Homebuilders Rally on Positive Reports

Shares of big homebuilders jumped on Monday after a batch of positive analyst reports painted an optimistic outlook for the housing sector in 2006, reassuring investors that the nation's homebuilders may have more room to rally after nearly five years of frenzied growth.

Homebuilders like Lennar Corp., KB Home, Pulte Homes Inc. and Toll Brothers Inc. all rose more than 4 percent on the New York Stock Exchange in afternoon trading. The Philadelphia Housing Sector Index, an index of 21 construction industry stocks, advanced 3.5 percent, led by manufactured homebuilder Champion Enterprises Inc., which climbed 8.4 percent.

"Long-term housing demand remains strong, (with) housing starts over the next decade to be in a range of 1.8 to 2 million per year," Merrill Lynch analyst Lorraine Maikis wrote in a report dated Jan. 9.

Housing starts, which refer to the beginning of construction of a unit of housing, are the bellwether indicator of the housing industry. The brokerage also projected large homebuilders' current backlog of homes for sale, land holdings, and access to capital "should translate into an above-industry unit growth rate in 2006."

Merrill's bright forecast for the industry coincided with bullish reports issued by other investment banks on Monday.

"We believe 2006 will shape up to be another strong year for the builders, as we look for new orders to increase by 16 percent on average on the back of continued industry consolidation, increasing market share gains and a benign interest rate and economic landscape," Deutsche Bank analyst Gregg Schoenleber wrote in a client note.

Although Deutsche Bank forecast housing starts will remain flat over the next year, "our outlook suggests the builders will grow sales and earnings at a more modest pace, 20 percent and 16 percent, respectively," compared to earnings growth of 42 percent in 2005, driven by strong backlog and order growth.

The positive research reports come as mortgage rates have been rising and home sales and price appreciation have been slowing in recent months, leading a growing camp on Wall Street to predict the nation's housing market has entered a downturn.

Recent economic indicators measuring housing starts, new and existing home sales and other data have generally pointed to a slowdown in the sector.

A growing number of homebuilders have also cautioned they are seeing a return to historical trends after posting several years of double-digit earnings and sales growth. Last Thursday, Colorado's top homebuilder MDC Holdings Inc. reported lower home orders in the fourth quarter, citing shortfalls in Virginia, Colorado and Arizona.

However, even MDC's fourth-quarter slowdown did not deter Citigroup housing analyst Stephen Kim, who predicted homebuilder stocks will rally on stronger-than-expected spring order data. "MDC's disappointing fourth-quarter orders do not portend a wider housing downturn, as many skeptics fear," Kim wrote in a note dated Jan. 8, adding that MDC's shortfall was specific to the company, not the overall industry.

"Although homebuilding stocks may continue to tread water during the rest of winter, we continue to believe the group is positioned to rally" with the advent of the spring selling season, which starts in early February, Kim wrote. "We believe the entire group will participate in the rally later this year."