December's New Home Sales Favor Western Builders

Includes: DHI, KBH, LEN, PHM, TOL
by: Markos Kaminis

New home sales were reported today for December 2010, offering a positive surprise for investors in homebuilders’ shares. However, a closer look shows complete concentration of gains in the western portion of the country, and so the month reflects better for some than others. Thus, the shares of K.B. Homes (NYSE:KBH), with significant concentration of operations in the west, are up to a greater degree today.

The annual rate of new home sales increased 17.5% in December, to 329K, against the revised November rate of 280K. Still, readers are advised to temper enthusiasm, considering the absolute level of sales activity remains soft. This is evident in the year-over-year comparison, which has the rate of sales down 7.6% from the 356K rate seen in December 2009.

Sales growth was concentrated in the west region of the country, where a 72% increase was extraordinary. The next best gain came in the midwest, which only saw a 3.2% rise. The south posted a 1.8% increase, and the northeast saw a decline in sales of 5.0%. The skew favors western players like K.B. Homes, whose shares are up 2% at the hour of this scribbling. Lennar (NYSE:LEN) shares are also up significantly, marking a gain of 2.8%. Shares of other homebuilders are also higher, given the national exposure of most of the publicly traded builders. Toll Brothers (NYSE:TOL) is up 0.6%, PulteGroup (NYSE:PHM) is up 0.8%, and shares of D.R. Horton (NYSE:DHI) are up 0.8%.

December’s report showed that new home inventory available for sale improved to a 6.9 month supply, down from 8.4 months in November and 7.8 months last December of 2009. Of course, inventory is directly tied to the rate of sales when measured in this manner, and so when sales change, inventory changes in an inverse relation. The actual number of homes out there for sale may offer different data.

Likely reflecting the regional skew, home prices gained during the month, based on the report. The median price of a home sold during December was $241,500, compared to $215,500 in November. The average price of a home sold, which would be less affected by the skew, increased to a lesser degree, to $291,400, from $284,000 in November. Also, the higher price of sales may not be relative to an improving economy, given the skew toward higher priced homes.

However, it looks to me like the new home market may have bottomed out in 2010, given the report estimates sales of 321K for the year, down from 2009’s 375K. December’s pace of 329K exceeds last year’s sales despite seasonal constraints, and so offers hope for a better 2011. The western skew to the data might simply reflect the most likely place for activity to start up first, the desirable west. However, the irregular and isolated change, offers reason for investor caution as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.