Real Estate Flops in May, Post Tax Credit

Includes: DHI, HOV, KBH, NVR, PHM, TOL
by: Thomas Smicklas

The latest Credit Suisse First Boston Monthly Survey of Real Estate Agents has been released (taken last week). I prefer this survey because it relies on timely reports from active realtors and other real estate professionals in the top fifty metropolitan areas of the country. CSFB cuts through the hype and spin and instead relies upon boots on the ground to assess and predict.

The results for the home market are poor, post tax-credit. Traffic levels were weak at the beginning of May and remained weak thereafter. CSFB will be following traffic patterns carefully to determine how long the post tax credit slowdown will last, with their expectation being that it will not improve from depressed levels anytime soon (perhaps in the Fall, if the stars align to improve the economy).

The worst declines occurred in Texas (Austin, Dallas, and Houston),Florida (Jacksonville and Orlando), Seattle and Washington D.C. metro. Decreased traffic nationwide was most evident in areas with relatively low average selling prices (high proportion of first time buyers). California appears to be less daunting, as the California tax credit assisted home buyers.

Renewed pricing pressure is appearing again, with the largest decrease in home prices reported since November, 2009. CSFB believes that price pressure downward is and will be commonplace, still. High existing home inventories remain.

From a securities standpoint, new home builders/developers are more reasonably valued now after an average 28% decline in recent prices as a whole. Builders now trade at an average 1.25x adjusted book value. CSFB believes that further declines are likely in stock prices this summer, at which time they may be prone to recommend buying the strongest of the lot.

Building supply companies face further weakness as product volume and pricing slips, in spite of the efforts of companies such as USG and MHK to hold the line.

Agents, in a monthly exercise, were asked to rate home builders. Highest were Toll Brothers (NYSE:TOL), Pulte Group (NYSE:PHM) amd D.R. Horton (NYSE:DHI). Lowest were Hovnanian Enterprises (NYSE:HOV), NVR, Inc. (NYSE:NVR) and KB Home (NYSE:KBH). It should be noted that some may rate a home builder based upon incentives given to compensate the real estate professional.

The over fifty-page document presented the mild to horrific problems facing the real estate industry, city by city and region by region. There were but a few spots of hope. Quotes from agents were generally discouraging in almost every respect.

Those involved in real estate know that there is always a good deal somewhere, especially for the experienced property investor. This survey generally does not focus on this relatively small group, nor on commercial and industrial property. A review of prior CSFB survey reports displays that their methodology in the compilation of the monthly report is a valid assessment tool.