Homebuilders' double-talk paints murky picture
By ASSOCIATED PRESS
Published November 28, 2006
Financial markets are puzzled about whether the housing sector has bottomed out. Executives leading the nation's homebuilders certainly aren't making that assessment easier.
Those CEOs are publicly saying more doom-and-gloom is likely 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 homebuilders 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, homebuilding stocks plunged. But they began moving higher over the summer. The Standard & Poor's 500 Homebuilding 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 homebuilding 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 this month, 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," said NAHB president David Pressly, a home builder from Statesville, N.C. "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 homebuilders 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.
Some companies feel so uncertain about the future that they declined to provide analysts earnings guidance for next year. Others cited forecasts that the housing recession could last from 12 months to four years, so the future seems too murky to set future expectations.
Maybe builders are overemphasizing the bad news to beat down expectations - something that could help them in the months ahead if housing conditions even slightly improve.
That theory may sound far-fetched, but it could help explain why homebuilders are trying to tell a tale of two sectors.