Skip to main content

Homebuilders got a boost Monday after another analyst upgraded the sector, saying that the U.S. housing market slowdown may be close to reaching a bottom and that investors' sentiment on the stocks has greatly improved.

BB&T Capital Markets analyst Todd Vencil raised his ratings on

Beazer Homes

(BZH) - Get Beazer Homes USA, Inc. Report



(LEN) - Get Lennar Corporation Class A Report

to buy from hold.

Even if fundamentals in the market remain "god-awful" and "continue to get worse," sentiment on the stocks has turned more positive, Vencil wrote in his research note.

"With the


move to the sidelines in August, the market seems to have undergone a shift in perspective -- apparently, from this new angle the homebuilding glass looks half-full -- driving the stocks higher in the face of a steady stream of bad news," Vencil wrote.

Since bottoming in mid-July, builder stocks are up over 20%. In early trading Monday, Beazer rose 2.9% to $42.52 and Lennar rose 1.7% to $47.08.

TheStreet Recommends

Last week, JPMorgan upgraded the sector in a

very bullish note. But Centex sounded a warning bell, preannouncing

very weak quarterly earnings because of large land writedowns.

In his research note, Vencil said the bottom in the U.S. housing market should begin when builders slow the introduction of new inventory into the market and buyer demand improves (or at least stops getting worse). These factors will lead to a drop in inventories.

Vencil argued that the first two parts of this three-fold process are already under way. Recent home starts are down 20%, which means builders are curtailing new inventory. Buyer demand has leveled off on a national basis, as evidenced by the recent Mortgage Bankers Association purchase index, which has been moving sideways for several months now, Vencil noted.

The issue, however, is that inventory still remains high in many markets. But things may be changing in once tough markets like the greater Washington D.C. region.

According to Vencil's report, the latest regional housing data show that the total number of homes for sale in the greater northern Virginia area has declined for three straight months after peaking in June. This region was one of the first to have been hit by the real estate downturn.

Meanwhile, other markets around the country continue to be weak.

For instance, Florida real estate broker Mike Morgan says that builders and other sellers of homes remain in deep trouble in that state.

The two major sources of inventory right now are builders and the flippers that are going broke, he says. That's in addition to the traditional inventory of sellers in a normal market.

Morgan predicts a third wave of inventory is coming. "It is a tidal wave of sellers that are going to lose their homes because they cannot refinance," he says.

He says that homeowners who bought in recent years with an adjustable rate mortgage often are unable to refinance their houses because the bank wants the owners to account for the differences in the equity (since the housing prices have dropped). Since these owners don't have that difference, they decide to sell, Morgan says.

"When I tell them what they can sell for, they are speechless. In 99.999% of everyone I have spoken with, they cannot sell at a price to cover the mortgage," he says.