Housing's Bright Spot: Stocks

Despite the Sector's Spiraling Crisis, Builders' Shares Are Gaining Fast

Washington Post Staff Writer
Sunday, April 6, 2008; Page F01

When the stock market becomes erratic, as it has in the past year, investors tend to play it safe, fleeing to recession-proof sectors such as consumer staples and utilities. After all, who's willing to give up shampoo and electricity?

But since the beginning of the year, analysts have noticed an upswing in one unlikely area: housing.

Shares of U.S. home builders rose 18.5 percent in the first quarter, according to Capital IQ, a division of Standard & Poor's. Residential REITs, essentially real estate mutual funds, were up 12 percent. Land subdividers and developers jumped 17 percent. By comparison, the S&P 500-stock index was down 9.9 percent.

So what's with the rebound in industries tied to home building, the root of the economic crisis that has spread across the globe?

"It's one of those things where you can probably come up with a million theories and none would be right," said Greg Fernandez, a financial planner with Nations Capital Wealth Management in McLean.

Chris Hussey, managing director of Goldman Sachs's small- and mid-cap research group, offered one theory: "These stocks are down a lot," he said. "[Investors] say to themselves, 'What didn't work out last year? Maybe they'll do well this year.' "

Recent government intervention has buoyed hopes of a recovery for the industry. Congress passed an economic stimulus plan. The Federal Reserve slashed a key interest rate. And last week, Senate Democratic and Republican leaders agreed on a package that would provide billions of dollars in tax rebates to home builders.

Such moves, said Hussey, signal that "the government was very singularly focused on the housing market." That, he said, is comforting to shareholders. "Investors say that's a good sign. Maybe that's a sign that the worst is behind us."

Another reason for the rebound could simply be that stock markets tend to predict what's to come. They've accurately predicted the last few recessions. "Stock markets are renowned for anticipating things," Hussey said.

Is the market anticipating correctly this time? Have these stocks hit bottom? Is now a good time to buy them?

Ask the National Association of Home Builders, and the future looks bright. The association projects that housing starts will reach 986,000 units this year and increase to 1.1 million units in 2009, said Stephen Melman, director of economic services for the NAHB. That assessment is based on several factors: government intervention, lower mortgage rates, pent-up demand, lower prices. "All these things will move people off the fence," Melman said.

Already, there have been some promising -- albeit still bleak -- data. Residential construction spending fell in February for the 24th straight month, but by a modest 0.9 percent, less than what economists had expected. Meanwhile, sales of existing homes increased unexpectedly in February after declining for six consecutive months.

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