I have been following the exciting homebuilding industry closely in recent months. What I have been noticing is that there is a huge difference between a thriving industry and a bargain stock. The homebuilding industry exemplifies this today: the industry is going gangbusters, but the stocks in this space are not bargains.
The macro picture
Homebuilders including Lennar Corporation (NYSE:LEN), and D.R. Horton, Inc. (NYSE:DHI)have reported strong order trends above the expectations. Taylor Morrison Home has filed plans in January 2013 to raise $250 million in an IPO.
Cheap financing exists both for new home buyers and also for companies which could sell shares at rich valuations or debt at low interest rates. This is good news for companies is also bad news for investors (the people buying shares at high prices). Not surprisingly, homebuilders are raising funds from public-equity and debt markets. Similarly, demand for new construction is increasing among its buyers as a result of low mortgage rates and decreasing supply of existing residences for sale. The National Association of Home Builders expects builders to report 650,000 single-family homes during 2013, representing an increase of 22% from 2012.
Tri Pointe Homes Inc (NYSE:TPH), a company financed by Barry Sternlicht, increased by 12% after raising $233 million through an IPO. The company’s shareholders sold 13.7 million shares for $17 each, above the range of $14 to $16. The company will use the proceeds raised from the IPO to acquire land. Since 2010, Sternlicht’s Starwood Capital Group has invested $150 million in the company, holding approximately 84% in the company pre-IPO. He sold his 3.7 million shares in the company for $62.7 million during the IPO and retained 14.3 million shares.
According to the Richard Dugas, Chairman and CEO of the company, “We have every reason to expect that housing has indeed turned the corner and that industry sales in 2013 can continue to move higher as pent-up demand is released.”
The demand for new houses has increased due to tightening of existing properties inventories and mortgage rates float to record lows. New home sales in the U.S. increased by 20% during 2012 to its highest level since 2009. So, as was the case with on the corporate level, consumers are taking advantage of cheap financing.
However, there is more to investing than cheap financing. Even with cheap financing, if you pay too much you are setting yourself up for disappointment and possibly loss. Some of the expectations in the market are just too high.
D.R. Horton climbs after reporting doubled earnings
Analysts were expecting great results after Lennar Corporation (NYSE:LEN) reported a 32% increase in the home orders during the last quarter. This is an amazing result, but it is not as shocking as the results of D.R. Horton. D.R. Horton, Inc. (NYSE:DHI) reported that first quarter earnings have doubled year over year, propelling company shares to their highest price in almost 6 years. The main factors that have contributed to this growth include low mortgage rates and a rising demand for housing among the general public. The Commerce Department indicated that for last year alone U.S. homebuilders were able to sell about 367,000 homes. This is the highest figure in three years.