DALLAS – Homebuilder stocks are getting hammered.
Investors have been indiscriminately selling shares of the big homebuilders for the better part of two weeks.
After a five-year surge, most are down 10 percent to 15 percent in August – making the sector’s record one of the worst this month.
Although the existence of a housing bubble is endlessly debated, there is no question that “the market is telling us something is amiss here,” said Hugh Johnson, chairman of Johnson Illington Advisors in Albany, N.Y.
“I hope investors move to the exits slowly, and we let the air out gradually, if indeed this is a bubble,” he said. “And I hope that hissing sound is not the beginning of a collapse in these stocks. But I don’t have the answer.”
Much of the recent sell-off came Aug. 9 when the Federal Reserve raised short-term interest rates to 3.5 percent. It was the 10th quarter-point increase in the Fed’s 14-month campaign to tighten credit.
The Fed doesn’t control mortgage rates, but the fear is that higher short-term rates eventually will result in higher long-term rates.
This could squeeze some homebuyers out of the market. Mortgage rates have moved higher six weeks in a row.
The average rate of a 30-year, fixed-rate mortgage is now 5.89 percent.
“I think we are in a very dicey period,” Johnson said.
But even though mortgage rates have moved slightly higher, they are still at historical lows, and home sales continue to rise.
Homebuilding stocks have been levitating since 2000 as interest rates began falling and the economic ship righted itself after the 2001 recession.
Also, the sector has been pushed higher by a powerful demographic tailwind as baby boomers began buying second and even third homes – sometimes for speculative purposes.
The homebuilders and many analysts argue that these same factors – low mortgage rates and strong demand – will continue to drive earnings and the stock prices higher in the coming months.
They believe the recent sell-off is just a blip – a buying opportunity, no less, for investors.
“We have been positive on this group all year, and we are no less positive now despite the sell-off,” said Bill Mack, a stock analyst at Standard & Poor’s. “I think this is a temporary move down, a normal correction in a good group of stocks.”
Luxury homebuilder Toll Brothers Inc. is typical of the sector, with its eye-popping earnings growth and stock price appreciation. Net income climbed 57 percent in 2004 over the previous year, and it predicts 70 percent earnings growth in fiscal 2005.
The stock is up more than 100 percent, from about $21 a share last August to a high of $58 in July before falling back recently.
Fred Cooper, senior vice president of finance at Toll Brothers, argues that his company’s recent 15 percent stock price decline is not unexpected after such an uptrend.
“Our backlog of homes to build under contract is up 55 percent from a year ago,” Cooper said.
In other words, almost half the company’s 2006 revenue is already in the backlog, he said.
Mack of Standard & Poor’s estimated that homebuilding shares could easily run up 10 percent to 15 percent in the next year.
Eventually, though, investors will rotate out of this sector and into something else, and the stock prices will fall either slowly or quickly, Johnson said.
Predicting when a high-flying sector will come back to earth is next to impossible, but he offers this bit of advice.
“People who are looking for a signal that a break in housing prices is coming should know this,” he said. “It will show up first in the stock price of the homebuilding companies.”
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AP-NY-08-16-05 1946EDT
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