Outlook, Stock Prices Improve for Builders
Jim Zeumer, vice president of investor relations at Pulte Homes Inc., still shakes his head when he looks at sales charts of the nation’s largest home builder. Pulte’s sales fell 20% in September from a year ago, and they were off 10% in October.
But Zeumer said the number of prospective buyers touring the company’s homes, which plunged 30% immediately after Sept. 11, has since surged ahead of last year’s figure. “We are more encouraged about 2002,” he said.
Zeumer’s improved outlook says a lot about the home-building industry, which after a spate of grim reports is beginning to recover its confidence.
On Friday, the National Assn. of Home Builders reported a slight uptick in optimism in November, largely because of a rebound in traffic by potential customers.
The improved expectations are shared by investors who have bid up home-building stocks in recent weeks. The Standard & Poor’s index of the largest public home builders has recouped its loss since Sept. 11 and then some.
After Friday’s report from the NAHB, Bruce Smith, the association’s president and a home builder in Walnut Creek, Calif., said: “The housing sector is well-positioned not only to cushion the effects of the current economic slowdown but also to lead the economic recovery in 2002.”
Although some say such optimism is still unfounded, the home-building industry has seen a big boost in recent weeks, thanks to declining mortgage rates. The average 30-year fixed-rate mortgage hit a three-decade low of 6.45% last week, although it edged up this week to 6.51%. Prices for building materials also have dropped, which has helped builders’ bottom lines.
“Business isn’t as bad as people expected,” said Matthew Moyer, a broker at A.G. Edwards & Sons in St. Louis, who is advising clients to purchase stocks of a few builders producing the largest returns. “We haven’t seen the downward earnings that some were expecting.”
“A lot more people can buy a home at mortgage rates of 6.5% than 8.5%, and that’s made a big difference for the percentage of the population that can buy a home,” said Gordon Milne, chief financial officer of Calabasas-based Ryland Group Inc., the nation’s sixth-largest builder.
Ryland shares, after falling 15% in the week after the attacks, have climbed sharply on the New York Stock Exchange. They closed at $58.97 on Friday, up $1.50 for the day and more than 22% higher than its price Sept. 10.
Investor optimism aside, it’s unclear how strong the housing sector will hold up, given the current economic uncertainty.
Consumer confidence has fallen sharply, and layoffs have mounted, swelling the number of unemployed. And some analysts say there’s more bad news to come for the economy and the housing market in particular.
Investors should expect “a fairly constant barrage of negative housing statistics,” said a report this month by Salomon Smith Barney, a New York-based brokerage firm.
The report indicated that major builders suffered a 15% decline in new-home orders on average since the terrorist attacks.
Data on new-home sales have been a bit confusing. The Commerce Department reported a modest 1.4% decline in September, less than analysts had anticipated.
But Meyers Group, which studies new-home sales, said sales in California fell 30% in the third quarter, with the terrorist attacks accounting for some of that decrease.
Stephen Kim, the Smith Barney analyst who wrote its report, said he is skeptical shares of major home builders will continue to rise in the short term. Despite his warning, Kim still thinks the industry will be a solid long-term investment
Michael Carliner, an economist at the National Assn. of Home Builders, said there’s good reason to believe housing isn’t as vulnerable now as in past economic cycles. He expects only a mild slowdown in home sales before a turnaround by mid-2002.
In addition to low mortgage rates, inventory levels remain tight. There’s a 4.4-month supply of available homes nationwide, far fewer than the six-month-plus supply during the last recession in the early 1990s.
For builders, the surge in stock prices and growing confidence could spur more building, which would provide fuel for an economic recovery.
At Atlanta-based Beazer Homes USA, officials are projecting earnings per share to rise 10% next year, down sharply from 62% this year. Still, the company projects that investors will receive an estimated $9 a share next year, up from $8.18 this year because of rising demand for new homes, said David Weiss, chief financial officer at the nation’s ninth-largest home builder.
In the fiscal year ended Sept. 30, the company said its backlog of unfilled orders was more than one-third higher than in the same period last year, and October orders had jumped 33% higher than a year earlier.
“With those sorts of figures,” Weiss said, “there’s no reason to believe that earnings will go down next year.”
