CNBC's Halftime Report Tuesday. He indicated that WY's internal metrics showed solid sales in its home building segment and strong orders into the company's wood products segment. He said that housing inventory had come down dramatically nationally, prices had firmed and that activity had been strong, even through winter. He was most enthused about the recovering California market, which is important for its West Coast timber mills. Plus, the company's Q4 housing sales in California increased 80%. The company reported strong earnings and returns in January, and its shares were down less than the builders listed above today, down just a half point around midday.
Toll Brothers is scheduled to report earnings on Wednesday, providing some insight into the luxury builder's progress. I was pleased to see Toll Brothers present at the Emerald Groundhog Day Investment Forum in Philadelphia earlier this month. I came out as impressed as ever with the company whose headquarters I grew up near and which I researched for a business school valuation project; not to mention that I owned and profited from the shares' performance in the past. I'll probably put together a fresh analysis of the company in the near future.
As for the earnings release, I would not attempt to put money at play for the event itself due to some concerns I have about near-term visibility. Analysts expect the company to post EPS of $0.11 for its quarter ended in January. However, the estimate for this quarter was cut sharply from where it stood 90 days ago. The previous average estimate for the quarter was about $0.17, according to Yahoo Finance data. The company has beaten results over the last three consecutive quarters, but given the reduction in this quarter's number and the wide range of analyst estimates incorporated into that figure, visibility is unclear. The range of estimates extends from two cents per share to $0.21, and that high figure indicates that some estimates have not been adjusted. I'm not close enough to the story today to say for certain what the catalyst was for the adjustment, and this is not a TOL specific article; but if I had to venture a guess, I would say it's Hurricane Sandy related. If that is the case, investors will look beyond the quarter to the company's guidance for direction. Over the long term, I remain a fan of Toll Brothers and its business model, and I'll have more to say about its shares in the future.
Wednesday brings with it the regular Weekly Applications Survey, the Mortgage Bankers Association (MBA) report on weekly mortgage activity. Mortgage application activity decreased last week by 6.4%, as effective rates mostly increased across mortgage types. We recently wrote about the impact of a lender supply shortage on mortgage rates, and we have concern about the impact a recovering economy could have on rates despite Fed action. However, these holiday and weather affected weeks are difficult to read, so investors will want to look forward to future reports for a better read on activity.
Housing Starts will be reported for January at 10:00 AM ET Wednesday. The annual pace of starts is expected to decrease to 914,000, from 954,000 in December. However, Builder Permits are expected to edge up to a pace of 920,000 in January, up from 903,000 in December. If permitting activity improves, it should outweigh a slower pace of starts, depending on the degree of change for each of course.
Existing Home Sales will be reported for January on Thursday. Economists surveyed by Bloomberg see this measure of the used home market producing an annual pace of sales of 4.9 million, which is down just slightly from December's pace of 4.94 million. The existing home sales market is so much more important than the new homes sales data that this report will weigh heavily on housing ideas generally. Poor sales activity in recent years has offered a boom for apartment REITs like Apartment Investment & Management (AIV), but the charts of names like Equity Residential (EQR) and Avalonbay Communities (AVB) have been disrupted recently on questions about forward performance. I continue to see significant opportunity in the rental market, but over the near term, it seems some will question whether an improving economy could reignite homeownership. Meanwhile, others in the real estate arena like the major mortgage lenders, including Bank of America (BAC) and J.P. Morgan Chase (JPM), have been on a tear. In fact, a lender shortage and hesitation by larger players due to their return requirements has allowed for new opportunity for smaller players, who are reentering the business despite new regulations.
I see good news built into housing stocks at this point, so any data disappointment could meaningfully affect industry shares this week. I think the minor slip in the Housing Market Index and the reaction of builders' shares is evidence of that. As for real estate itself, I continue to believe there exists a special opportunity in the asset class today.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.