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The Honolulu Advertiser
Posted on: Friday, November 24, 2006

Home-building executives sending markets mixed signals

By Rachel Beck
Associated Press

NEW YORK 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 CEOs are publicly saying more doom-and-gloom is 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 past 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. The Standard & Poor's 500 Home-building index is up 13 percent since late July, compared with the 33 percent decline during the first seven months of the year.

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 coming 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," NAHB President David Pressly, a home builder from Statesville, N.C., said in a statement. "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 the Horsham, Pa.-based Toll Brothers Inc. He was speaking on Nov. 7 as the company forecast a 10 percent drop in quarterly construction revenue because of rising order cancellations and sharply cut its production forecast.

  • "I'd say we're in the early stages of a declining market," said D.H. Horton Inc.'s CEO Donald Tomnitz, when reporting on Nov. 14 a rise in cancellations for the third consecutive quarter and a 51 percent drop in profits for the Fort Worth, Texas-based 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 Inc. when reporting on Nov. 7 that the Atlanta-based company saw a 44 percent drop in profits because of 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.