Homebuilders’ Stock Bounces Despite Dip in Sales

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Could investors be telling us the housing market has hit bottom?

That’s one intriguing read on the stock market’s reaction last week to data showing housing is even weaker than expected – news that reasonably should have punished the shares of the county’s two big homebuilders, but didn’t.

Last Monday, in anticipation of a dismal report from the National Association of Realtors, shares of L.A.-based KB Home declined 4 percent and Calabasas-based Ryland Group fell 3 percent. Economists predicted the report would show a drop in existing home sales of 13 percent during July compared with the same month in 2009.

The next day the report announced that sales fell 27 percent, twice the expected drop. Yet by day’s end, both companies’ stock prices were up, not down. By the end of Wednesday, KB Home’s shares were up 7 percent from Monday, although prices settled down thereafter.

Why? Some believe the unusually bad report may signal the bottom, or close to it. And to the forward-thinking stock market, that would mean there’s only one direction to go.

“It’s hard to say why a stock moves, but maybe those who bought decided the only place to go is up,” said Stuart Gabriel, director of the UCLA Ziman Center for Real Estate. “The general consensus among analysts is that home prices and interest rates have come down so far that those factors plus a stronger economy will ultimately pull up the housing market.”

Both companies are struggling but they are cutting losses and staying afloat. KB Home reported a net loss of $30.7 million in its second quarter, but that was less than half of its $78.4 million loss a year ago. The company said it had $1 billion in cash reserves.

Ryland also reported a sharply lower second quarter net loss of $21.8 million, down about two-thirds since 2009. The company had $878 million in cash reserves.

Chris Thornberg, a real estate forecaster and principal at Beacon Economics in Century City, said both companies appear in solid financial position.

“They have cut costs and if they have survived the past two years, they’re probably going to make it,” he said.

Josh Levin, an analyst at Citigroup who covers both KB Home and Ryland, expects a wave of consolidation in homebuilding. He listed both companies as possible targets, a position that would boost their share prices.

“Management teams are not discussing the issue publicly, but we would be surprised if at least some of them were not talking about it privately,” he wrote in a research note this month.

Ryland did not return a call for comment. A representative of KB Home said the company does not comment on its stock.

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