Sector Wrap: The Surprisingly Strong Homebuilders (TOL, DHI, LEN)

By Ryan Freund | December 03, 2008 AAA

The combination of the housing bubble bursting and the worst credit crisis since the Great Depression has made 2008 an extremely difficult year for the home building industry. One would assume that the stocks of the large homebuilders would be faring equally poorly, but, somewhat astonishingly, they're doing quite well.

Home builder scorecard

Let's take a peek at a few of the largest home builders in the industry, and how their stocks have fared during 2008.

Surprisingly Strong Homebuilders
Company Dec. 5, 2008 Price Jan. 2, 2008 Price Gain (Loss)
Toll Brothers
(NYSE:TOL)
$22.03 $19.55 +12.7%
D.R. Horton
(NYSE:DHI)
$8.10 $12.50 (-35.2%)
Lennar
(NYSE:LEN)
$9.06 $16.62 (-45.5%)
NVR
(NYSE:NVR)
$472.50 $515.05 (-8.3%)
Pulte Homes
(NYSE:PHM)
$11.86 $10.32 +14.9%
Data as of market close December 5, 2008

As you can see, there's quite a wide variance between the best performer and the worst performer. Pulte Homes and Toll Brothers have performed quite well in 2008, NVR has remained fairly flat, while D.R. Horton and Lennar have seen their shares drop significantly.

Apples to Oranges?
Now, you might be thinking to yourself, "How can anyone say that home builders have performed well overall?" To understand the answer, we must compare these numbers to something. For this exercise, we will compare the home builder numbers to the S&P 500's performance in 2008, which lost nearly 40%.

Company Outperforming S&P by
Toll Brothers +52.7%
D.R. Horton +4.8%
Lennar (-5.5%)
NVR +31.7%
Pulte Homes +54.9%
Data as of market close December 5, 2008

Looking at the data this way and it becomes readily apparent that these stocks, with the exception of Lennar, have performed quite well; especially Toll and Pulte.

Let the Head Scratching Begin
If you're anything like me, you're probably wondering just how the top homebuilders - for the most part - have done so well given the current economic conditions. Perhaps I'm overly pessimistic, but I am fairly certain that 2009 will not be kind to home building stocks, or any stocks for that matter (but that's another matter for another day).

In November alone, the U.S. economy shed 533,000 jobs - the worst since 1974. According to the National Association of Realtors, 4.3 million previously occupied homes nationwide were listed for sale at the end of September. At the current sales rate, it would take 10 months to work through the inventory, a full 67% higher than the 6 months considered balanced. Furthermore, the restriction of credit has put a stranglehold on the industry, stifling any real demand for homes. (For related reading, see Economic Indicators Tutorial: Housing Starts.)

Conclusion
Although the homebuilders in this article have outperformed the broader S&P 500 index by a significant amount, 2009 is not shaping up to be a good year to own them. Of course, the government could step in and offer 4.5% 30-year fixed rate mortgages, but, as Alan Heavens of the Philadelphia Enquirer said in a recent article, "A 4.5% mortgage rate means nothing for a person without a job." I couldn't have said it better myself.

To learn more about the causes of the current crisis, be sure to read Why Housing Market Bubbles Pop.

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