A Housing Slowdown?
Not if You Ask Builders
Everyone has heard the housing market is showing signs of slowing. But the companies that build homes aren't going to let popular wisdom gum up their works -- or their stocks -- if they can help it.
New-home construction rose 5.3% in November from the previous month, the largest monthly increase in housing starts since April and far above the level economists and analysts were expecting. The pace of applications filed by builders for future construction also picked up last month.
Much of this November activity was tied to plans made months ago, and data watchers say that the housing-starts reports, which are put out by the Commerce Department, are questionable given seasonal adjustments and other assumptions that go into them. But bearish economists and market watchers still feel there are too many foundations being poured and nails being pounded.
Traffic is down at new-home communities around the country. Real-estate agents are taking longer to sell homes, and homeowners in some areas have had to cut prices to trade out of their patch of the American Dream. Meanwhile, the number of unsold new homes under construction is at an all-time high.
Executives at some of the biggest publicly traded home-building companies say they're on top of their game and are managing their projects and landholdings in a way that won't leave them or shareholders exposed. Yet some of these same executives, including those at Toll Brothers Inc., have been net sellers of their companies' stocks this year, even as they cite the health of their industry. The Dow Jones U.S. Home Construction stock index is up nearly 17% on the year, although many builders' stocks are well off levels seen this summer.
Representatives of the builders couldn't be reached for comment on the executives' stock sales.
If construction continues apace, it will exceed demand, even in a country full of peripatetic property hounds, says Banc of America Securities analyst Daniel Oppenheim. "We could definitely see home prices start to fall," he says, noting that overbuilding is affecting sellers' prices in northern Virginia, Chicago and Sacramento, Calif.
Besides Toll, chief executives at Lennar Corp., KB Home and other big builders are telling Wall Street and investors that the market remains strong and is merely slowing to a "more normalized" pace. They cite continued job growth, demographics and a limited supply of land in constrained markets as factors supporting their business.
Skeptics see it differently. "Home builders are now in the business of selling shares, not houses," Peter Schiff, president of Euro Pacific Capital Inc., a Darien, Conn., brokerage firm, wrote in a report Tuesday. "To maintain a market for the former, they must keep building the latter," he says in an interview. "That is the only logical way to explain building new houses amid a growing glut of unsold inventory."
Some builders' aplomb appears to be abating a bit, however. An index released earlier this week by the National Association of Home Builders and Wells Fargo & Co. showed a December reading that suggests builders still view sales conditions positively, yet the level slid to its lowest reading since April 2003.
Mr. Schiff, who has long warned of a housing bubble, points to executives at the top publicly traded home builders who have accelerated disposal of their companies' stocks as evidence of an industry whose declarations and deeds don't always jibe.
Richard Bernstein, an analyst at Merrill Lynch, says he has seen record net insider selling this year at eight of the 12 home-building companies he tracks.
"If the builders pulled back heavily on construction, Wall Street would say, 'We have to reduce our earnings estimates a year forward,' and the stocks would take a huge hit," Mr. Schiff contends.
The big builders point to other supportive strategies: building in places where land is scarce and cutting back on "spec" homes built before they find buyers, although the industry's spec-construction statistics aren't uniform. D.R. Horton Inc., Fort Worth, Texas, says that 25% to 30% of its inventory is on spec. Pulte Homes Inc., Bloomfield Hills, Mich., reported that out of its 662 communities at the end of its third quarter, finished specs averaged less than one per community.
But analysts say the builders are using more incentives to get rid of spec homes. Meanwhile, the rate at which new buyers order a house but then walk away before closing is creeping up, essentially creating more spec inventory.
And while the biggest builders are being more careful than they have in the past to manage their land purchases and the financing for them, smaller builders are said to be less sophisticated. "They're the ones who might be saying, 'I've bought this land, I've got to build homes on it and try to get whatever I can for them before the market gets any worse,' " says Sam Lieber, a portfolio manager at Alpine U.S. Real Estate Equity Fund, based in Purchase, N.Y.
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