Housing Outlook Brightens, Lifting Builder Stocks

After all the doom and gloom in recent months, the beleagured housing market got a bit of good news on Wednesday.

A decision by U.S. regulators to let mortgage giants Fannie Mae and Freddie Mac buy more home loans--as well as an improved housing forecast by Lehman Brothers and comments by Federal Reserve Chairman Ben Bernanke--help lift shares of U.S. homebuilder nearly 2.6%.

Shares of Toll Brothers rose 4 percent despite reporting a greater-than-expected quarterly loss.

The Office of Federal Housing Enterprises Oversight lifted the caps on their portfolio allowing the two companies to buy more mortgages. Whether they will buy more is another story, said Mike Larson, analyst with Weiss Research.

"If when it comes down to it Fannie and Freddie get the ability to expand they also may tighten their credit standards," Larson said. "There will likely be some benefit. The question is how much."

Fannie Mae and Freddie Mac buy mortgages and then issue bonds based on the payments of those mortgages.

Also Wednesday, Lehman Brothers said it expected home-sales trends to improve within the next two quarters.

"As a result attractive investment opportunities do exist in this space," Lehman analysts said in a note. "In our view the builders that have been able to generate the most cash flow while also maintaining the healthiest balance sheets are KB Home, Toll Brothers and D.R. Horton," the analysts said.

The news came on the heels of Toll's release of its fiscal first-quarter results, for which Toll recorded a loss of $96 million, or 61 cents per share, for the three-month period ended Jan. 31, greater than the loss of 51 cents a share analysts had forecast.

Analysts attributed the miss to the pretax write-downs of $245.5 million, or 93 cents per share, greater than the mid-point of the $150 million to $300 million the company had estimated Feb. 6.

A year earlier, Toll, based in Horsham, Pa., posted a profit of $54.3 million, or 33 cents per share.

Toll Brothers ended its first quarter with about $950 million in cash and more than $1.2 billion available under its bank credit facility.

The U.S. housing market has been in a tailspin for more than two years, with demand falling and builders cutting prices.

Wednesday, the Commerce Department said sales of new single-family homes fell 2.8 percent in January to the lowest level in 13 years, while the median sales price dropped 15.1 percent from a year earlier. The months' supply inched up to 9.9 months, the highest since October 1981.

Federal Reserve Chairman Ben Bernanke said the central bank would act as needed to ensure the beleaguered housing and credit markets would not further undermine the weakening economy.

"We believe that revived buyer confidence is paramount to getting the market moving again," Robert Toll, chairman and chief executive, said in a statement. "Only when customers believe we are done with housing deflation will the excess supply clear and the market return to equilibrium."

As shares of the builders gained, the benchmark Dow Jones U.S. Home Construction Index, rose 3.3 percent.

As Robert Toll said last week at the Reuters Housing Summit, the crucial spring selling season was weak compared with a year earlier, which may portend additional impairments, JP Morgan analyst Michael Rehaut wrote in a research note.

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