Source: Investor's Business Daily: Housing Stocks Take Dive Despite Strong Numbers.
A wave of negative speculation over the future of the housing market has sent home builders' stock prices plunging.
The sector's downturn follows several years of massive gains. The home-building group was one of the few holdouts during the bear market of 2000-02. Industry leaders continued to rack up triple-digit gains as the new bull market started in March 2003.
But lately former market leaders such as Toll Bros., (TOL) Meritage Homes (MTH) and NVR (NVR) have plunged off their July and August highs. IBD's Building-Residential/Commercial group has dived 25% since its July 29 high, going from market leader to laggard in the process. With pundits and consumers fretting over rising interest rates, tighter loan restrictions and talk of a housing bubble, investors are jumping ship.
For all the hand wringing, though, housing growth rates continue to be robust. The latest data showed builders breaking ground on more than 2.1 million housing units last month, up 3.4% from August and 10.3% from September of last year. Building permits rose 2.4% to the highest level since February 1973 as builders prepped for a new wave of construction.
What's causing this divergence?
"You just have investors that have made a lot of money," said Stephen East, an analyst with Philadelphia-based Susquehanna Financial Group. "They're looking at the housing market, listening to all the media hype about it, assuming a worst-case scenario for 2006 and exiting the stock.
"Given the industry's fundamentals are still strong, compared to the lower valuations we're seeing, the divergence is pretty significant," he said. Investors "are really anticipating a massive slowdown in the housing market."
Some data have given worried investors some reason for concern. While housing starts grew nationwide from August to September, they were flat in the Northeast and West, signaling growth in those once-hot regions has cooled.
Other possible warnings signs:
• Angelo Mozilo, CEO of Countrywide Financial, (CFC) the nation's No. 1 mortgage lender, said this month he thinks housing markets may have peaked in hot areas such as South Florida and Las Vegas.
A "substantial reduction" in condominium values may soon follow, he added.
"I have been doing this for 53 years, and it seems we are topping out," Mozilo said in an interview this month.
• Janet Yellen, president of the San Francisco Fed, said housing remains among the "downside risks" to economic growth. She said the U.S. real estate market may be headed for a bubble, despite the economy's overall strength.
• The widespread availability of ARMs, no-interest loans and other easy-to-get financing options may soon evaporate. Fed Chief Alan Greenspan has repeatedly warned lenders to tighten loan standards. Wells Fargo, Bank of America and other financial institutions have said they plan to do just that.
• Home builders are starting to show snippets of weakness in their fundamentals. Virginia-based NVR (NVR) plunged this week after reporting third-quarter earnings that rose 28% year over year but fell short of Wall Street views.
Though NVR doesn't usually issue guidance — thus forcing analysts to take their best guess at results — some skeptics worry that similar disappointments could crop up among other leading builders.
Comments