Dow Steady At 12,000: Is Housing Optimism Setting In?

by: Edgar Ambartsoumian

Monday showed that our markets might be able to walk with European lingering problems after all. Did the global markets become so sensitive, that a simple decline in Spain's $7.3 billion borrowing costs could be the catalyst for the Dow remaining above 12,000? This is not only discouraging, but it's pathetic. I don't know about the rest of the investors, but I gave more emphasis to the housing starts and the rising building permits. Builders reported on 685,000 new homes, which was a 9.3% increase from October. Building permits surged 5.7%, which was mainly due to the increase in apartment construction. This fresh confidence mixed with the recent Black Friday record breaking surge of 6.6% in sales makes me anxious to see the upcoming holiday shopping figures.

While everyone's eyes were glued to Materials Select Sector SPDR (NYSEARCA:XLB), I went through a list of builders that were boasting solid intraday gains: Toll Brothers Inc. (NYSE:TOL), D.R. Horton, Inc. (NYSE:DHI), Lennar Corp. (NYSE:LEN), PulteGroup, Inc. (NYSE:PHM), Beazer Homes USA, Inc. (NYSE:BZH), and Hovnanian Enterprises Inc. (NYSE:HOV).

Company / Monday's Gain Market Cap EPS (ttm) Forward P/E (ttm) PEG Past 5 Year EPS Growth Rate Volatility Risk vs. S&P (Beta)
Toll Brothers (+6.44%) $3.43 Bill. $0.24 53.4 9.6 -43.67% 11% Riskier than S&P (Beta 1.11)
D.R. Horton (+5.70%) $3.93 Bill. $0.23 26.4 3.5 -43.46% 9% Riskier than S&P (Beta 1.09)
Lennar Corp. (+6.32%) $3.68 Bill. $0.48 28.5 1.5 -42.52% 71% Riskier than S&P (Beta 1.71)
Pulte Group, Inc.


$2.4 Bill. $-1.03 32.7 -2.21 -16.51% 22% Riskier than S&P (Beta 1.22)
Beazer Homes USA, Inc. (+15.09%) $184.44 Mill. $-2.71 -1.6 n/a -32.56% 342% Riskier than S&P (Beta 4.42)
Hovnanian Enterprises (+18.11%) $142.51 Mill. $-2.88 -0.9 n/a -66.28% 189% Riskier than S&P (Beta 2.89)
Click to enlarge

From a basic glance at the 5 year EPS growth rates across the board, it doesn't take a rocket scientist to figure out that the industry as a whole is still far from recovery. The aforementioned numbers look awful since there is a negative sign next to every percentage. The end of 2011 will mark the 5 year anniversary of the subprime crisis mess, although in some parts of the country the decline in housing prices began a little earlier. I truly want to see a modest housing recovery in 2012, followed by a rush of investment property purchases in 2013 when bargain hunters with plenty of hoarded cash come out to play after seeing a bottom. 100% financing is history, which means now we have more renters than buyers. Henceforth, a surge in rental property purchases is expected and it's already happening in California, Florida and Texas, the largest housing markets.

If housing does recover faster than expected in 2012 with a higher rate of change in consumer confidence and unemployment rate (since we all know how magically everything falls in place before elections), then we just might see our greenback creep up closer to Euro.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PHM, BZH over the next 72 hours.