Homebuilder Shares Set to Soar in 2011

Includes: BZH, DHI, KBH, PHM, TOL, XHB
by: Markos Kaminis

You would have thought that given Beazer Homes’ (NYSE: BZH) bad news Tuesday, homebuilder shares might be lower. However, a well-timed Bloomberg article speaking to the seasonal push for housing that follows the Superbowl, published a minute after midnight Tuesday morning, got traders started early looking for a homebuilder share recovery. Even BZH’s shares were up almost 3% yesterday (Tuesday). More importantly, I see the industry poised for a significant drive higher, but not without disruption.

It makes logical sense that once the NFL football playoffs conclude, married men have a weekend void to fill. Well, it seems their wives and fiancé’s don’t miss a beat in getting their men busy prepping a nest and looking for a house. The spring home buying season officially begins after the Superbowl, according to the experts, and this year they have their hopes on the first GDP contribution from the sector since 2005, according to Bloomberg’s article.

The Commerce Department reports that the yearly peak in New Home Sales has occurred in March or April in 12 of the last 14 years. Since new home construction takes time, prospective buyers look to spring, in order to be in their home by the start of the school year. Thus, each spring brings new hope to the industry.

A closer look at the numbers though, shows that while growth is finally expected for 2011, it’s nothing special. Decent percentages are forecast on historically horrible numbers. The National Association of Home Builders (NAHB) strong forecast only has the absolute pace of new home sales reaching 385K. However, Fannie Mae (OTC: FNMA.OB) is forecasting an 18% rise, the Mortgage Bankers Association is forecasting 10% and the NAHB is forecasting +20%. They are all looking for growth. I expect that because of this, and while homebuilder stock speculators are looking for any reason to place the early bet, we will see Tuesday’s spurt continue. I don’t think the appreciation in homebuilder shares will be without disruption though, and so I advise liquid capital to be nimble, and long-term money to take a taste now, and save some appetite for later as well.

My reasoning for this is because I anticipate harsh January weather destroyed the home sales pace for the month in much of the country, and I expect the possibility of bad housing news this month is not yet perfectly factored in by today’s enthusiasts driving the shares higher. All of December’s deceptive growth in new home sales was born in the Western U.S., and that will have to be the case in January, and then some, for sales to continue rising overall.

The Employment Situation Report for January showed construction employment declined by a hefty 32,000 through the snowy month. Given the amount of job shedding in the decimated industry through the recession, the number (however small) is actually an extremely disheartening sign. When the month’s housing sales results are reported, I expect they could fluster the market. That is unless what I am reporting today is understood by then.

Still, in my view the speed and willingness of capital to chase homebuilder shares now, and thus their upside sensitivity, is a positive factor to investment in the sector now. Beazer Homes (NYSE: BZH) reported orders for homes slipped, and BZH shares were down as much as 4% on the news. However, they accomplished a 7% intraday swing as speculative money floods into the industry. I think you can count on this push driving higher over the near-term.

Even as Beazer reported a poor fiscal first quarter, it noted a 50% sequential month increase in new home orders in January, and said the rate was about equal to the prior year. Thus, perhaps the 72+% increase in Western U.S. new home sales reported for December were simply a leading indicator of an even better than expected drive for overall new home sales across the country. The stocks are catching fire, that’s for sure. K.B Homes (NYSE: KBH) was up 4.5%; Toll Brothers (NYSE: TOL) up 3.9%; PulteGroup (NYSE: PHM) up 2.2%; D.R. Horton (NYSE: DHI) was up 2.4%; and the SPDR S&P Homebuilders ETF (NYSEArca: XHB) up 1.9%.

The shares of homebuilders have been recovering gradually since early 2009, from the rock bottom the entire market touched. The chart of the XHB shows that the market saw a dip in the summer of 2010, when tax incentives expired and the housing market with it. Since then, capital has been speculatively hopeful for an organic recovery to begin in housing. With most of these cyclical companies only now coming out of years of producing losses, and with real EPS only prospectively seen in 2012 for most of the industry, the sector may be set up to benefit from a surprisingly better pace of sales growth this year. We may not be at inflection point, but it appears we are at a point of important change, which investors tend to benefit greatly from. If earnings estimates are set up for upward adjustment as it appears, these homebuilder stocks should see rich price appreciation as well.

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