Wednesday, July 25, 2012

Goldman and the Homebuilders (XHB)

Not as catchy a band name as Wilbur and the Monolines but it will suffice.
The XHB is up a couple cents at $21.12.
This little excursion was prompted by a Reuters headline:
New home sales post biggest drop in over one year
First up, the WSJ's Developments blog:
Goldman Sachs Picks Builders Worth Buying
Goldman Sachs has gone bullish on home builders.

In a client note, the investment bank says it turned positive on the formerly beaten down sector, as it raises its ratings on several of the nation’s largest home builders, a signal for investors to give them a second look.
MDC Holdings was added to the firm’s “conviction buy” list, its highest rating, because of a strong balance sheet and the Wall Street’s perceived underestimation of near- and long-term orders. KB Home is upgraded to “buy” as the firm expects 2012 missteps to pave the way for order outperformance next year.

The Ryland Group climbs to “neutral,” while “buy” ratings are reiterated on PulteGroup, one of the nation’s largest builders, and Toll Bros. a luxury builder.

The firm lists several positives for the sector, which it says is ripe for recovery:

1. Home prices are rising and that’s where it all begins. “Since March, asking prices as measured by have steadily increased to nearly 4% year-over-year growth,” the firm writes. “We believe that widespread recognition of home-price appreciation, by both investors and consumers, is just a few months off.

2. We could see 50% growth in new-home sales without additional jobs growth....MORE
And, thanks to a sharp-eyed reader a counterpoint.
From Mark Hanson Research:
The Housing “Supply” I See
Folks are overly optimistic on the housing “inventory” issue to the point of being sorely misguided. The confirmation bias is rampant with pundits obsessing on inventory but ignoring everything else.
Each 12 to 18 months when housing (on the bubble or at the margin) responds to some sort of massive stimulus effort consensus quickly jumps behind the macro “recovery” theme and forgets the granular.
The “inventory I see” that has to be de-levered before this housing market has a shot at a “durable” recovery could be as high as 30 MILLION units. Most likely a “bottom” can occur after two-thirds is worked through — or ~20mm units — but no “escape velocity” can ever occur with over half of all mortgage’d households unable to sell and rebuy or rent…sitting stuck in their houses awaiting default or short sale.

Bottom line:   In order to permanently de-lever this housing market something must be done to address the 20 to 30 million homeowners in a negative or “effective” (lacking the equity to pay a Realtor 6% and put 20% down on a new house) negative equity position; with 2nd liens; and without the credit needed to qualify for a new vintage loan. That’s because repeat buyers are the “durable” demand cohort;  not first-timer buyers and “investors” who come and go with the stimulus wind like we saw in 2010 and will again in the second half of this year.

Note, the three constituents of the “Ghost Supply” cohort are not mutually exclusive of each other meaning a homeowner in an “effective” negative equity position may also have a 2nd lien and impaired credit.

Undermining Fed monetary policy leaves the housing market vulnerable to years more pain...MORE