Homebuilder Shares Find Buyers After Strong Data

Updated from 2:27 p.m. EDT

Low mortgage rates continued to prop up housing sales last month, and as the trading day progressed investors slowly translated the gains into the shares of companies that build homes.

The Commerce Department reported that sales of new single-family homes surged by 6.7% to a record annualized rate of 1.02 million in July. Meanwhile existing-home sales rose 4.5% to an annual rate of 5.3 million in July, up from a revised 5.1 million-unit rate in June and in line with the 5.3 million units analysts were forecasting.

While impressed by Monday's print, at least one analyst was skeptical the pace would last.

"We're not creating enough households to sustain that rate," said Carl Reichardt, a homebuilding equities analyst for Banc of America Securities. Reichardt believes that by the end of 2002 the annualized rate will end up being between 900,000 to 950,000 new homes.

Reichardt also says that homebuilding stocks don't always react to the national housing numbers that come out every month.

"No one builder has a huge national share of the market place and how the national market moves doesn't necessarily determine the share price," Reichardt said.

The impact was delayed Monday but as the broader market recovered the gains eventually did accrue to builders' shares. Late in the session, Centex ( CTX) was adding 2% to $52.40; KB Home ( KBH) rose 1.5% to $51.40; MDC Holdings ( MDC) rose 2.2% to $44; Pulte gained 1.6% to $51.46; Lennar ( LEN) added 3.2% to $55.90; and Ryland ( RYL) wasup 3% to $45.43.

Reichardt says that, on average, these companies are expected to see 15% earnings growth in 2002 and 2003 even though, contrary to popular opinion, sales of new homes have basically been flat since 1998.

"This is an underappreciated and undervalued group," Reichardt said. (His firm, Banc of America Securities, does underwriting work for homebuilding companies.)

The steady climb in housing sales, especially with the labor market appearing stagnant, has raised in some investors' minds the prospect of an economic bubble sustained by home equity prices. Lawrence Horan, an analyst with Parker/Hunter, a Pittsburgh investment bank, says those concerns are misplaced.

"A bubble means speculators with no real desire to hold on to anything," Horan said. With housing, people are generally living in their homes, even second ones, which are often purchased as vacation homes in anticipation of it becoming the main retirement residence.

More important, Horan said, is that demand for housing is up while supply is constricted. He says the U.S. has experienced a larger-than-expected immigration of educated workers going into fields such as technology and medicine. Those workers are buying homes.

On the supply side, Horan said land to build on is becoming more scarce, with 80% of the states now carrying legislation on their books that restricts housing growth.

A third point Horan makes is that housing prices haven't outpaced household income, as they did during the real estate bubble of the 1970s. Today, about 27% of a median household income is spent on the mortgage of a home purchased at the median home price. The lowest that ratio in the last 20 years has been 25%, Horan said. During the 1970s real estate bubble, it reached 35%.

More from Technology

Facebook Takes Aim at YouTube, But It'll Be an Uphill Online Battle

Facebook Takes Aim at YouTube, But It'll Be an Uphill Online Battle

Microsoft Chief Says Its ICE Contract Isn't Part of Child Separation Policy

Microsoft Chief Says Its ICE Contract Isn't Part of Child Separation Policy

Immigration, Instagram and Oil - Here's What You Can't Miss Wednesday

Immigration, Instagram and Oil - Here's What You Can't Miss Wednesday

What Will GM Do With Cruise -- and Is Its Stock Worth $55?

What Will GM Do With Cruise -- and Is Its Stock Worth $55?

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio