Home sweet home builders?
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Hopes that government intervention will bolster the housing market are giving a boost to home-builder stocks. But investors hoping for a lasting turnaround in the ravaged sector may be building castles in the air.
The five home-builder stocks in the Standard & Poor’s 500 index climbed 6.6% as a group today even as the 500-stock gauge — taking another of its patented late-day swan dives — slumped almost 3%. The builder index is now up 82% from its Nov. 21 low but remains down 83% from its July 2005 peak.
All five of the big builder stocks were up today. D.R. Horton climbed 8% to $7.82, Centex jumped 9% to $11.10 and Lennar gained 10% to $8.50. Even luxury home builder Toll Bros., which isn’t in the index, rose 6.9% to $20.55 despite posting its worst annual results since going public more than 20 years ago and issuing a bleak forecast for the coming year.
The sudden surge of optimism comes as the federal government is trying to force down mortgage rates. That effort is seen by the industry as a crucial component to reviving the nation’s moribund housing market.
Last week, the Federal Reserve said it would buy up to $600 billion in mortgage-backed securities and other debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Now reports are circulating that the Treasury Department may buy additional hundreds of billions of the securities. And Fed Chairman Ben S. Bernanke is calling for more government actions to stem foreclosures.
Bond guru Bill Gross of Newport Beach-based Pimco said this morning on CNBC that the plans could push rates on 30-year fixed-rate home loans to 4.5%, and they already appear to be having some effect. Nationally, 30-year mortgage rates fell to 5.53% this week, Freddie Mac reported today. That was down from 5.97% a week ago and represented the biggest one-week drop in 27 years....
... The residential real estate industry hopes lower rates will prod home buyers back into the market, stopping the ruinous slide that has sent home prices nationwide back to 2004 levels. That has led to the wave of mortgage defaults that is a root cause of the current credit crisis.
But some analysts caution that pent-up demand for homes may be offset by the steadily worsening condition of the U.S. economy — which is lambasting consumer confidence — as well as by fears that home prices still have a ways to fall.
“The head winds of poor credit, lack of existing home equity, minimal sources for down payments and near-record low consumer confidence may limit the upside” in housing demand, Ivy Zelman, chief executive of housing research firm Zelman & Associates, wrote in a report today.
“Unless the government can end the downward foreclosure spiral, we believe that consumers will be unwilling to purchase a home when there exists a high probability that their down payment could be eliminated in a short amount of time by further home price deflation.”
Clearly, the employment news isn’t doing much to buck up consumer confidence. The Labor Department reported today that 4.1 million Americans are collecting jobless benefits, more than analysts were expecting and the highest number since 1982.
The news could get worse Friday when the department releases its monthly employment report. Analysts surveyed by Bloomberg expect payrolls to have decreased by 330,000 in November, which would be the largest monthly drop since 1982. And the unemployment rate probably climbed to 6.8%, the highest since 1993.
The bottom line for the home-building sector, according to Zelman, is that “it is too early to assume that it can sustain anything beyond a short-term rally.”
-- Martin Zimmerman
Chart credit: Los Angeles Times