Homebuilders Supported By Market Share Gains

by: Markos Kaminis

The differences in economic data between and within some of the metrics of the housing industry, offer evidence of a value added trend for the publicly traded homebuilders. They are the beneficiaries of an important industry factor change, and will likely lead the real estate market in recovery as a result. This is not a new statement by your author by far, but it is the first dedicated article to the important issue.

Many of the publicly traded homebuilders have and will gain market share into the next upturn of the business cycle. The benefits of such change should be akin to a nitrogen boost for a drag racer's speed machine. That said, I continue to warn that more broader reaching market shock via an Iran event and the more easily envisioned contagion from European recession, should offer new stumbling block for the economy, for single-family housing generally and for cyclical high-beta shares especially; that is inclusive of the homebuilders and despite the important industry factor value add.

This, like all investment sectors, is a dynamic and complex environment that should never be simplified by blank statements and vague descriptions. Thus, you are wise to assess the value of your advisors and the authors of articles and reports based on how well they see the entirety of each dynamic investment option.

The complexity of the industry is why we see such ups and downs for the homebuilder shares of late. Real estate data has been mixed, and is confusing for those who do not understand the very important point being made through this report. New Home Sales data offered the latest neck jerk for shareholders of homebuilders, with the SPDR S&P Homebuilders (NYSEARCA:XHB) up 1% Tuesday. The report indicated the pace of new home sales improved to 328K in March, which exceeded the consensus of economists' forecast for 318K. Furthermore, February's tally was ratcheted higher to 353K, up from the initially reported pace of 313K. Also, the latest count was 7.5% more than last March. The shares of PulteGroup (NYSE:PHM), K.B. Home (NYSE:KBH), D.R. Horton (NYSE:DHI), Beazer (NYSE:BZH) and Toll Brothers (NYSE:TOL) were all higher by 2% to 4% on the news. Likewise, builder supply shares like that of USG (NYSE:USG), Masco (NYSE:MAS), Owens-Corning (NYSE:OC) and Mohawk Industries (NYSE:MHK) were up to a similar degree.

Yet, just a few days prior, disappointing real estate data in the form of Existing Home Sales for March sent the shares lower. Before that a tough Housing Starts report, highlighting regional variances and a multi-family drop, also weighed on housing stocks. Also last week, the Housing Market Index showed general builder sentiment had fallen after several months of improvement. What's it all mean?

Investors in these stocks should realize that many factors will play roles in their operational performance. For instance, multi-family projects project the harsh reality that many Americans can no longer qualify for home ownership and are moving into rental property. However, this data influences overall activity positively, and while it helps support building product supply companies, it means little for the builders of single-family or other housing for home ownership.

Existing home sales data continues to reflect a difficult real estate environment on the whole, and builder confidence reflects the general level of activity and the mood of many decimated smaller undercapitalized builders. Yet, many publicly traded homebuilders like D.R. Horton, which reported this week higher revenues, earnings, closings and orders, are providing pleasing results. This is leaving many housing stock investors confused, if not suffering from whiplash.

A major driver of the differences between the performance and moods of housing segments and individual builders is the result of a shake-up that happened in the building industry through the real estate crisis. As in every cycle, highly levered and mostly overenthusiastic smaller builders found themselves in a tough spot when the market collapsed. Given the depth, degree and length of the current downturn in real estate, the shake-out has been exceptional. The result is fewer builders in position to capitalize on any new demand, and so the fewer numbers of builders are garnering a larger percentage of business. So even while the aggregate results remain depressing in real estate, the improvements are magnified within the short list of capable and capitalized builders.

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