Who Do You Believe: The Home Builders Or Government Figures?

by: Stephen Rosenman

No matter what: Don't sell the homebuilders when the government publishes the new residential sales report this Thursday - even if the numbers disappoint.

I say that because the government reports don't reflect the publicly traded builder's remarkable strength. In fact, the reports consistently understate the homebuilders' sales growth. I would not sell Toll Brothers (NYSE:TOL), DR Horton (NYSE:DHI), or Ryland (NYSE:RYL) on so-called "weak" housing number reports. Instead, I would use any weakness to buy.

The government's new residential monthly sales numbers suggest housing sales are growing at a 10 to 35% clip. The last six months of new residential monthly sales have reported on average a 20% increase in home sales year/year.

(Sourced from Census.gov.)

Yet, most of the publicly traded homebuilders have torched that year over year growth. In sharp contrast to the government's figures, nine of the largest homebuilders grew their home deliveries on average by 38% year/year in their most recent quarters.

Toll Brothers experienced a 32% rise in home deliveries. DR Horton saw a 33% rise. PulteGroup (NYSE:PHM) unit sales grew by 23%. Lennar's (NYSE:LEN) closings climbed 28%. Standard Pacific (SPF) moved 48% more homes. Ryland sold an astounding 60% more homes and M.D.C. Holdings (NYSE:MDC) hit it out of the park selling 64% more than in the year-ago quarter.

(Sourced from 10Qs.)

So who do you believe? The bean counters or the publicly traded companies? My money is on the builders.

And, just in case, you are not convinced, the homebuilders produced strong growth in their previous quarter as well.

(Sourced from 10Qs.)

The explanation for the disparity? Some well-timed acquisitions (Ryland and M.D.C.) for sure. However, I think the private builders aren't building homes as quickly as the public ones. That explains why the growth rates reported by the government are so much less than the publicly traded builders. The private ones either went out of business or they don't have the land and capital. And this is to the great advantage of the Tolls and DR Hortons.

The Bottom Line

The public builders are doing much better than the new home sales reports would indicate. There is a disconnect between the census numbers and the big builders. I suggest you key in on the individual companies and take advantage of any dips following "disappointing" the monthly census data. You'll be glad you did.

Disclosure: I am long TOL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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