Declining Orders Fail to Sink
Shares of Home Builders

Wall Street seemed to shrug off the latest grim results from a pair of home builders yesterday, as shares in the sector rose while signs indicate that the housing slump is far from over.

D.R. Horton Inc., Fort Worth, Texas, one of the nation's largest builders by market value, said yesterday that orders for new homes fell 25% in its fourth quarter ended Sept. 30, while M/I Homes Inc. of Columbus, Ohio, posted a 51% decline in orders in its calendar third quarter.

The two companies join an increasing number of builders posting sharp double-digit pullbacks. Last month, KB Home reported a 43% order decline in its fiscal third quarter, while Beazer Homes USA Inc. said it had a 49% drop in net sales in the two months ended Aug. 31 compared with the same period a year earlier.

"The current selling conditions in the home-building industry continue to be challenging, with higher than normal cancellation rates and increased use of sales incentives in many of our markets," D.R. Horton Chairman Donald Horton said in a statement. D.R. Horton's shares rose 92 cents, or 3.9%, to $24.76, while M/I Homes added 26 cents to $36.61.

In another development yesterday, Los Angeles-based KB Home said a preliminary internal review found that the company had likely incorrectly dated certain stock-option grants and that it may need to record additional compensation expenses to rectify accounting, but the exact amount hadn't been determined. The Wall Street Journal reported in August that several past stock-option grants to KB Home Chief Executive Bruce Karatz were dated at unusually low points in the company's stock price. Four grants to Mr. Karatz between 1998 and 2001 were propitiously timed. One was dated at the stock's lowest closing of the year, another at a quarterly low, and the remaining two at monthly lows, the Journal found. KB Home said the Securities and Exchange Commission also is conducting a review of the company's stock-option grants.

All of this comes as many home builders are slashing quarterly earnings estimates and declining to give guidance for next year because the outlook is so uncertain.

Yet the Dow Jones Wilshire U.S. Home Construction Index, while still down for the year, was up 2.8% yesterday. It has climbed roughly 21% since July 18; many analysts say they believe stocks in the sector hit a bottom at the end of July. Around that time, many home builders' stocks were trading near their book value -- assets minus liabilities, often seen as a rough approximation of a company's value if liquidated. That makes the stocks enticing to investors, even though the housing market is still showing signs of weakness.

Many economists and analysts foresee a long stretch of sagging home sales ahead. But an increasing number of bulls see glimmers of improving housing fundamentals. Yesterday, J.P. Morgan analyst Michael Rehaut upgraded three stocks, writing that "key leading fundamentals are either beginning to stabilize or are on the cusp of recovering over the next few quarters." Mr. Rehaut upgraded Horton and Standard Pacific Corp. to "overweight" from "neutral," and upgraded Toll Brothers Inc. to neutral from underweight.

Mr. Rehaut said inventories of unsold homes in sluggish markets, such as Washington, D.C., San Diego and Sacramento, Calif., have "declined 4-5% from their peaks." In other markets, the supply of homes on the market isn't increasing as quickly as it had earlier in the year. This matters to home builders because in many markets, supply has outpaced demand, forcing some builders to offer generous incentives to lure buyers. Mr. Rehaut said he was changing his "cautious near-term" stance on the sector to a more "bullish posture."

In a report earlier this week, UBS analyst Margaret Whelan said that, "anecdotally, sales among high-end buyers are firming in Arizona, Nevada and Washington," which could help fuel a recovery of luxury builder Toll Brothers.

Shares of Toll Brothers climbed $1.48, or 5.1%, to $30.29 yesterday. Standard Pacific rose $1.25, or 4.9%, to $26.62. But JMP Securities analyst Alex Barron says the recent home-builder rally may be premature. "I just believe there's more bad news to come that's even worse than what we've seen so far," he said.

Also yesterday, KB Home said it had delayed filing its fiscal third-quarter 10-Q report because it hadn't completed an internal review of stock-option grants. The builder added in an SEC filing that the "unavailability of third-quarter financial statements may result in a default under the indentures governing our senior and senior subordinated notes and our credit agreements." KB Home said in the filing that it was asking the banks for an extension to deliver the third-quarter statements. Analysts expect the extension will be granted.

In its SEC filing, KB Home stated preliminary third-quarter results, indicating net income fell 32% from a year earlier to $155 million, or $1.93 a share. KB Home shares gained 96 cents, or 2.1%, to $45.75.

Email your comments to rjeditor@dowjones.com.