Through the Roof : Home builders’ stock has jumped 50% despite a sluggish market

Despite a real estate slump that last month caused housing construction to fall 9.3%, home builders’ stocks have jumped more than 50% in value this year and become a key factor in fueling the stock market’s recent record climb.

Investors’ hopes for home builders such as Los Angeles-based Kaufman & Broad Home Corp., Centex Corp. of Dallas and Ryland Group Inc. in Columbia, Md., have risen steadily since December, when tension in the Persian Gulf brought home sales nearly to a standstill. Although many home-building companies have had a significant erosion in earnings during the period, many experts say the firms’ shares are a long way from peaking.

“There is still time to buy these stocks,” said Stephen J. Dobi, a housing analyst with Smith Barney in New York. “You should not spend time looking at how far up they’ve come, but rather how far down they still are from their previous peaks.”

In trading Monday on the New York Stock Exchange, Centex--which was as high as $44.24 in 1990--rose 62.50 cents to $39.50, up $20.25 from its 1990 low.

Newport Beach home builder J. M. Peters Co., which traded as high as $8.625 in 1990 on the American Stock Exchange, is up more than 150% from its 1990 low of 75 cents. Although Kaufman & Broad has exceeded its 1990 high, its close of $15.75 is up nearly 300% from its 1990 low of $5.375 a share.

The performance has come even as housing starts fell to a seasonally adjusted 901,000 units from 993,000 in February.

As a result of the disappointing construction news, a few stock watchers remain dubious about continued strength in the home-building sector, particularly in California, where layoffs are rising and where some builders are slashing prices--and sacrificing profit margins--to lure buyers.

Earlier this month, for example, Kaufman & Broad announced the opening of a development in the Antelope Valley Community of Rosamond, where homes will start at $76,990.

The company said the asking prices in the new community are the lowest for new single-family, detached houses in California. Though Kaufman & Broad’s focus on low-cost housing for first-time home buyers has helped it win market share from weaker builders, some analysts wonder whether its profit can hold up at such price levels.

“Margins are declining significantly,” said Charles Biderman, who edits the weekly Market Trim Tabs newsletter from Santa Rosa, Calif.

By the end of the year, he said, “I expect a lot of blood to be shed by builders.”

The outlook for home builders may become clearer by the end of June, when data on the traditional spring home buying season is in. Investors clearly are expecting mortgage rates to head lower and spur sales.

Yet some housing experts, such as Bob Edelstein, co-director of the Center for Real Estate and Urban Economics at UC Berkeley, believe that housing demand is going to remain weak in California and some other areas of the country. California’s unemployment rate jumped to 7.7% in March, highest in six years. The U.S. jobless rate also climbed in March--to 6.8% from 6.5%.

Those numbers “don’t bode well for the housing market,” Edelstein said.

And if the numbers don’t improve soon, experts say, enthusiasm for home builders’ stock could cool.

Investors had been willing to brave a rise in unemployment and a slump in earnings for the first four months of this year because the quick victory of U.S. and allied forces in the Persian Gulf War eased fears of a long standoff that may have brought greater economic calamity.

But now that more time has passed, some have begun focusing on the balance sheets of home builders and have discovered that improved numbers aren’t yet on the horizon.

Net income at Centex, considered by many analysts the strongest of the publicly held builders, is expected to decline 3% from the $62 million reported for the fiscal year ended March 31, 1991.

Likewise, Kaufman & Broad President Bruce Karatz said his company’s net income for the quarter ended Feb. 28 fell more than $10 million to $2.6 million and that “slim margins will continue in the second quarter.”

“Margins aren’t what they were two years ago,” conceded William Gillilan, chief operating officer of Centex.

But he said that sales volume has picked up in the past 12 weeks and that he is optimistic the long-term outlook for large home builders is bright.

Many analysts agree.

“My thesis is these guys are going to pick up tremendous market share,” said James F. Wilson, a Montgomery Securities housing analyst.

“We’re looking for Kaufman & Broad to hit $20 a share in the next six months.”

Wilson said he also expects that shares of Centex and some other home builders will rise.

Through the Roof

Since last autumn, share prices of home building companies have taken off.Weekly prices April 30, 1990 to April 29, 1991 PHM Corp. $16.375 down $0.125 Centex Corp. $39.50 up $0.375 Kaufman & Broad Home Corp. $15.75 up $0.125 Ryland Group Inc. $22.25 down $0.75 J.M. Peters Co. $2.75 no change Source: Dow Jones