A slow home building recovery seems to be underway--but remember that these stocks have already run and that in most years they show a seasonal peak in April or May

03/27/2012 6:38 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Two reads today on the U.S. housing market that both say the same thing: The market is bottoming; the recovery is underway; and the process isn’t going to be fast or smooth.

First, the big picture from the S&P/Case-Shiller index of property values in 20 U.S. cities. The index dropped 3.8% in January 2012 from January 2011. How is that a sign of improvement? Well, in December the year-to-year decline was 4.1%. One of these days, we’ll see a 0% year-to-year change and then after that, be still my heart, an actual increase in housing prices. The 3.8% year-to-year decline in January matched the forecast by 32 economists surveyed by Bloomberg.

Second, a somewhat smaller scale picture from homebuilder Lennar (LEN) but one that’s certainly more up-to-date than the lagging Case-Shiller index. Before the open in New York today the company reported first quarter 2012 earnings of 8 cents a share. (The builder’s first quarter ended on February 29, 2012.) That was 3 cents a share above Wall Street projections. Revenue climbed 30% year-to-year to $725 million versus the Wall Street consensus estimate of $721 million. Deliveries climbed 29% and new orders were up 33%.

In its conference call Lennar characterized the housing market as stabilizing. The recovery isn’t broad-based but Lennar has seen some strength in all its geographies. (West is best for prices and South is worst.) The company is seeing more traffic, and believes that the increase is a response to improvement in the job market and in consumer confidence. Lennar is starting to see buyers who are afraid of missing out on low prices and low interest rates. Unfortunately, while mortgage rates are low, bank lending remains tight with many homebuyers unable to meet current tight underwriting standards. (Can’t quite remember but isn’t there a saying about barn doors and missing horses or something.)

February, Lennar said, was the strongest month of the quarter (which began in December) and so far March growth is consistent with February’s strength.

Investors should remember the strong seasonal pattern to homebuilder stocks before deciding to jump into the sector. Shares of Lennar are up 35% for 2012 as of March 26 and the residential building sector as a whole is up 25%. (The Standard & Poor’ 500 index is up 13% for that period.)

In an average year homebuilder stocks bottom in October and November and top out in late April or early May. Spring, apparently, turns investors’ hearts to thoughts of homebuilders.

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