As the time tested adage states, a bull market climbs a wall of worry. Now we are quite certain that there is plenty to worry about at the moment but the question we’re asking today is whether what works for the market in general e.g. the worry wall, also works on a sector basis and the sector in question is the homebuilders.
The overhang of possible foreclosures brought on by a mortgage modification plan that, by many accounts, is not working the way it should as well as a December home sales number that was 7.6% lower than its November cousin was not the news the market was looking for. “Overall, the housing-market recovery remains fragile,” wrote BNP Paribas’s Anna Piretti recently.
Not helping either was the report last week by the National Association of Realtors that national median price of a single-family home declined 4.1% YoY in 2009. If there was any silver in that cloud it came in the fact that the decline was the smallest in over two years. Also somewhat encouraging was that single-family home prices actually rose in 67 of the 151 U.S. metropolitan areas it tracks in 4Q09. That the number of foreclosed homes equaled 32% of 4Q09 transactions only looks good when it is viewed next to the 37% number for 4Q08.
Homeowner rates in general are also on the decline as the Commerce Department reported recently that 67.3% of Americans owned in 4Q09; the lowest percentage since 2Q00. Mike Larson, a real-estate analyst with Weiss Research said of the smaller number of people owning their own homes, “You can do all kinds of things to get people into a house, which we did; the real problem is making it so they can stay there.”
With all of this worry around it would seem most illogical for the builders that have survived to start building houses on “spec”, as in speculating that they will be able to find a buyer, but that is what is happening. With the extension and expansion of the home buyers credit, or more properly, The Worker, Homeownership, and Business Assistance Act of 2009, Ken Campbell, CEO of Standard Pacific (SPF) thinks that “it does make a difference if the home is ready, available to go.”
Jody Kahn, VP with John Burns Real Estate Consulting said, “Every builder I talk to around the country is starting a spec home or two [per community] for the spring season, provided they have the cash to do it.”
Adding a little more Ag to the H2O, the CFO for Beazer Homes USA Inc. (BZH), Allan Merrill, reported that new-home orders rose almost 37% to 728 in 1Q10 while the cancellation rate dropped to 27% from 46% a year ago. At the time of the release Mr. Merrill commented that, “We cannot say the impairment cycle is done, but we can say that improving absorption rates and firming prices are currently reducing the probability of significant additional impairments”. Funny, after all we’ve been through that almost sounds positive.
So how far up the wall of worry do we have to be to see the silver inside the cloud? The XHB or SPDR Homebuilders ETF closed at $16.06 last night. Very close to its 52-week high of $16.47 reached on 9/16/2009. On an individual basis the CEC Strategy is currently long 15 of the 21 names it tracks in the Homebuilder sector. Followers of this space know that long positions require a falling CDS level and rising stock price to be initiated so that would be the case in about 71% of the CEC’s homebuilder names.
Maybe, just maybe, that wall of worry works even when there is a little silver in the clouds.
