Homebuilders Hopeful on Economists' Views

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

The latest Housing Market Index data reported by the National Association of Home Builders (NAHB) in conjunction with Wells Fargo seems to reflect a more hopeful mood among residential builders. While this report does not yet illustrate a healing new home market, it still offers positive reinforcement for real estate prices and sales growth views.

After dipping three points in June, on spring buying season hopes that went unfulfilled, the Housing Market Index rose two points in July, to a mark of 15. It’s still a sad level on an absolute basis, as 50 marks break-even between good and bad conditions and expectations. Yet, as students of securities markets know, change in trend and velocity of growth matter to stock movement, so investors in the shares of home builders like Toll Brothers (NYSE: TOL) should also find the opportunity I see for hard real estate. That said, as far as the home builders go, I still believe nimble trading and selective stock investment are appropriate. In other words, stock performance may vary from builder to builder, especially around earnings season when reality is compared against hope. Still, generally, I also see rise for the industry’s shares in 2011, barring catastrophic U.S. government failure to pass debt ceiling legislation in time.

It should be understood that new construction may lag existing home sales growth, given the constraints that are now well-embedded in the marketplace (tight lending, distressed property inventory). Still, it appears to me that home builders are prospectively contemplating a housing outlook that is shifting from contraction to growth, albeit miniscule year-to-year appreciation from a low relative base of housing sales.

This seems apparent based on the details of the Housing Market Index Report, which shows builders reporting the traffic of prospective buyers at about the same level as in June (component index reading of 12). The important driver of the overall index gain is the same one that drove early year improvement: hope. The HMI component gauging expectations over the next six months jumped seven points to a mark of 22 in July. My feeling is that this also pulled the view of current conditions higher among builders, as that component inched upward two points to 15. So I think builders are well aware of the many economists and industry organization forecasts seeing a turn toward year-over-year sales growth in or around the second half of 2011.

As far as regional results go, the most confidence was found in the South and West parts of the nation. Each of the two regional indexes saw two point improvement, with the South doing a bit better at a mark of 17 and the West still languishing at 14. The Northeast actually posted a two point decline to a mark of 15, and the Midwest improved just a point to 12. So, the most prospective markets exhibited the greatest change in hope.

As always, I remind readers that this index includes many smaller builders who are in a tougher spot than large well-capitalized builders. Their mood is going to be inherently worse than the larger builders, yet their voice is loudly heard in this data. This must be kept in mind when looking at the absolute level of misery the readings announce. In conclusion, I view the positive change here the most important takeaway, and believe it is supportive of my case for improving home prices and home sales through the rest of the year, as it is based on informed survey participants. Finally, I continue to qualify all positive forecasts against the risk tied to the U.S. government’s negligent handling of our nation’s credit rating, which is tied to the debt ceiling legislation and pending default on debt payments.

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