Sector Snap: Homebuilders Sag Amid Weak Job Market

NEW YORK (AP) â¿¿ Shares of homebuilders and their suppliers were down Monday after a KeyBanc Capital Markets Inc. analyst said weak job growth this year probably would not be enough to help the housing market shake off excess inventory from foreclosures and vacant units.

KeyBanc analyst Kenneth Zener said the health of the housing market will be closely tied to the labor market this year. Basically, workers need a steady income before they are willing to take on debt to buy a new home, and disappointing job creation hasn't created enough new positions this year to significantly reduce the unemployment rate.

As Zener put it in a note to clients: "no job (equals) no house."

Zener analyzed employment trends in the nation's top 25 markets for homebuilding in April, and found that the jobs market improved, along with the pace of new home building permits. But the growth was tepid.

The top 25 markets gained 262,000 jobs from a year earlier, while 169,000 permits were issued. Year-over-year job growth occurred in 16 of 25 markets, compared with 15 markets six months ago. A year ago, only four markets showed job growth.

Still, the growth won't be enough to soak up the excess housing supply after a wave of foreclosures put empty houses on the market, Zener said.

"Over the next several years, we expect still weak job growth to dilute longer-term demographic demand, as household formations remain tied to job growth," Zener said.

Since 1960, it has taken about 1.2 jobs to be created to support one new housing unit, Zener said. He predicted that housing demand in the next decade will continue to be tied to job growth, but that the new demand will have to absorb 2 million excess vacant units left over from the housing crisis and recession.

Still, Zener said some companies will be able to grow in the face of a tepid market. He rated homebuilder Lennar Corp. a "Buy" and gave the company's stock a share price target of $23. He said Lennar could benefit from having its capital deployed outside the traditional homebuilding sector, and cited its likely recovery of deferred tax by the end of the year.

Zener also rated homebuilder Toll Brothers Inc. a "Buy," giving the company's stock a share price target of $25. He said Toll Brothers, which was battered by the housing market downturn, could benefit from its land holdings that leave it with both property and cash now that the market is slowly improving.

Some companies that supply homebuilders could see their business lifted as well, Zener said. He rated supplier Armstrong World Industries Inc. a "Buy" with a price target of $55, while rating Owens Corning Inc. a "Buy" with a price target of $44. He gave Whirlpool Corp. a "Buy" rating and a target price of $99.

Zener said there are risks that could turn the tide for all these companies. Sales could fall from reduced federal backing for home lenders or tighter loan standards. Also, an increase in foreclosures above Zener's estimate of 5 million through 2012 could throw more excess supply into the market. If the job market takes an unexpected turn for the worse, it could reduce demand.

Shares of Armstrong World Industries Inc. fell 83 cents, or 2 percent, to $45.22 in midday trading. Shares of Owens Corning Inc. were up 1 cent to $36.65.

Whirlpool Corp. fell $2, or 2.6 percent, to $74.98. Lennar Corp. fell 33 cents, or 1.8 percent, to $17.65, while Ryland Group Inc. fell 37 cents, or 2 percent, to $16.90.

Toll Brothers Inc. fell 47 cents, or 2.2 percent, to $20.56.

Copyright 2011 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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