The home-building group at Credit Suisse is out today with a pair of research reports that reflect what appear to be deteriorating conditions in the market for new homes.
The first reported a drop in Credit Suisse's profit-weighted home-building market score, which fell 4% to a 5.4, the equivalent of a letter-grade of "D." The score is based on a survey of public and private building companies and reflects their view of the state of the marketplace. The second reported a rejiggering of the group's stock recommendations in which Centex was upgraded from "neutral" to "outperform" and Ryland from "underperform" to "neutral", and D.R. Horton, NVR and Pulte were downgraded from "neutral" to "underperform." The firm still maintains an "underweight" rating on the overall home-building sector.
In the report on the March home-building survey, only 25% of those builders who responded said March was better than February, compared to 41% who said February was better than January and 62% who said January was better than December. Another 24% rated the market in March as worse than the month before, up from 18% who said February was worse than January and 7% who said so of January compared to December. Ivy Zelman, the lead analyst, wrote, "After a more optimistic January and February, our contacts were more negative this month, with March deteriorating on several levels...March is the single most important month of the year for homebuilders. Not only does it represent the largest order month at roughly 10% of the annual total, but it sets the tone for the remainder of the spring andsummer. In one large private's words?'The spring selling season is a bust. It is going to be a long, long hot summer.'"
Among other findings in the March survey, orders were down for 69% of respondents, worse than 59% in February, cancellations deteriorated for 27% of builders versus only 10% last month, tightening credit accounted for 34% of cancellations, up from 25% in February and 81% of builders responded that credit tightened in the last month; 32%deemed it "tightened significantly."
Regarding the individual builder stocks, the Credit Suisse team said, "Given the uncertainty regarding the timing of a recovery from the current housing recession...investors should be focused on builders that are positioned for the worst, even if the worst never materializes. This is particularly important as we expect home and land prices to remain under pressure through this year, which is the most important data point in our valuations. In this vein, we favor low leverage, strong cash flow, lower levels of land investment, and strong leaders at the corporate and divisional offices (the been-there-done-that crew)."