This morning the Commerce Department released figures that homebuilding activity in the U.S. had unexpectedly fallen in October. The reasoning was that increased joblessness in addition to doubts that the homebuyer tax credit would be renewed weighed on homebuilders. Homebuilders slipped to an annual pace of only 529,000 homes which is 11% lower than last year and the lowest result since April. Multifamily homes such as condos and townhouses slumped 35 percent, far more than single family homes. Economists had expected to see a slight rise in homebuilding activity in the month, which only adds to the surprise. Economists, always ready with an answer, pointed out that the wettest October in century could have been a factor. Building permits also saw an unexpected drop to only 552,000 annual rate.
Homebuilder stocks were mostly unscathed by the news as investors took solace in the fact that the tax credits were indeed renewed which will hopeful further induce buyers into the market. Pulte Homes (PHM) was among the most active of homebuilder stocks following an upgrade to Buy at Citigroup (C). Citi raised their price target to $12 as the recent acquisition of Centex is a positive for the company and they were “undeservedly out of favor.” The stock is trading 4% higher in afternoon trading on this gutsy call.
At Ockham we are reaffirming our Overvalued stance on Pulte Homes as well as many others in that peer group. The company has seen new orders improve in the most recent quarter thanks in part to their merger with Centex, but there still remains a lot of risk in all of these homebuilders. Pulte’s CEO Richard Dugas said that “the housing market is still choppy.” He also said that he expects operating conditions will continue to be difficult through at least 2010.
This month may be an aberration in the general trend of improvement in the housing market, and we sincerely hope that is the case. However, we cannot ignore the fact that homebuilders enjoyed very profitable times as the rode the housing bubble up for better part of the decade. During that time many parts of the country were overbuilt, and that supply overhang is only beginning to clear itself. Foreclosures remain extremely elevated only adding to the supply glut. At this time, we just do not see a compelling reason to invest in homebuilder stocks.
