Homebuilders: Earnings & Price Analysis

One of the weaker arguments mustered by the Real-Estate-has-bottomed crowd is the move off of the lows by the homebuilders.

"Look how far the homebuilders have rallied," they declare. What more proof do you need that the carnage in Real Estate is over?

I find this analysis flawed: 1st, a short-term stock move up after a sector gets shellacked is hardly proof that this economic sector has bottomed; with the homebuilders, it's more likely proof that they have been a crowded short.

If you suspect that argument sounds familiar, you are correct: We have seen this movie before:
click to enlarge

Source: ContraryInvestor.com

Second, as this table (courtesy of ContraryInvestor.com) reveals, the Homies have not only had a huge run in share prices, their earnings went through the roof also, peaking in 2005. Now, we are on the other side of that mountain, and for many of the major builders, their Earnings are right back to where they were before the big run up began.

The difference? In 2002-03, rates were down and heading towards 46 year lows. Now, they are elevated and likely heading higher.


Source: ContraryInvestor.com

Lastly, as we learned just Thursday, prices of homes are still falling - and in an increasing number of regions, about half nationwide. The National Association of Realtors reported:

Home prices declined from a year earlier in about half of all metropolitan areas in the fourth quarter.

It was the first time the trade group has recorded declining or unchanged prices in the majority of cities covered since it began collecting the data in 1979, a Realtors spokesman said. On a national basis, the median home price during the quarter was $219,300, down 2.7% from a year earlier. Prices began falling in many areas last year after a boom that pushed prices up at double-digit annual rates in much of the country in the first half of this decade.

In the latest quarter, the median price declined in 73 metro areas, increased in 71 and was flat in five. The biggest decrease was in the Sarasota-Bradenton-Venice area of Florida, down 18% from a year before. Many of the biggest decliners were in Florida, where a glut of new condominiums is weighing on the market, and in Rust Belt cities like Youngstown and Toledo, Ohio, hurt by shrinking industrial employment.

Not exactly the sort of stabilization Greenie has been chatting about for a few Qs, is it?

click to enlarge

Ken Fisher disagrees:

Housing Boom!

More proof of the bottom! Marketwatch notes:

Housing starts plunge 14.3% to 10-year low; Pace of building new homes down 37.8% on year-over-year basis:

U.S. home builders started the fewest homes in nearly a decade last month, as housing starts plunged 14.3% to a seasonally adjusted annual rate of 1.408 million, the Commerce Department reported Friday.

January's rate was the lowest for housing starts since August 1997. Starts were down 37.8% compared with January 2006. Also, building permits dropped 2.8% to 1.568 million in January, 28.6% below the same month a year ago. Read the full government report.

The starts figure was much lower than expected on Wall Street, where economists were looking for a 2% drop to 1.60 million annualized units. The permits figure was close to the median forecast of 1.58 million expected in a MarketWatch survey of economists. See Economic Calendar.

The stunning drop in home construction indicates that builders are scaling back their plans on a massive scale, aiming to work down the excess inventory of unsold homes on the market.

Sources:
Home Prices Decline in Majority of Cities
By JAMES R. HAGERTY
February 15, 2007 11:29 p.m.; Page A2
http://online.wsj.com/article/SB117155660166310014.html

Housing starts plunge 14.3% to 10-year low Pace of building new homes down 37.8% on year-over-year basis
Rex Nutting
MarketWatch, 9:05 AM ET Feb 16, 2007
http://tinyurl.com/2m7bbj