Saturday, April 08, 2006

Home Builders: Spring Forward, Fall Back

In Nicholas Yulico’s Homebuilders Spring Forward [], he says:

With the housing market slowing, why bother investing in homebuilding stocks if the group's best days are behind them? Well, the sector is cheap, the bulls say, and even if fundamentals cool down, earnings won't drop off a cliff.

"Our view is that going forward, we're going to see a slowdown in activity, but not enough to derail anything," says Sam Lieber, portfolio manager of the Alpine US Real Estate Equity fund (EUEYX), which has about 50% of its holdings in homebuilders.

Builders' 2006 results are largely in the bag, because the bulk of revenue will come from the companies' backlog of homes already sold but not yet closed upon. The real issue keeping investors nervous relates to the scenario for 2007, and orders in the all-important spring selling season will provide a crucial look at homebuilders' prospects.

It takes roughly seven to nine months for orders to convert into revenue, which means the order numbers that builders report in the coming months will provide more transparency for late 2006 and early 2007.

Ken Rosen, a University of California-Berkeley real estate professor and hedge fund manager, believes a 25% to 30% total drop in new-home sales is possible over the next three years, and that builders will be meaningfully hurt this time around.


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