Homebuilders Benefitting from Market Share Gains

The differences in economic data between and within some of the metrics of the housing industry, offer evidence of a value added trend for the publicly traded homebuilders. They are the beneficiaries of an important industry factor change, and will likely lead the real estate market in recovery as a result. This is not a new statement by your author by far, but it is the first dedicated article to the important issue.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Homebuilder Market Share

Many of the publicly traded homebuilders have and will gain market share into the next upturn of the business cycle. The benefits of such change should be akin to a nitrogen boost for a drag racer’s speed machine. That said, I continue to warn that more broader reaching market shock via an Iran event and the more easily envisioned contagion from European recession, should offer new stumbling block for the economy, for single-family housing generally and for cyclical high-beta shares especially; that is inclusive of the homebuilders and despite the important industry factor value add.

This, like all investment sectors, is a dynamic and complex environment that should never be simplified by blank statements and vague descriptions. Thus, you are wise to assess the value of your advisors and the authors of articles and reports based on how well they see the entirety of each dynamic investment option.

The complexity of the industry is why we see such ups and downs for the homebuilder shares of late. Real estate data has been mixed, and is confusing for those who do not understand the very important point being made through this report. New Home Sales data offered the latest neck jerk for shareholders of homebuilders, with the SPDR S&P Homebuilders (NYSE: XHB) up 1% Tuesday. The report indicated the pace of new home sales improved to 328K in March, which exceeded the consensus of economists’ forecast for 318K. Furthermore, February’s tally was ratcheted higher to 353K, up from the initially reported pace of 313K. Also, the latest count was 7.5% more than last March. The shares of PulteGroup (NYSE: PHM), K.B. Home (NYSE: KBH), D.R. Horton (NYSE: DHI), Beazer (NYSE: BZH) and Toll Brothers (NYSE: TOL) were all higher by 2% to 4% on the news. Likewise, builder supply shares like that of USG (NYSE: USG), Masco (NYSE: MAS), Owens-Corning (NYSE: OC) and Mohawk Industries (NYSE: MHK) were up to a similar degree.

Yet, just a few days prior, disappointing real estate data in the form of Existing Home Sales for March sent the shares lower. Before that a tough Housing Starts report, highlighting regional variances and a multi-family drop, also weighed on housing stocks. Also last week, the Housing Market Index showed general builder sentiment had fallen after several months of improvement. What’s it all mean?

Investors in these stocks should realize that many factors will play roles in their operational performance. For instance, multi-family projects project the harsh reality that many Americans can no longer qualify for home ownership and are moving into rental property. However, this data influences overall activity positively, and while it helps support building product supply companies, it means little for the builders of single-family or other housing for home ownership.

Existing home sales data continues to reflect a difficult real estate environment on the whole, and builder confidence reflects the general level of activity and the mood of many decimated smaller undercapitalized builders. Yet, many publicly traded homebuilders like D.R. Horton, which reported this week higher revenues, earnings, closings and orders, are providing pleasing results. This is leaving many housing stock investors confused, if not suffering from whiplash.

A major driver of the differences between the performance and moods of housing segments and individual builders is the result of a shake-up that happened in the building industry through the real estate crisis. As in every cycle, highly levered and mostly overenthusiastic smaller builders found themselves in a tough spot when the market collapsed. Given the depth, degree and length of the current downturn in real estate, the shake-out has been exceptional. The result is fewer builders in position to capitalize on any new demand, and so the fewer numbers of builders are garnering a larger percentage of business. So even while the aggregate results remain depressing in real estate, the improvements are magnified within the short list of capable and capitalized builders.

Once again, it is my pleasure to make some sense of a complicated matter for my friends and followers. Please follow me here and subscribe to our email distribution at the blog, as I do my best to add value to your investment decision making and economic understanding.

Editor's Note: Article should interest investors in Investors Title (Nasdaq: ITIC), Freddie Mac (OTC: FMCC.OB), Fannie Mae (OTC: FNMA.OB), 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), 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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