What's Up With The Housing Market and Homebuilders

The San Jose Mercury reports:

Financial markets are puzzled about whether the housing sector has bottomed out or not. Executives leading the nation's home builders certainly aren't making that assessment any easier.

Those chief executives are publicly saying more doom-and-gloom is probably on the way. But they are providing a more upbeat outlook behind closed doors, judging by their responses in a closely watched survey tracking their sentiment.

The tricky part is knowing what to believe. Investors seem to be latching on to the positive, pushing shares of home builders higher in recent months. Many on Wall Street worry that they could be getting ahead of themselves.

A five-year surge in home prices came undone over the last year amid fears that higher mortgage rates would cool buyer demand. While rates haven't jumped much, sentiment in the housing market changed dramatically, resulting in a steep decline in new-home construction, sales and building permits.

As the housing market contracted, home-building stocks plunged. But they began moving higher over the summer.

Those who have been talking up the home-building sector include some big institutions, including Neuberger Berman and Legg Mason. The thinking goes: As the housing market's retreat begins to slow, earnings will rebound and potentially will take stocks along with them.

Investors seem to be hanging their hopes on data like the report from the National Association of Home Builders last week, which showed that builder sentiment was up for the second straight month in November. The biggest gain was seen in the builders' expectations for the next six months.

``Looking ahead, builder outlook is perking up,'' said NAHB President David Pressly, a home builder from Statesville, N.C. ``Our members are telling us that the market is steadying after a significant downward correction. On the demand side, we look for sales to stabilize and gradually move up in the coming months.''

But that contradicts what many home builders have been saying lately to their shareholders and stock analysts. Just about every CEO running a public company in that sector has been pessimistic recently in their outlook for the housing market.

Among some of the negative comments:

• ``We continue to look for signs that a recovery is imminent but can't yet say that one is in sight,'' said Robert I. Toll, CEO of Horsham, Pa.-based Toll Brothers. He was speaking Nov. 7 as the company forecast a 10 percent drop in quarterly construction revenue due to rising order cancellations and sharply cut its production forecast.

• ``I'd say we're in the early stages of a declining market. . . . Most of these downturns are longer and deeper than we envisioned at the beginning,'' said D.H. Horton CEO Donald Tomnitz, reporting Nov. 14 a rise in cancellations for the third consecutive quarter and a 51 percent drop in profit for the Fort Worth company.

• ``Despite recent references to signs of a bottoming or even the beginning of a recovery, we have not yet seen any meaningful evidence to suggest that a rebound in the housing market is imminent,'' said Ian McCarthy, CEO of Beazer Home, reporting Nov. 7 that the Atlanta company saw a 44 percent drop in profit due to lower demand for new homes.

Some companies feel so uncertain about the future that they declined to provide analysts any earnings guidance for next year. Others cited forecasts that the housing recession could last anywhere from 12 months to four years, so the future still seems too murky to set expectations of what could come.

Analysts at Goldman Sachs say the housing pullback is now in its 16th month -- and that previous housing-cycle downturns have lasted from 24 months to 48 months. That's why the investment firm has told its clients to ``stay on the sidelines for now'' when it comes to home-building stocks.

Many on Wall Street also worry that more bad news could be ahead should there be a massive rise in land-value write-downs. Not only would that reduce already weak earnings, but it could lead to further erosion in the ``book value'' of many home builders -- which is generally defined as the value of a company's business should it have to be liquidated.
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What's forgot is:coming in 2008 the first baby boomers will start retiring.If you live in an area that's going to have baby boomers leave to go somewhere else,the downturn in specific areas could last a lot longer.