Another Home Run
Home Improvement
By Monica Rivituso
November 19, 2003
THIS JUST IN: Housing is hot!
OK, so that's hardly earth-shattering news these days. For months — no, years — the housing market has been on a tear. Historically low borrowing rates have wooed people out of rented spaces and into their own homes like never before. And since those mortgage rates show little sign of soaring anytime soon (the 30-year rate dropped last week to its lowest level since July), home building's strength has surpassed those who predicted a cooling off many months ago.
The latest housing data indicate the home-building train hasn't slowed — at all. October housing starts rose 2.9% to a seasonally adjusted rate of 1.960 million units from September's 1.905 million (revised higher from 1.888 million). And building permits — an indicator of future activity — rose 5.2% to an annual rate of 1.973 million from September's 1.875-million rate (again, revised higher from 1.860 million). The report came as a surprise, as market watchers expected housing starts to inch lower to a 1.850 million rate and permits to ease to a 1.855 million rate. Instead, the data hit record heights.
Economists don't see the trend changing in the foreseeable future. "Going forward, beneficent underlying fundamentals, i.e., low interest rates and an improving jobs picture, should continue to support housing activity," wrote David Rosenberg, chief North American economist at Merrill Lynch, in a report Wednesday.
Of course, for the industry to keep up its pace, the housing market is also dependent on skimpy mortgage rates, and when those start to jump, housing will cool off. Indeed, the latest housing report from the National Association of Home Builders indicated that traffic at model homes had slowed down. Builder confidence, while still strong, slipped this month after hitting a nearly four-year high in October.
But the industry doesn't face certain demolition when activity eases. Several factors will aid big builders as the market cools. For starters, housing inventory remains tight, which means companies are less likely to be saddled with surplus unsold homes. The zoning and permitting process grows more complicated by the day, which favors large, well-capitalized builders. And since the vast majority of the home-building industry is dominated by smaller, independent builders, the big guys can continue to grow by stealing market share.
For now, though, the residential construction market remains strong, and some of the latest rumblings from home builders attest to this fact. Take Toll Brothers (TOL). Earlier this month, the luxury builder boosted its fiscal fourth-quarter and full-year guidance for sales, contracts and backlog. Quarterly revenue was approximately $894 million — the highest for any quarter in the company's history, and a 29% increase from a year ago. Fourth-quarter contracts of $1.02 billion were also the highest in the company's history and a 55% increase from a year ago. Backlog, which increased 41% from a year ago to $2.64 billion, was another record. "With the possibility of economic recovery, job growth and improved consumer confidence on the horizon, we believe the outlook for Toll Brothers and our industry is bright," said Robert Toll, chairman and CEO, in a statement.
Likewise, D.R. Horton (DHI), the industry's biggest builder, has issued upbeat news of late. The Arlington, Texas-based builder handily topped fiscal fourth-quarter results last week, earning $1.46 a share — 16 cents greater than analysts' consensus estimate, and 54 cents more than it earned a year ago. Total revenue surged 32% to $2.86 billion from $2.16 billion a year ago. And the company raised its fiscal 2004 outlook, based on the strength of the housing market. It now expects to earn $4.50 to $4.60 a share, higher than its July forecast of $4.25 to $4.30 a share. (The consensus estimate stood at $4.34 a share prior to the announcement.)
Industry fundamentals have only contributed to home-building stocks' rise. Consider that Hovnanian Enterprises (HOV), Ryland Group (RYL) and D.R. Horton have soared 164%, 152% and 137%, respectively, this year. Forget Cisco System's (CSCO) paltry 67% rise — home builders have risen 77% this year, on average, according to Zacks Investment Research. That makes the nearly 18% rise in the Standard & Poor's 500 look like a cramped studio apartment by comparison. Having come so far this year, home-building shares barely budged on the housing-report news Wednesday. But one thing is clear: The industry's foundation passed its latest inspection with flying colors |
