Homebuilding Stocks Looking Up

Aug.27.09 | About: D. R. (DHI)

U.S. homebuilding stocks are certainly benefiting from back-to-back upbeat reports on the housing market this week.

On Wednesday afternoon, the four-member S&P 500 homebuilding index was up 3.7 per cent after rising 3.2 per cent on Tuesday. DR Horton Inc. (NYSE:DHI) was the group’s top performer, rising 5.6 per cent. The group is now at its highest level since early October, and has risen a total of 162.5 per cent from its low in November.

The latest surge was no doubt triggered by a report that new home sales in July jumped 9.6 per cent, to a 10-month high of 433,000 units – a rise of 32 per cent from January’s low.

But it was the decline in the supply of unsold homes – which is traditionally expressed as a ratio of inventory to sales, and expressed in months – that got observers particularly excited: That supply fell to 7.5 months from 8.5 months in June, and down from a record high of 12.4 months in January.

“This is still high by historical standards, but its direction coupled with the low absolute level of inventories suggests that builders are getting a strong signal to build more homes, at least for a while,” said economists at Goldman Sachs, in a note.

The blogger Calculated Risk isn’t quite as upbeat, largely because there continues to be a large supply of existing homes for sale.

“Months-of-supply and inventory have both peaked for this cycle, and there is a good chance that sales of new homes has also bottomed for this cycle,” Calculated Risk said. “However any further recovery in sales will likely be modest because of the huge overhang of existing homes for sale.”