Home builder stocks rallied for a second consecutive day on Tuesday as investors gambled that the struggling U.S. housing market, with a chance of further interest-rate cuts, may have bottomed out and now is the time to buy, investors said.
The Dow Jones U.S. Home Construction index rose as much as 8.4 percent on Tuesday morning and was still up 5.6 percent in late morning trading.
The anticipation is that we are at or near the bottom of the (housing) market and the only place to go is up, said Paul Nolte, director of investments at Hinsdale Associates, in Hinsdale, Illinois. His firm does not own any home builder stocks, but he follows them closely.
Among the home builder stocks showing large gains were Brookfield Homes Corp, up 7.4 percent; M/I Homes Inc, up 8.1 percent; Beazer Homes USA Inc, up 9.3 percent; and Standard Pacific Corp, up 9.4 percent.
On Monday, the home-builders index rose as much as 5.1 percent before closing up 4.2 percent after Citigroup analyst Stephen Kim raised his ratings on several home-builder stocks to buy, saying the companies with the strongest balance sheets would benefit most from any near-term bounce.
While he warned that he does not see any near-term relief for the U.S. housing sector, its history has shown that when things look really bad is when the stocks start looking good.
It bears repeating that the home-building stocks have an established history of rallying well before industry fears have finished transitioning into fact, Kim said in the Monday research note.
Thomas Leritz, portfolio manager with Argent Capital Management in Clayton, Missouri, said Tuesday that Citigroup's note, along with the Federal Reserve's recent rate cut and more expected to come, have combined to give investors hope.
People are trying to figure out the bottom, he said, adding he did not personally believe the sector has hit bottom yet. When you look at the stocks, they've really been hit hard. There's a lot of people out there who are trying to discount the future.
Argent does not own any home builder stocks, but Leritz follows the sector closely.
The stock surge came just as the National Association of Realtors reported that its Pending Home Sale Index in August fell to its lowest level since the index's inception in 2001. The index was down 6.5 percent from July and 21.5 percent down from August 2006.
Lawrence Yun, the trade association's senior economist, attributed the sharp decline to the mortgage credit crunch, which made loans, especially those for greater amounts, difficult to obtain.
The greatest declines in the pending sales index appeared in the most expensive markets where the use of jumbo loans is more prevalent.
The West region performed the worst, falling 27.1 percent from August 2006. The South fell 21.3 percent The Northeast was down 18.3 percent. The Midwest was off 18 percent.
However, Yun said expects an improvement in the fall.
The problem has since become less severe, though jumbo loan rates are still higher than they would be under normal conditions, Yun said in a statement. Therefore, sales activity in late fall will better reflect market fundamentals.
Wachovia analyst Carl Reichardt said the poor showing by existing-home sales, and reports by home builders concerning deterioration in August, point to weak order trends for public home builders in the third quarter.
We expect price capitulation in the existing housing market to become much more acute this winter as sellers attempt to 'unfreeze' potential buyers, he wrote in a research note.