1/14/2008

Housing Risk Factor: Keep an Eye out for December Data
By David Urani

Until a few days ago, homebuilder stocks had been taking a much needed breath of fresh air above their 50-day moving averages on optimism from the White House "teaser freezer" plan. The overall affect is illustrated by movement in the Dow Jones U.S. Home Construction Index [$DJUSHB]. This was a major victory for homebuilders, as the 50-day moving average had been serving as a major psychological barrier for over six months. Then, this Tuesday, homebuilder stocks were hammered back down to where they came from upon a disappointing pending home sales index and KB Home's (KBH) painful fourth quarter earnings report. The results, which showed no indication that the housing market was improving, gave investors good reason to worry. One thing many investors may be forgetting, however, is the fact that the White House Mortgage Plan, as well as a subsequent federal rate cut, took place in December. The Pending home sales index data released on Tuesday tracked November's sales and KB Home's earnings report covered its fourth quarter ended November 30.

Consumer confidence currently plays a large part in the housing market. Potential customers have been worried about mortgage payments and the idea that home prices could continue to plummet. The key part of the White House mortgage plan and the December rate cut is the motivation they will give buyers. There has virtually been no mention yet about how well December faired for homebuilders, except for statements made by Hovnanian's (HOV) management during their December 18 earnings report and conference call that sort of slipped under the radar. According to them, "home sales increased significantly" during the first three weeks of December, seemingly as a direct result of the White House plan and federal rate cut.

The reality of the housing market right now is that an abundance of consumers want to buy homes, but the conditions have just not been right. Home prices and mortgage rates are so much lower now than they were a year ago that investing in a new home is a very tempting proposition. Something tells me the flood gates may have been pried open a bit in December. That is why I am expecting a surprise increase in December home sales. Whether you agree with me or not, the fact remains December will be make-or-break for homebuilders. Be ready for a big short term swing in stock prices when the next round of sales data rolls in starting with existing home sales on January 24.

Listed below are my investing guidelines:

Safe Bets: Toll Brothers (TOL): A luxury homebuilder, this Company has limited exposure to the sub-prime market, and mortgage lending plays a small role in its customer base. Copious returns are not likely as it has not suffered as large of a loss in value.

Low Risk: D.R. Horton (DHI), Ryland (RYL), Centex (CTX): Diversification away from problem regions and/or strong liquidity positions makes these Companies stable and more able to weather the storm.

Risky: Hovnanian (HOV), Pulte Homes (PHM), K.B. Home (KBH), Lennar (LEN): High debt levels and/or exposure to problem regions make these stocks volatile, meaning they are less likely to emerge in full form, but they have large upsides.

Very Risky: Standard Pacific (SPF), Beazer (BZH): Large fluctuations in stock value have attracted many bottom fishers to these stocks, but be wary of the fact that large upswings leave the potential for equally large downswings. These Companies are immersed in debt obligations and complications, and face a real risk of default.