5 Reasons Housing Stocks Are Still in Trouble

Is anyone out there still trying to catch the falling knife that is shares of U.S. home builders? It's tempting to watch the stocks drop like rocks and think, "I'll get back in when the damage is done." Well, investors have been saying that (and getting burned) for a good chunk of the last year. The optimists are in for more pain. At this point, buying shares of homebuilders is largely a bet that the bottom is close for the housing market. It isn't, so you shouldn't. Here are 5 reasons to keep avoiding the sector:

Obama's foreclosure plan is no help for Wall Street. The $75 billion plan could help nine million Americans avoid foreclosure. That's good news if it works, but investors looking for a chance to bottom-feed on builders are disappointed today. The SPDR S&P Homebuilders ETF (XHB) is down more than 2 percent today and more than 15 percent so far this year.

Home sales are still plunging. Today we get housing start data for January, and it's uniformly grim. U.S. builders began construction on the fewest homes on record during the month. Starts slumped 17 percent to an annual rate of 466,000, the Commerce Department said. Goldman Sachs economists called the drop "shocking" by itself, and even more troubling since it's the third straight month of double-digit declines in sales.

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Leadership is lagging. Luxury builder Toll Brothers (TOL) normally trades at a premium to the rest of the group, but earlier this month Citigroup's Josh Levin noted that Toll had slipped below both its peer group and its book value. Part of the reason, he says, is worries over the impact of the falling stock market on buyers for higher-priced homes (They're unfounded, Levin says, because home buyers worry more about income than net worth when buying a home). There's still a case against Toll, however, since pricey homes aren't going to be moving anytime soon.

Builders are still bearish. Executives are still predicting gloom and doom for the industry. Some highlights: Donald Horton of D.R. Horton (DHI) says "the homebuilding industry continued to deteriorate during our first fiscal quarter" and Centex (CTX) CEO Timothy Eller said his firm faced "unprecedented buyer hesitancy" in its third quarter (via Investopedia). Meanwhile, sentiment among builders still hovers near an all-time low. The National Association of Home Builders/Wells Fargo housing market index rise gained one point to nine in February compared to eight in January. Builders still remain pessimistic about a recovery over the next six months.

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Lost home value is huge and growing. Bloomberg points to a survey of real estate by Zillow showing the U.S. housing market lost $3.3 trillion worth of value last year, and says one in six homeowners with mortgages owed more than their homes were worth.

On the bright side, some big investors are moving slowly back into builders. Barclays Global Fund Advisors recently reported taking passive stakes in eight big builders late last year including D.R. Horton, Centex, Hovnanian Enterprises (HOV), Beazer (BZH) and others. Maybe those bets will pay off. For now, let other people take those risks.

Comments

[1234987:]

I agree helping 9 million stay in their homes does nothing for the 2.5 million homes currently REO by financial institutions. (and more to come)

Removing 2 million homes from the MLS for Sale market will help everyone including the homeowner currently upsidedown, the homeowner in foreclosure can now sell into a rising market. (The law of Supply/Demand will increase prices as potential buyers will frenzie to buy a home at discount). The fear of not getting in will drive the market back to a more sustainable level/Price.

The Gov thru an RTC should purchase these homes & send the home to the local HUD agencies for rentals & ultimate disposition thru MLS sales.
The RTC could sell 600 billion in long term (30 year) bonds to finance 2 million homes @ 300,000 (app) each. Price could be set at 20% less than the first mortgage. No jumbos, They work themselves out.

When the homes are eventually sold (as the need for housing increases the HUD could place inventory for sale). Prices will be set @ the original first mortgage (collect the 20% discount from purchase).

Any losses after all homes are sold (5-10 years) will be absorbed by the
institutions selling homes to the RTC in proportion to the amount purchased and sold by the individual institutions. This loss will be paid to the bondholders over the remaining years of the bonds. (more easily digested).

Any comments?

Feb 19 03:26 PM

[PeteK:]

Don't be silly, of course the Obama Plan will help millions of people, including Wall Street.
You rather have those people out on the streets ?
That will cost the gov more in time.
Everyone knows the housing stocks are still in some trouble, but it's been improving quite alot already. We don't need you to tell us that. Look at the trade volumes of most home builders, all up so much that should tell you something. With the Government promised credit for home buyers, and other incentives, home builders will do fine eventually. Interest rate is coming down each week, that should help too. So, cheer up please.

Mar 25 05:33 AM