Best Builder Bets for 2012

New home construction
New home construction

Sales of newly built homes are on track to set a new record low for this year. The street was expecting a flat to slightly down reading in July, and while the number came in at -0.7%, that figures in a very large downward revision for June.

"The annual rate coming in at 298k for July is just terrible, but what makes things worse are the downward revisions to June and May, -5 percent in revisions are just not very good," says JT Smith of Aristar Funding. "The unadjusted actual sales coming in at 27,000 would make this the 2nd worst July in recorded history."

New homes aren't selling, new delinquencies are rising, and inventories of existing homes are way too high. So why am I titling this blog, Best Builder Bets? Because some analysts out there think that some builders are well-positioned to profit going forward. Jeff Meli of Barclay's Capital is naming names and markets.

"A couple of the names that look appealing to us include, Meritage , Standard Pacific and DR Horton as three examples where they are primed to take advantage of improvements in building conditions that we think could happen over the course of the next couple of quarters," says Meli.

He is looking at areas of the country that are seeing some price appreciation and seeing which builders already have a substantial base of operations there, because it takes builders up to two years to get established in a new area. He's bullish on Atlanta, Washington, DC and, Believe it or not, Phoenix. Phoenix??

"Where Phoenix has obviously had a rough time, prices dropped precipitously, there is a large number of foreclosures to go through the system; however, looking forward 6-9 months, we think that a lot of that distressed overhang will be worked through, and it will actually reach an equilibrium and potentially provide a robust place for homebuilders to be operating," argues Meli.

While Meli is looking ahead to which builders are well positioned, Dan Oppenheim over at Credit Suisse is busy revising down estimates on the big public builders.

"We are lowering target prices by an average of 30%, on the expectation of lower sales, greater pricing pressure, and increased risk of impairments," he says, while upgrading Ryland to "neutral" from "underperform."

If the housing market really gets "pummeled," as Oppenheim suggests could happen, the builders at least risk would be "NVR, MDC, DR Horton and Toll Brothers, greatest risk for Hovnanian, Beazer, KB Home and Pulte."

As we've suggested before, the housing recovery will be extremely regional. While all real estate has always been local, factors in today's housing market, like judicial versus non judicial foreclosure states, and in today's economy, like unemployment, make it even more so.


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