Could the housing market be returning to normal?
Investors in local homebuilders KB Home and Ryland Group Inc. seemed to think so last week after the release of a national report showing housing starts reaching their highest level in eight years.
The news sent shares up at homebuilders across the nation, including Westwood’s KB Home and Westlake Village’s Ryland Group. Both posted share price increases of roughly 6 percent for the week ended Aug. 19, gains that stood out in an otherwise down week for stocks on the LABJ Index. (See page 44.)
The bump came after the Department of Housing and Urban Development and the Census Bureau released data Aug. 19 showing housing starts reached a seasonally adjusted annualized rate of 1.21 million units in July. That was up 10 percent from a year earlier and was the best reading since October 2007, before the Great Recession.
But one analyst who follows the sector cautioned against exuberance. Buck Horne, an analyst with Raymond James in St. Petersburg, Fla., noted other, less upbeat figures in the report, including a modest 6 percent year-over-year growth in single-family housing permits.
“Yesterday’s housing starts headline surprised to the upside, setting off a strong rally in homebuilding stocks and cries of ‘We’re back!’ from the pundit class,” he said in an Aug. 19 research note. However, bad weather across much of the country earlier in the year may have pushed many housing starts into June and July.
What’s more, Horne said, some homebuilders benefit more than others from a steady growth in housing starts and permits. Companies focused on entry-level and high-end homes have reported strong sales growth, while homebuilders with an emphasis on the middle-class move-up market have seen their growth rates slow. KB Home and Ryland both have substantial move-up market segments; Horne has “market perform” ratings on both companies.
In his research note, Horne said he was particularly cautious about Ryland. The company has considerable exposure in the Houston market, which as the nation’s center for the oil industry has been hit hard by a collapse in oil prices. He is also waiting to see how the company’s planned merger with Irvine’s Standard Pacific Corp. plays out. That deal, announced in June and projected to close this fall, still needs approval from both companies’ boards. The combined company is to be renamed CalAtlantic Group Inc.
“The merger could enhance both companies’ trading multiples; however, until the dust settles with the integration, we prefer to remain on the sidelines,” Horne said.
