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Housing Market Getting Overconfident?
This morning we got the NAHB/Wells Fargo Housing Market Index, which tracks homebuilder sentiment. So it turns out that the market is still looking better, with the headline reading bumping up to 40 from 37. That is the highest reading for this index since June 2006. That's not to say that sales are anywhere near where they were in 2006 yet (we're at roughly 1/3 of that level in terms of new home sales), but expectations for improvement are high. Expectations for sales in the next 6 months jumped to 51 from 43. As a reminder, the index does tend to track home construction activity well.
Yet, the market doesn't seem to want to take the bait today as the Dow Jones home construction index is down more than 1%. When it comes down to it, anyone who's been watching this housing rebound knows it's been going on for a while now. Consequentially most of these homebuilder equities, which were basement bargain discounts a year ago, are trading with a certain amount of expectation; in fact, they're trading at somewhat of a growth premium.
Take for instance Ryland (RYL) which posted a Q3 update; this is likely contributing to the moderate selloff in housing stocks today. This is a stock that, similar to others in the industry, has more than tripled in the past year. Consequentially, investors looking to buy into the housing recovery have traded it up to a 22 P/E ratio which is indicative of a company with expectations for strong earnings acceleration.
Looking at the Q3 update, Ryland did indeed show acceleration. New orders were up 62% over last year in July and August. Certainly a great result by any means. But note that out of the 980 new orders through the two months, 141 were acquired in the buyout of Timberstone Homes. Excluding those, organic demand was up 39%. Obviously that's still a big improvement over last year but it posted 33% new order growth in 2Q so this isn't a huge step forward; at least, not the kind of blowout the Street seems to be looking for out of homebuilders at this level. In fact, that's approximately in line with the 38.9% and 41.3% revenue growth rates the consensus is calling for in Q3 and Q4.
The market has been letting these stocks play catch up for a year now, but perhaps at this point they're expected to deliver above and beyond.
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