The country’s largest homebuilders have been improving a little in the first quarter, and that improvement is expected to increase in the second half of the year. D.R. Horton Inc. (NYSE: DHI), PulteGroup Inc. (NYSE: PHM), Lennar Corp. (NYSE: LEN), Hovnanian Enterprises Inc. (NYSE: HOV), Toll Brothers Inc. (NYSE: TOL), NVR Inc. (NYSE: NVR), KB Home (NYSE: KBH) and other builders still face headwinds from falling prices as distressed sales continue.

Last week’s report from the National Association of Realtors indicated that existing inventories have continued to decline, a good sign for homebuilders. There has been a large increase in sales of existing homes to investors and private equity firms who plan to rent out the homes to all those new households. As the inventory declines, prices could begin to rise again, until those homeowners who want to sell finally see their chance (call it ‘pent-up supply’).

D.R. Horton, which released its quarterly results today, posted better than expected EPS and revenue, with EPS coming in a $0.13 on total revenue of $935.6 million. The consensus estimates had called for EPS of $0.04 on revenue of $853.4 million. Horton’s sales, closings, and backlog all finished the quarter with double-digit growth year-over-year. That’s fine, of course, but the market for new houses in the first quarter of last year was pretty awful, so that puts some perspective on this year’s spurt.

Here’s a quick look at the other builders and their most recent reports and expectations for the next quarter.

PulteGroup Inc. (NYSE: PHM) is scheduled to report earnings on Thursday. The consensus estimate calls for an EPS loss of -$0.03 on sales of $836.6 million. In the same period a year ago the company posted an EPS loss of -$0.10. PulteGroup is currently expected to post EPS of $0.04 in its June quarter and full-year EPS of $0.22, with about half that expected in the third quarter. The company’s shares are up nearly 33% since January and up 7.6% for the last 12 months.

Lennar Corp. (NYSE: LEN) posted EPS of $0.08 for its quarter ended in February, double the consensus estimate. For the quarter ending in May, the company is expected to put up EPS of $0.17 on revenue of $883.8 million, and for the full year, EPS is forecast at $0.83. PulteGroup’s shares are up about 31% since the beginning of the year and up more than 36% in the past year.

Hovnanian Enterprises Inc. (NYSE: HOV) has had a rough few years. In its most recent quarter, the company posted an EPS loss of -17% and the consensus estimate for the quarter ending in April is for an EPS loss of -$0.32. For the full-year the company is expected to post an EPS loss of -$1.02. Year-to-date shares are up about 37%, but for the past 12 months shares have lost nearly -44%.

Toll Brothers Inc. (NYSE: TOL) posted an EPS loss of -$0.02 in its January quarter, but the consensus estimate for the April quarter calls for EPS of $0.03. For the full-year, the forecast is for EPS of $0.33, with about half of that coming in the company’s fourth quarter. Year-to-date and for the past 12 months Toll Brothers is up about 17%.

NVR Inc. (NYSE: NVR) reported first quarter EPS of $3.90 last week, below the consensus estimate of $4.16. For the June quarter the company is expected to show EPS of $8.80 and for the full year EPS is expected to come in at $33.87. NVR’s shares are up about 12.8% since the beginning of the year, and for the past 12 months shares are up 6.7%.

KB Home (NYSE: KBH) reported an EPS loss of -$0.59 in its first quarter, about 2.5x the consensus estimate. For the May quarter the EPS loss is estimated to be -$0.33, an improvement of nearly 60% from the same period a year ago. KB Home’s shares are up 16.8% year-to-date, but off more than -31% in the past 12 months.

D.R. Horton opened up 1.5% this morning, at $15.61 in a 52-week range of $8.03-$16.45.

The S&P Homebuilders ETF (AMEX: XHB) opened lower this morning at $20.23 in a 52-week range of $12.22-$21.98.

Paul Ausick

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

The Home Depot, Inc. (NYSE: HD) shares are down 1.8% at $48.78; Lowe’s Companies, Inc. (NYSE: LOW) is now down 2.6% at $30.13. iShares Dow Jones U.S. Home Construction ETF (NYSE: ITB) is now down 3.7% at $14.29 on more than 1 million shares; SPDR S&P Homebuilders (NYSE: XHB) is down 2.8% at $20.74.

JON C. OGG

According to the Mortgage Bankers Association, the number of mortgage applications fell by -10% last week. Of that total, there were -2.3% fewer applications for new purchases and -12% fewer applications for refinancing. Refinancing accounted for 77.3% of all mortgage applications last week, down from 78.6% in the previous week, which might be slightly better news for new home builders if the total number of applications for new homes had increased.

As it is, builders like KB Home (NYSE: KBH), Lennar Corp. (NYSE: LEN), PulteGroup, Inc. (NYSE: PHM), D.R. Horton, Inc. (NYSE: DHI), and Beazer Homes USA Inc. (NYSE: BZH) will continue to face the dual headwinds of higher inventory at lower prices and hard-to-get credit for new home buyers. The expected spate of foreclosed properties soon to hit the market is also expected to make matters even worse for the builders.

Home sales are reviving a bit in some markets, as we noted our story on the cities where people want to buy homes. All are in sunbelt cities where underwater mortgages and foreclosures have kept prices low, and where many Americans may be looking for a place to retire. One interesting side note to the uptick in home sales in these cities is that buyers may be making all-cash purchases, and foregoing the whole mortgage application process.

About 30% of US homes sold every month are purchased by all-cash buyers. Nearly 20% of buyers are investors who plan either to rent the property or to flip it as soon as possible. It’s probably no surprise that nearly all these all-cash deals are made on foreclosed or distressed properties. According to the National Association of Realtors, about 30% of all sales in September involved foreclosed or distressed properties.

Another interesting note on mortgages is the rise in 15-year refinancing loans. Last month, 28.8% of all mortgages were of that type. At existing low interest rates, homeowners wanting to stay where they are may be able to refinance and end up paying less per month on a 15-year loan than they are currently paying on a 30-year loan. That assumes, of course, that the homeowner can get approved for the loan.

In September, about 18% of all mortgage applications failed to get approval. Part of the problem has been a lowering of loan limits by lenders, which raises the cost to buyers in areas of  expensive homes where buyers need to get a more expensive jumbo mortgage that exceeds $417,000.

The SPDR S&P Homebuilders ETF (NYSE: XHB) is up nearly 2% over the past 12 months, although it has dropped about -1.5% in the first few minutes of trading this morning. The individual homebuilders shares are down anywhere from -1% to -2.25% in early trading as well.

Paul Ausick

According to today’s report, the seasonally adjusted annual rate of sales of new single-family homes in August is -2.3% lower than in July, but 6.1% higher than August 2010.  The number of new homes sold in August 2011 was 295,000 new homes, compared with 278,000 in August 2010. That’s okay, except August 2010 monthly sales were the lowest on record. Pretty weak.

Last week both KB Home (NYSE: KBH) and Lennar Corp. (NYSE: LEN) reported weak earnings. KB did note a jump of 40% in new orders, once again a hopeful sign until compared with the same period last year which couldn’t have been much worse. Other homebuilders PulteGroup, Inc. (NYSE: PHM), D.R. Horton, Inc. (NYSE: DHI), Toll Brothers Inc. (NYSE: TOL), NVR Corp. (NYSE: NVR), and Beazer Homes USA Inc. (NYSE: BZH) have all struggled during the past twelve months, with only NVR showing a share price drop of less than -10%. This is not an industry on the mend.

The Commerce Department also estimates that the US housing inventory increased slightly in August to a 6.6 month supply at the current sales rate. Of that, the Department estimates that 60,000 new homes are completed and ready for sale and another 77,000 are under construction. Another 27,000 are permitted but construction has not yet begun. The total inventory at the end of July was 163,000 houses with 26,000 sold in August. At the end of August, 164,000 new houses were for sale. That’s not an improvement.

The best thing to be said for new home sales is that they are not getting worse even though the absolute numbers are very low. If this data indicates a recovery or any sign of better days ahead for homebuilders, then one is looking at the numbers through rose-colored lenses.

Shares of KB Hoe are down more than -6% in the early afternoon, at $5.55, in a 52-week range of $5.09-$16.11.  Lennar shares are down about -1.5%, at $13.20, in a 52-week range of $12.39-$21.54. Pulte shares are down nearly -2%, at $3.97 in a 52-week range of $3.40-$8.99. The other builders are also trading lower, and the SPDR S&P Homebuilders ETF (NYSE: XHB) is up a fraction at $13.45, in a 52-week range of $13.02-$19.21.

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 Homebuilder Sentiment for August was a repeat of 15 for the month, a reading which is still just dismal.  The most obvious issue to take over the last three weeks is that almost no sentiment readings are going to be very positive this month (and likely more).  How on earth could there be positive sentiment readings by anyone right now as the economy is slowing enough on macro-data that the “double-dip recession” is one of the top searched terms now?

The results from Lowe’s were lightly ahead on the bottom-line and slightly soft on the top-line: $0.68 EPS vs. $0.66 estimates; and $14.5 billion in sales vs. $14.75 billion expected.  The company has now put its 2011 guidance in a range of $1.48 to $1.54 EPS from a prior range of $1.56 to $1.64 EPS.  Lowe’s is down 1.4% at $19.24 against a 52-week range of $18.07 to $27.45.  The long and short is that no one could have expected a surprise win here.  How could anyone have expected positive figures if they have been reading the financial and housing news of late?

Home Depot Inc. (NYSE: HD) reports on Tuesday morning and Thomson Reuters has estimates of $0.83 EPS and $19.96 billion in revenues; next quarter estimates are $0.58 EPS and $17.17 billion in revenues.  Shares are trading around $30.90 with a 1.3% gain so far this morning and the 52-week trading range is $27.10 to $39.38.  The belief is that Home Depot is taking away from Lowe’s in the current market.

What is interesting is that despite the negative sentiment and a continued negative homebuilder climate expected for months more, SPDR S&P Homebuilders (NYSE: XHB) is higher by 1% at $14.40 and the iShares Dow Jones US Home Construction (NYSE: ITB) is up 1.5% at $9.65.

DR Horton Inc. (NYSE: DHI), one of the few building stocks with a dividend, is up 1.8% at $9.69 in late-morning trading.

PulteGroup, Inc. (NYSE: PHM) is up the second highest today as shares are up 3.5% at $4.68 on the most active trading volume of more than 5 million shares.

The most interesting move today is in the down-and-out PMI Group Inc. (NYSE: PMI).  This company is hated by borrowers who have to get home mortgage insurance, but the stock is up 25% at $0.40.  It is a penny stock and a cult stock but investors will take what they can get right now.

The woes of the building sector are going to likely be here for some time.  Many do not expect a recovery to surface before next year, while others are worried that the persistent jaw-boning in the elections in 2012 may just put the whole housing recovery off until 2013.  Regardless of the move, many underwater homes and mortgages are going be no different than Atlantis… underwater for the long-haul.  The trick to remember is that these stocks may turn even as the news just continues to look “only as bad” or just a bit “less bad” than before.  If investors are waiting for the news to show real gains, the stocks will have moved much higher by then.

JON C. OGG

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

Before we start calling this runaway home building, a gain of more than 30% was seen in apartment and multi-family construction.  The single-family construction starts were up 9.4%, but that was still apparently the biggest boost in about two years.  This is 453,000 starts on an annualized basis.

iShares Dow Jones US Home Construction ETF (NYSE: ITB) is up 2.6% at $12.45 and the 52-week range is $10.50 to $14.29. Shares were above $13.00 as recently as July 7.

SPDR Series Trust S&P Homebuilders (NYSE: XHB) is up 2.4% at $17.73 and the 52-week range is $13.59 to $19.21.  Shares were above $18.60 as recently as July 7.

KB Home (NYSE: KBH) is up 3% at $9.51 and the 52-week range is $8.95 to $16.11; shares were above $10.00 as recently as July 12 and shares were above $12.00 as recently as late-June.

Hovnanian Enterprises, Inc. (NYSE: HOV) is up 3% at $2.27 and the 52-week range is $1.84 to $5.00.

D.R. Horton, Inc. (NYSE: DRI) is up 4.7% at $11.82 and the 52-week range is $9.72 to $13.50.  Its shares were above $12.00 on July 7.

Lennar Corp. (NYSE: LEN) is up over 5% at $18.34 and the 52-week range is $11.93 to $21.54.  Toll Brothers Inc. (NYSE: TOL) is up 2.8% at $21.18 and the 52-week range is $15.57 to $22.42.  Both of these are much closer to highs than lows compared to many peers.

So, here is why we ask if this is too soon to count a real housing recovery…  Building permits were up 2.5% while builders and real estate agents are effectively still competing with lower-priced existing homes, foreclosed and short-sale properties, plus that huge shadow inventory that banks have still held back.  May’s new home sales were only 319,000 on an annualized basis, about half of what a normal market might be.  Monday’s homebuilder sentiment came in above expectations at 15 for June, but 50 is the benchmark for a positive reading on that front.

Investors will often look to anything they can for a silver lining or a buying opportunity.  The reality is that celebrating these figures right now is still a bit like taking your child to the store and saying he can have the pick of any gift at the store.  It sounds great until that kid is old enough to realize that this is the dollar store.

The issues to consider in homebuilders are numerous.  The important thing to consider is that these stocks are generally considered to be proxies for the actual market about one or even two quarters out.  Investors buying today are not buying for news reports due in August, but they are buying for news coming out this fall and even in winter.  If the stock market stabilizes, these can still run even in a cautious minefield of international economics.  If the stock market tanks all over again or if the data still resembles a double-dip recession’s increased chances, then these will remain in the basement.

JON C. OGG

The iShares Dow Jones US Home Construction ETF (NYSE: ITB) holds a stake in 28 companies and claims net assets totaling about $479 million. Just over 60% of the fund’s assets comprise the top 10 holdings. Among the other 40% are several industrials, a furniture company, and a roofing supply company. Every one of the non-homebuilders has shown a share price gain over the past twelve months, with furniture maker Ethan Allen up by around 50%. Of the top 10 holdings, Home Depot is one of the top 3 performers and Lowe’s is one of the top six.

The SPDR Series Trust S&P Homebuilders (NYSE: XHB) claims total assets of about $794 million in a portfolio of 39 stocks. Unlike ITB, only about 30% of the fund’s holdings are in homebuilders; the rest of the holdings include industrials like USG Group and Whirlpool; retailers like Bed, Bath, and Beyond, Home Depot, and Lowe’s; and the top holding, bed-maker Tempur Pedic. More than 50% of holdings are in home furnishings, retailers, and building products.

The PowerShares Dynamic Building & Construction ETF (NYSE: PKB) has a market value of $32.4 million spread among a portfolio of 30 stocks. Industrials comprise nearly 48% of the portfolio and only homebuilder NVR Inc. is included among the top ten holdings. Unlike the ITB and the XHB, building and construction here refers to commercial and industrial projects. KBR Corp. and Fluor Corp. are among the fund’s top holdings.

Housing prices continue to fall, and could drop as much as another 10% this year.  Foreclosed properties are dragging prices for new homes down, and new orders are weak too.

The only reasonable explanation for the run-up in homebuilding ETFs is that some investors are trying to get ahead of a hoped-for recovery in the housing market. They could have a long wait.

OptionMonster reports this morning that in one trade yesterday, 30,000 September 18 put options were bought.  As OptionMonster noted, this could be a hedge against an outstanding long position or it could be revealing a bearish outlook for the homebuilding ETFs and the homebuilders in general.

It should be the latter.

Paul Ausick