Reports Boost the Housing Bull Case

Updated from 2:09 p.m. EST

Wednesday provided plenty of new grist for the housing debate -- most of which seemed to confirm that demand remains strong.

A report from the Mortgage Bankers Association showed a 17% on-year decline in its weekly Market Composite Index, a gauge of mortgage loan applications, while the report's index of new purchases rose 10.2% to 386.6. The component gauging refinancing declined 26% to 4151.9. Refinancing as a component of all mortgage loan activity dropped to 69.5% from 76.6%.

The sharp decline in refinancing comes after a surge that followed the half-point cut in interest rates by the Federal Reserve last month, and it wasn't unexpected. It's also worth noting that the absolute levels, above 4000 for refinancing and above 320 for purchase, remain historically high.

Several of the nation's leading homebuilders also reported preliminary numbers for November orders Wednesday, providing something for both bulls and bears to chew on. Beazer Homes (BZH) said orders jumped 33% to 1,108 in the month, but the figure includes orders from Crossmann, which Beazer purchased last April. Adjusted for the acquisition, orders actually declined 2.7% from the year-ago period.

Larry Horan, an industry analyst with Parker/Hunter, said he doesn't think the full-year numbers give a true picture of the current strength in the market. "The homebuilders operate on a November calendar year. Given seasonality and the immediate effects of 9/11, the year started very slowly. Now we see demand has not dissipated at all."

KB Homes (KBH), meanwhile, said its orders for November were up 13.2%, powered by a 45% increase from the Southwest region. But net year to date orders grew at a more modest 3.5%. Separately, Lennar(len) reported a 19% increase for the year ended Nov. 30.

Horan pointed out that these companies don't necessarily need the overall market to grow, given that "no one player has more than 5% market share ? consolidation will continue to be a driver, and this favors the larger developers."

Shares of KB Homes were up 72 cents, or 1.7%, to $42.25 in late trading, and Lennar was up 20 cents to $50.35. Beazer shares were down 55 cents at $60.45.

The resiliency of the housing market continues to confound the bearish camp, which argues that given a generally weak economy and rising home prices, the pool of qualified buyers should be depleting.

However, Horan notes that most housing now is more affordable than ever. "Using a measure based on a 20% down payment, home purchases are currently 27% of medium income, very manageable and down the 35% of medium income experienced during the mid 80s," he said. Horan maintains that in most areas, people aren't stretching themselves too much in purchasing a home.

The bears' view relies on anecdotal evidence that supply is starting to match demand. "It's a given that low interest rates are turning many renters into owners, but the rental market is still always a great canary," said Patrick Owen of Superior Partners, a Chicago-based research firm. "You are starting to see a drop in rental prices in urban areas, landlords offering concessions ? and this is spilling over into asking prices on sales. Price pressure starts at the high end of the market and works its way down."

Horan, meanwhile, believes that despite some pockets where the market got overheated, macroeconomic conditions remain in place for a continued strong performance for housing stocks. He cites reasons ranging from immigration patterns to a belief that interest rates won't rise unless the economy revives. He also cites the economies of scale that the largest companies can achieve through continued industry consolidation.

>To order reprints of this article, click here: Reprints