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

In late March, Goldman Sachs Group Inc. (NYSE: GS) added Pulte to its “Conviction Buy” list for reasons known only to the Goldman nabobs.  Since then the company’s stock has fallen from about $13/share to about $7.60/share.

Goldman’s boost didn’t help the other homebuilders much either. KB Home (NYSE: KBH), Lennar Corp. (NYSE: LEN), Toll Brothers Inc. (NYSE: TOL), Hovnanian Enterprises, Inc. (NYSE: HOV), and D.R. Horton, Inc. (NYSE: DRI) stocks have done no better than stay flat. The SPDR S&P Homebuilders ETF (NYSE: XHB) has been the best performing equity, and it’s up by only about 3%.

Builders have taken impairments on land, fired workers, booked tax benefits, and generally done everything they can to staunch the bleeding from the moribund US market for new homes. Pulte at least deserves some credit for innovative thinking. Firing a few top executives is not something we see every day.

The company’s six regional operations will be consolidated into four, but Pulte said that it did not expect to close any of its local offices. In its first quarter earnings report, the company said it expected to achieve profitability in the second half of 2011, but than in the meantime it would implement actions to “drive further margin expansion and sustained overhead leverage.” Does that mean anything to anyone except Goldman Sachs?

Hovnanian has performed even more poorly than Pulte over the last 12 months. Its share price is down about twice as much as Pulte’s. Only D.R. Horton has posted a 12-month share price gain, and the company recently said that it sees homebuilders struggling in 2012 as well as this year.

If sales are tanking and homebuilders have fired all the hired help it can, then streamlining the company’s org chart is really all that’s left. Pulte may have broken new ground here, but now that it’s been done, other builders could follow.  There has at least been one business model change as others have gone into refurbishing homes and trading distressed mortgages.

Pulte shares are trading down less than -0.5% this morning, at $7.63, within a 52-week range of $6.13-$12.13.

Paul Ausick

SPDR S&P Homebuilders (NYSE: XHB) is down marginally today at $18.23 and the 52-week range is $13.59 to $20.00.  The iShares Dow Jones US Home Construction (NYSE: ITB) is up 0.4% at $13.56 on Monday with a 52-week trading range of $10.50 to $15.77.  If you saw last week’s housing numbers and knew nothing about the broader stock market trend of the time, you’d likely have guessed that these were all hitting 52-week lows or were at least close to those lows.

PulteGroup, Inc. (NYSE: PHM) is up another 1% today at $7.65 and its 52-week range is $6.13 to $13.91.  The Goldman Sachs defense of Pulte last week might have offered more support than anything else.  This was actually one of the top analyst calls of the week.

The chart shows how these three have performed in the last 3-months.  Frankly, it is almost surprising that these are not all lower if you merely looked at the housing data that comes out each week.

We would likely offer more analysis and data behind this housing effort but the numbers just haven’t justified it.  The incentives to buy a home have passed.  The affordability keeps getting more and more affordable.  Many housing markets are back to prices from 2004 and even before.  Finding anyone who believes that inflation will come to home prices is no easy task.

JON C. OGG

Over the past year, Pulte shares are down more than -35%, the worst in a group of six builders that includes KB Home (NYSE: KBH), Toll Brothers Inc. (NYSE: TOL), Lennar Corp. (NYSE: LEN), Hovnanian Enterprises, Inc. (NYSE: HOV), and D.R. Horton, Inc. (NYSE: DHI). Of that group only Lennar has shown a share price gain over the past year. Over the past five years, every homebuilder’s share price has fallen at least -40%, with Pulte down more than -80%.

According to MarketWatch, Goldman’s research note pointed out that Pulte is “the sole name across our universe where investors are already being paid to wait for the housing recovery.”  What the heck does that mean?

Pulte pays no dividend, special or otherwise. And analysts are expecting a loss per share in 2011 of -$0.20, substantially better than 2010′s loss of -$2.47, but still not likely to generate a dividend.

In its 2010 annual report, the company noted, “[S]ince early 2006, the homebuilding industry has been impacted by weak consumer confidence, tightened mortgage standards, a significant increase in the number of foreclosed homes, and large supplies of resale and new home inventories which have contributed to an industry-wide softening of demand for new homes. As a result of these factors, we have experienced significant decreases in our revenues and profitability. We have also incurred substantial impairments of our land and certain other assets.”

Exactly — and if anything has changed since Pulte filed its 10-K on February 10th, we haven’t noticed. New home sales are being hammered by lower-priced foreclosed houses. The median price for a new home in 2010 was $230,600. The AP reports that new homes are now priced 48% higher than prices for existing homes. The median price for an existing home was $156,100 in February, and that is about 5% lower than the median price in 2010.

New housing starts and new building permits are both lower. Part of that is seasonal, of course, but there’s little reason to believe that the spring will see a significant turnaround.  The new data seems to continue to be drifting south rather than indicative of any pending housing recovery.

The mean price target for Pulte is $8.39, with the high target at $11. The forward P/E ratio sits at 25.45, indicating that investors think something good is going to happen in the next 12 months. Any positive sign that home buying is picking up boosts the share price for Pulte and its peers. The effect is always temporary. Until unemployment falls substantially and consumer confidence rises, new home sales aren’t going anywhere. And even oracular pronouncements from Goldman about investors getting paid to wait won’t make a difference.

Pulte shares are up more than 3% in early trading, to $7.37, within a 52-week range of $6.13-$13.91. The SPDR S&P Homebuilders ETF (NYSE: XHB) is down slightly, to $17.85, in its 52-week range of $13.59-$20.00.

Paul Ausick