Although the expiration of the federal first-time and move-up homebuyer tax credit has already led to weaker-than-expected buyer traffic during May and June, beleaguered homebuilders may experience some relief as the year progresses and several catalysts likely lead to price-to-book multiple expansion.
“We find the builder space to be attractive on valuation and long-term fundamentals, and suspect an appropriate entry point for equities could occur over the next six months,” said Michael Kim, a senior vice president at CRT Capital Group LLC. Kim points to the sizable tax refunds made available to homebuilders through the Worker, Homeownership and Business Assistance Act of 2009, in addition to these companies’ high levels of cash and shortened construction timelines as several positive dynamics within the homebuilder universe.
“Our thesis has been that we will dance along the bottom for a little while until we get that boost to the broader economy, especially considering housing is estimated to represent almost 30% of GDP. Household formation and favorable demographic trends on a regional level should support a baseline level of demand,” Kim said. “Once you start to see job creation and greater consumer confidence, potential buyers will start looking at the move-up category, which someone like Standard Pacific (SPF) is more focused on.”
And while value investors may be sitting on the sidelines, waiting for the appropriate time to jump into the homebuilders market, Kim says it’s only a matter of time until we start to see more normalized housing starts.
“We suspect builder equities are going to be governed by market technicals rather than fundamentals, which has been the case more recently,” he said. “And we believe investors will gain more conviction for the public builders some time over the next six months, if the macro data provides more visibility on a broader economic recovery.”
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