We expect foreclosure activity to pick up as the year progresses, adding additional pressure to prices and new home sales. We think growth in housing will be muted, below consensus expectations.

Homebuilders like Pulte, D.R. Horton Inc. (NYSE: DHI), KB Home (NYSE: KBH), and M/I Homes Inc. (NYSE: MHO) are all up between 22% and nearly 44% since the beginning of the year, with most peaking in mid-March. The SPDR S&P Homebuilders ETF (NYSE: XHB) is also up nearly 25% so far this year. Today, all are down more than -3.5% on the CapIQ note.

Shares of PulteGroup are down -5% at $9.00 in a 52-week range of $3.29-$9.69. That 52-week high was set just two days ago, on an earnings report from another homebuilder that sent most sector stocks to or near annual highs, even though the S&P Case-Shiller housing price index came out on the same day with a poor report on house prices.

Paul Ausick

According to online foreclosure tracker RealtyTrac, foreclosure filings topped 228,000 in August, a 7% jump over July filings.  One in every 570 US housing units is now in foreclosure. This puts even more pressure on new homebuilders like Toll Brothers Inc. (NYSE: TOL), D.R. Horton Inc. (NYSE: DHI), NVR Inc. (NYSE: NVR), Lennar Corp. (NYSE: LEN), PulteGroup, Inc. (NYSE: PHM), M/I Homes Inc. (NYSE: MHO), Ryland Group, Inc. (NYSE: RYL) and Beazer Homes USA Inc. (NYSE: BZH).

The builders have managed to stay afloat by cutting costs and shedding real estate and a myriad of other financial finagling, but they’re not making money building houses. And the more houses that are foreclosed, the weaker that housing prices get as banks are willing to take just about any reasonable offer to get rid of the foreclosed properties they own.

New default notices in August totaled nearly 79,000, up 33% since July and the largest one-month increase since August 2007. The peak month for notices of default was April 2009, when more than 142,000 notices were filed.

The well-publicized robo-signing issue and other documentation problems are finally being settled and there is plenty of reason to believe that more foreclosures will begin to work their way through the system. Freddie Mac has said that it expects the delay in filing foreclosures to last through the end of this year, but the August report could signal that the move is already on.

Just a month ago ratings on NVR, PulteGroup, M/I Homes, Ryland, D.R. Horton, and Beazer were raised at one research firm from ‘Sector Perform’ to ‘Outperform’. It’s difficult to understand why. What’s not difficult to understand is that the shares in these firms all jumped  by about 20%. Since then most of the companies have given it all back as reality takes over.

Lennar, which reports earnings on Monday, is expected to post EPS of $0.10 on sales of $810.2 million. Last year’s EPS in the same period was $0.16 and revenues totaled $825 million. The stock’s target price is $21.81 and it closed at $13.72 yesterday, an implied upside of nearly 60%. Anyone who believes that probably believes in the tooth fairy.

Paul Ausick

For the quarter, Toll Brothers sold 693 units, down from 803 in the same period a year ago. Contracts increased slightly year-over-year, from 701 in 2010 to 713. Backlog also increased, from 1,636 units in the same period a year ago to 1,780. Toll Brothers builds higher-priced homes and has been somewhat insulated from the turmoil at the lower-priced end of the market. However market volatility in the last few weeks could cause the company some more problems going forward.

Toll Brothers was not among six builders that received ratings upgrades earlier this month. NVR Inc. (NYSE: NVR), PulteGroup, Inc. (NYSE: PHM), M/I Homes, Inc. (NYSE: MHO), Ryland Group, Inc. (NYSE: RYL), D.R. Horton Inc. (NYSE: DHI), and Beazer Homes USA Inc. (NYSE: BZH).

The number of foreclosed homes either on the market or in the line to come onto the market remains very high. There has been a delay in processing foreclosures, and once that delay ends, the number of foreclosed homes is expected to jump again. Pricing pressure on new homes will follow.

The sort-of good news for the homebuilders is that this flow of foreclosures is not expected to hit the market until 2012. That’s some help to the builders for the rest of this year, but not much.

Toll Brothers guided deliveries for the full fiscal year at 2,475-2,675 homes, compared with an earlier estimate of 2,300-2,800. The company’s first estimate for new home sales was 2,100-2,900. In the 2010 fiscal year, Toll Brothers sold 2,642 units, a drop of -11% from 2009.

The market for new houses is weak, and there is really no good reason for optimism. A slow-growth economy combined with high unemployment and an abundance of foreclosed properties don’t forecast a sunny outlook for the homebuilders going into 2012.

Shares of Toll Brothers are up about 0.4% in the pre-market this morning, at $14.80. After posting a new 52-week low yesterday, the stock’s 52-week range is $14.59-$22.42. To indicate the abiding hope for the housing market, Toll Brothers trailing P/E ratio is nearly 41. The SPDR S&P Homebuilders ETF (NYSE: XHB) closed yesterday at $13.49, near the bottom of its 52-week range of $13.05-$19.21.

Paul Ausick

The Mortgage Bankers Association reported this morning that applications for mortgages rose nearly 22% in the past week.  Refinancings jumped 30%, while purchase applications fell by nearly -1%. The news comes the day after one analyst firm lifted ratings on three builders from ‘Sector Perform’ to ‘Outperform’. The three were NVR Inc.(NYSE: NVR), PulteGroup, Inc. (NYSE: PHM), and M/I Homes, Inc. (NYSE: MHO). Three other builders received similar upgrades on Monday: Ryland Group, Inc. (NYSE: RYL), D.R. Horton Inc. (NYSE: DHI), and Beazer Homes USA Inc. (NYSE: BZH).

The lone winner, not the ‘loan winner,’ may be Stewart Information Services Corp. (NYSE: STC).  All that matters for them is volume rather than if it is a refinance or a purchase.

Beazer reported its third-fiscal quarter earnings yesterday and badly missed already low expectations. The company reported an EPS loss of -$0.80, compared with an expectation of an EPS loss of -$0.42. Revenue of $172.8 million missed expectations of $232 million. Shares posted a new 52-week low of $1.69, and closed at $1.83. Ryland posted a new yearly low yesterday as did all the others we’ve noted.

A big part of the problem the builders face is the number of existing homes available for sale and the number of bank-owned homes, called REOs for “real-estate owned”, also on the market. In June a record number of REOs were sold and the inventory of REOs fell significantly. That should be good news for builders.

Alas, the good news must be tempered with the knowledge that 90-day delinquent loans and loans in foreclosure have been getting processed more slowly. Foreclosure proceedings have been delayed by process issues, changes in state foreclosure laws, and court rulings that have to be applied to existing foreclosures.

Freddie Mac expects the delays in foreclosures to continue through the rest of 2011. As a result, REO inventory is very likely to continue to decline, giving a false picture of the true level of delinquent and foreclosed properties. As that inventory falls, the instinctive response is that new building will increase.

While that may happen, far likelier is that the bottleneck on foreclosures will finally open and the REO inventory will jump again. New home building will come under pressure again as builders are forced to compete with foreclosed properties now up for sale at distressed prices.

With the S&P down by nearly -3% this morning, Beazer and PulteGroup are down more than twice that amount. Beazer shares have posted another new low today, at $1.68. The SPDR S&P Homebuilders ETF (NYSE: XHB) is down about -3.5%, at $13.64, just inside the 52-week range of $13.15-$19.21.

Paul Ausick

DR Horton Inc. (DHI)….. $3.5B; +5.8% at $10.78
Toll Brothers Inc. (TOL). $3.1B; +4.5% at $18.86
NVR Inc. (NVR)……….. $2.6B; +4% at $6.86
MDC Holdings Inc. (MDC).. $1.5B; +4.5% at $30.95
Lennar Corp. (LEN)……. $1.2B; +11% at $7.98
KB Home (KBH)………… $1.1B; +6% at $14.30
Ryland Group Inc. (RYL).. $728.8M; +6% at $16.80
Meritage Homes Corp(MTH). $401.3M; +7.3% at $12.99
Hovnanian (HOV)………. $125.0M; +11% at $1.72
M/I Homes, Inc. (MHO)…. $121.7M; +2.2% at $8.72
Standard Pacific (SPF)… $100.6M; +11% at $1.00

Oddly enough, the SPDR S&P Homebuilders (NYSE: XHB) ETF is only up almost 4% at $11.37.  The other ETF, the iShares Dow Jones US Home Construction (NYSE: ITB) is up 3.5% at $9.25.  This is a slightly different ETF, but the PowerShares Dynamic Building & Construct (NYSE: PKB) is up 1.3% at $9.65 on very thin volume.

JON C. OGG

As far as a use of proceeds, the company said that it intends to usethe proceeds for general corporate purposes, which may include theacquisition and development of land, refinancing of debt, purchase ofshares, capital expenditures, mergers, acquisitions and other strategicinvestments. 

The company has noted that the specific allocations of the proceeds forsuch purposes have not been made at this time, and pending theirultimate use it intends to invest the net proceeds in short-term,interest-bearing, investment grade securities.

Shares are up by about 1.3% today at $19.01, and the 52-week tradingrange is $7.20 to $29.74.  Its market cap as of today is roughly $266.5million.

Jon C. Ogg
August 4, 2008

After a mid-day review of 52-week lows, there was one obvious group that makes this list now more frequently than it does not: HOMEBUILDERS.  Related companies are also on the list of usual suspects as well.

**denotes hit intraday 52-week lows but may be above now

Centex (CTX)              $25.88; prior low $26.03
DR Horton (DHI)        $13.58; prior low $13.61
KB Home (KBH)        $26.43; prior low $26.55
**Lennar (LEN)          $25.61; 25.50 prior low (today low $25.34)
**Ryland (RYL)           $25.19; prior low 24.92 (today low $24.90)
**M I Homes (MHO)   $14.82; prior low 414.81 (today low $14.65)   

Those with related activities that saw intra-day lows under the prior 52-week low ar as follows: Beacon Roofing Supply (BECN), Builders Firstsource (BLDR), and Masco (MAS).

About the only good news is that the SPDR S&P Homebuilders (AMEX:XHB) shares are actually UP on the day now with the broader markets.  XHB shares are up 0.8% at $22.81, and its 52-week range is $22.59 to $40.03.  This ETF is being led by some of the large suppliers that serve the industry rather than by the homebuilder components themselves.  Toll Brothers (TOL) and Pulte Homes (PHM) are actually up on the day.

Jon C. Ogg
September 11, 2007

Jon Ogg produces the 24/7 Wall St. SPECIAL SITUATION INVESTING NEWSLETTER; he does not own securities in the companies he covers.