Home Builder Confidence Devastated, So Buy Housing Stocks Now

The National Association of Home Builders, in conjunction with Wells Fargo (NYSE: WFC), released its tally of builder confidence for June Wednesday morning. A relatively new factor acted like the last nail in the coffin of home builder confidence this month, sending almost all component measures toward record lows. Yet, “The Greek” still loves the shares of the best publicly traded home builders.

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Home Builder Confidence Devastated, So Buy Housing Stocks Now

Piling on home builder misery, rising construction materials costs simply took the pressure from intense to unbearable for home builders in June. The NAHB/Wells Fargo Housing Market Index fell 3 points to a reading of 13, as a softer than hoped for spring selling season also deflated builder mood moving into the summer.

We blamed it on the rain in April, the wettest on record. We looked toward gasoline prices in May, as they breached the point of no return for consumer spending impact. In June, we’ve still got wild weather in portions of the country, though arguably not any wilder than any other year now. We still have tough comparable property costs from heavy existing home inventory, weighed down by distressed property sales. And now, inflation everywhere but in housing offers the latest blow.

"It’s truly scary that the component replacement cost of homes - construction materials (plus labor) - might provide the ultimate floor for home prices."

With home prices still on the decline, prospective first-time buyers have little incentive to enter the market. Current home owners can’t get enough value from their existing home to leverage to a step up new home. On a relative basis, existing homes offer a better deal to most prospective buyers. Gasoline prices are on the decline, but construction materials costs are on the rise. It’s truly scary that the component replacement cost of homes - construction materials (plus labor) - might provide the ultimate floor for home prices. Builders certainly aren’t feeling good about that.

The NAHB reports that its surveyed home builders, which include many smaller builders who have borne the brunt of this downturn and have little capital access to emerge from it, noted declines in current sales conditions and in the traffic of prospective buyers in June; these component indices dropped 2 points each to index measures of 13 and 12, respectively. This thus led builders’ forward hopes back into despair, with the latest measure of sales expectations for the next six months dropping four points, to its lowest in history, at 15. The last time builders’ forward confidence marked this floor was in the heat of economic battle in March of 2009.

Looking across the nation’s regions, there was one bright spot, the Northeast, which saw its HMI rise 2 points to 17 in June. Across the West (down 4 points to index value of 12), Midwest (down 3 to 11) and South (down 2 to 14) there was nothing but bleakness. Most publicly traded builders have broad nationwide exposure, with important interests in the faster growing regions of the nation. Thus, Toll Brothers (NYSE: TOL), Pulte (NYSE: PHM), Hovnanian (NYSE: HOV), Beazer (NYSE: BZH), Lennar (NYSE: LEN) and D.R. Horton (NYSE: DHI) all have a presence in the Northeast.

Looking forward, we remind securities investors that there should be a divergence between real estate investment and homebuilder share investment in the earliest stages of recovery. It’s very important to understand that the NAHB’s survey includes many devastated smaller builders in its query, which explains the depth of despair; a mark of 50 signifies the break between a “good” or “poor” marketplace. The strife of the smaller builders, and the tightening of the capital markets, including bank funding, provides an improved landscape for large publicly traded builders. Capital access and market share are available to them. Thus, I expect that at the slightest sign of turn, homebuilder shares will take off. So they will precede broad real estate market recovery. The bar for real estate sales growth is now very low, and so we can expect it in the second half of this year, barring any new interfering extraordinary factor.

Editor's Note: Article should interest investors in Investors Title (Nasdaq: ITIC), Bank of America (NYSE: BAC), Freddie Mac (OTC: FMCC.OB), Fannie Mae (OTC: FNMA.OB), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Wells Fargo (NYSE: WFC), Toronto Dominion (NYSE: TD), UltraShort Real Estate ProShares (NYSE: SRS), Ultra Real Estate ProShares (NYSE: URE), ING Clarion Global Real Estate Income Fund (NYSE: IGR), Xinyuan Real Estate Co. (NYSE: XIN), Rydex Real Estate Fund H (Nasdaq: RYHRX), T. Rowe Price Real Estate Fund (Nasdaq: TRREX), Toll Brothers (NYSE: TOL), Hovnanian (NYSE: HOV), D.R. Horton (NYSE: DHI), Beazer Homes (NYSE: BZH), Lennar (NYSE: LEN), K.B. Homes (NYSE: KBH), Pulte Homes (NYSE: PHM), NVR Inc. (NYSE: NVR), Gafisa SA (NYSE: GFA), MDC Holdings (NYSE: MDC), Ryland Group (NYSE: RYL), Meritage Homes (NYSE: MTH), Brookfield Homes (NYSE: BHS), Standard Pacific (NYSE: SPF), M/I Homes (NYSE: MHO), Orleans Homebuilders (AMEX: OHB), Vanguard REIT Index ETF (NYSE: VNQ), PNC Bank (NYSE: PNC), J.P. Morgan Chase (NYSE: JPM), Hooker Furniture (Nasdaq: HOFT), Ethan Allen (NYSE: ETH), Pier 1 Imports (NYSE: PIR), Williams Sonoma (NYSE: WSM), Home Depot (NYSE: HD), Lowes (NYSE: LOW), Nasdaq: XNFZX, Nasdaq: FSAZX, Avatar Holdings (Nasdaq: AVTR), Apartment Investment & Management (NYSE: AIV), Equity Residential (NYSE: EQR), Avalonbay Communities (NYSE: AVB), UDR Inc. (NYSE: UDR), Essex Property Trust (NYSE: ESS), Camden Property Trust (NYSE: CPT), Senior Housing Properties (NYSE: SNH), BRE Properties (NYSE: BRE), Home Properties (NYSE: HME), Mid-America Apartment (NYSE: MAA), Equity Lifestyle Properties (NYSE: ELS), American Campus Communities (NYSE: ACC), Colonial Properties (NYSE: CLP), American Capital Agency (Nasdaq: AGNC), Sun Communities (NYSE: SUI), Associated Estates (NYSE: AEC), PennyMac Mortgage (NYSE: PMT), Two Harbors (AMEX: TWO), Simon Property Group (NYSE: SPG).

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