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Foundation For Recovery

A comeback in homebuilder stocks has bucked the trend of a slumping real estate market.

Buyers didn't keep pace in 2007 with the swelling inventory of new houses, and large builders including Hovnanian, Toll Brothersand Pulte Homessaw their share prices tumble. Toll Brothers fell 37 percent, Hovnanian was off 78 percent and Pulte dropped 68 percent.

But the builder stocks have staged a remarkable turnaround in 2008, despite a continued torrent of bad news from the housing market. By contrast to their poor showings in 2007, Hovnanian and Pulte are up about 28 percent in 2008, while Toll is up a more modest 5.7 percent.

Lehman Brothers recently forecast a real estate recovery beginning in the second quarter and raised its outlook for homebuilders.

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This despite a supposed housing crisis that some analysts are beginning to say is overblown or lumped into the bigger mortgage mess/credit crunch.

"When you look at this whole real estate thing, I think some of the problems are overstated and I think some people are associating it with the mortgage crisis, which isn't necessarily a fair thing," says Randy Carver, president of Carver Financial Services.

Some of the more recent housing numbers bear out at least a touch of optimism for the building trades.

The National Association of Realtors pending home sales index was unchanged for January, beating analyst estimates that it would drop 1 percent. The trade organization predicts a continuing slide in new home sales prices in the early part of 2008, but is forecasting a turnaround ahead, with prices expected to rise 5 percent for February 2009.

Still, there continue to be signs of trouble. The Commerce Department reported that sales of new single-family homes slipped to their lowest level in 13 years, leading the National Association of Home Builders to call on Congress to approve a home buyer tax credit as an addition to the economic stimulus package.

"Our latest surveys reveal that builders are seeing greater traffic of prospective buyers through their model homes than in previous months, yet this has yet to translate to any improvement in actual sales activity," National Association of Home Builders Chief Economist David Seiders said in a statement. "It stands to reason that policy measures to stimulate housing demand could be a powerful force and help bring about a housing and economic recovery."

To be sure, then, Lehman's position on housing isn't universally shared. Yet there is a feeling that some of the builders can begin to reclaim value.

"Lehman's always been very good on the contrarian calls and I sort of like it," says Nadav Baum, managing director of investments at Pittsburgh-based BPU Investment Management. "Everyone's jumping on gold and commodities, and I think I'd be selling that stuff. Risk-reward is definitely on your side."

A home is offered for sale at the Toll Brothers Country Club Estates luxury housing development in Moorpark, Calif., Wednesday, Aug. 22, 2007. The upscale homebuilder Toll Brothers Inc. said Wednesday its third-quarter profit tumbled, hurt by hefty writedowns and higher-than-expected cancellations as the housing downturn and credit quality concerns continue. Robert Toll, chairman and chief executive, said cancellation rates for the quarter were greater than at any point in the 21 years the compa
Reed Saxon
A home is offered for sale at the Toll Brothers Country Club Estates luxury housing development in Moorpark, Calif., Wednesday, Aug. 22, 2007. The upscale homebuilder Toll Brothers Inc. said Wednesday its third-quarter profit tumbled, hurt by hefty writedowns and higher-than-expected cancellations as the housing downturn and credit quality concerns continue. Robert Toll, chairman and chief executive, said cancellation rates for the quarter were greater than at any point in the 21 years the compa

Michael Cohn, at Atlantis Asset Management, likes Toll Brothers as well as Ryland, though he thinks a sustained comeback for the sector on the whole may still be a few months away.

"Their debt-to-equity ratios are much more palatable than 90 percent of the other names," Cohn says.

Baum also sees the builders as a longer-term play.

"You've still got to get through all the excess inventory before the builders can start making some money and building some homes," he says. "I still think it's going to be choppy and sideways for another three, four months, so there's no rush."

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