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Strategies & Market Trends : 50% Gains Investing

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From: Dale Baker	3/22/2006 5:05:29 AM
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KB Home's Turn March 22, 2006; Page C1 Expect more bad news about the U.S. housing market when KB Home reports quarterly results today. In the annual report it filed last month, the company said it saw more order cancellations in December and January, and fewer net orders than it had in the year-earlier period. That weakness likely persisted into February. Last week the Federal Reserve's "beige book" -- a roundup of anecdotal reports on business conditions gathered by the Fed's regional banks -- pointed to further cooling in the U.S. real-estate market in February. And builders surveyed by the National Association of Home Builders have been ratcheting down their outlook on the business since last summer. [Sagging Roof] So the question among investors has shifted from "When will housing slow down?" and "Is housing slowing down?" to "How bad is the slowdown going to be?" and "How badly will it affect the home builders?" KB Home will likely point to its just-opened Martha Stewart-branded community in North Carolina, where homes have been selling well, as a reason for optimism. That is unlikely to be enough to settle investors who are increasingly uneasy about the health of the U.S. housing sector. But perhaps some news from across the pond will. The U.K. has been far ahead of the U.S. in the housing cycle. The Bank of England started raising interest rates before the Federal Reserve, and the U.K. residential real-estate boom ended in the summer of 2004. And guess what has been happening? The shares of home builders have been on a tear lately. One example is a home builder called Wilson Bowen, which reported earlier this month that its profit declined 14.5% in the year ending December, thanks to the U.K.'s housing slowdown. Yet its share price has risen more than 40% since late October. It turns out that U.K. home builders played the boom less aggressively than they had in past, and so didn't get hurt as badly when the market slowed. Many U.K. home builders have been able to reward investors with continued dividend increases, and investors rewarded them with richer stock-market valuations. U.S. home builders say that they have been more conservative, too. Now it is their turn to prove it.

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