Rains After a Long Spell of Drought
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Optimism among the nation’s home builders climbed in September for the fifth straight month to reach the highest level in more than six years. Existing home sales have risen at the quickest pace in almost 2 years, while homebuilder sentiment has also increased to six-year highs. This closely watched index rose its highest level since 2006. It is said that several builders expects growth in housing activity in a range of 20% to 30% for each of the next few years.
The Standard & Poor's Supercomposite Homebuilder Index has risen 53 percent this year.
Constructions on new homes and apartment units during August are up from 733,000 in June and 581,000 a year ago, the Census Bureau said.
This past month we saw a 2.3 percent increase in starts for new homes across the country. Compared to the same month in 2011, total new starts for residential real estate nationwide are up 24.5 percent, a huge jump for a single year. Homebuilder sentiment which has also touched a 6-year high in September is expected to contribute to GDP growth this year for the first time since 2005.
KB Home, one of the largest home builders in the U.S., swung to a fiscal third-quarter profit, the latest sign that improvements in the broader housing sector are spilling over into the market for newly built homes. For the third quarter ended Aug. 31, KB Home posted a profit of $3.26 million, or four cents a share, compared to a loss of $9.6 million, or 13 cents a share, a year earlier. Revenue jumped 16% to $425 million and average sale price rose 7.8% to $245,100. Investors are enthusiastic, sending shares 16% higher on the day. The market values the company at $1.2 billion after Friday's jump. KB Home is seeing orders for new homes rise and it is completing more construction projects. Company shares jumped 14 percent, hitting levels not seen since early 2011.
The Street Ratings rates PulteGroup as a hold. PulteGroup shares have soared 98 percent this year. The company's strengths can be seen in multiple areas, such as its revenue growth, solid share price performance, and impressive record of earnings per share growth. It hit a new 52-week high Friday as it is currently trading at $17.45; above its previous 52-week average volume, 14 million shares, over the past 30 days. Currently there are six analysts that rate PulteGroup a buy. Pulte Group rebounded from a loss in the first quarter to adjusted earnings of $0.13 per share in the second quarter of 2012. Homebuilders like Pulte with significant land positions, broad geographic and product diversity, and better capital positions are expected to benefit the most as market conditions recover.
Fellow builder Toll Brothers (the homebuilder of luxury homes) shares rose 4.5% and ended the week 1% higher sparked gains across the sector in Wednesday's trading session after the company reported better-than-expected earnings and order growth. Toll's fiscal third-quarter earnings rose 46% amid what it called the most sustained demand it has seen in more than five years. The results also beat Wall Street expectations, as it is currently trading at $36.71, above its previous 52-week high. The Street Ratings also rates Toll Brothers as a buy. Toll is one of the more attractive businesses in homebuilding, in our view, represented in part by its narrow economic moat. The firm's well-managed indebtedness, lean operations, and disciplined adherence to the luxury market make it a likely big winner. The Shares advanced some 3% further the highest levels since the start of 2007 after the company published its third quarter results.
With a gradual recovery in the overall economy, the homebuilding industry is finally seeing signs of stabilization in 2012. According to Reuters, ground breaking on new homes increased by 2.3% in August, relative to a 2.8% drop in July. Despite tight lending standards, the housing market is slowly healing from the worst downturn in generations.
Prices of existing homes rose 9.5 percent year-over-year this past month. The market story unfolds higher consumer confidence and investors can cut long positions in PHM, TOL, and KBH. Their forward P/E and P/B ratios are the highest relative to their peers. It is an appropriate time to realize safe profits and sustained gains from the stocks of these three companies.
The developments, coupled with record-low mortgage rates, are increasingly affirming the fact that the housing sector is gaining traction in this otherwise depressed U.S. economy.
“The pieces for a more sustainable housing sector recovery are now falling into place,” says Millan Mulraine, an economist at TD Securities.
Home-builder stocks are among the top performers this year. An increase in housing construction and sales has been helping home builder stocks grow the last six months, reaching the highest levels in two years. This may be the most promising existing home sales report in five years and the gradual improvement of the battered housing market appears that real demand is returning to the market eventually. Not only has builder confidence increased by solid margins in every region of the country, the stocks of the sector are also gaining a boost from a higher broader market. In time it seems housing will become the bright spot in the economy for a change.
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