TODAY’S HOMEBUILDER CONUNDRUM

Yesterday’s 2% blast off is still a great mystery to most investors.   Conspiracies and window dressing aside, there was one piece of legitimately good data that gave the market a boost yesterday.  Lennar, a homebuilder, reported an absolutely miserable quarter, but said that cancellations were down to 15% from 22% last quarter.  They also said new orders were down 19% vs Q2 ’08 and up 63% vs last quarter.   They were relatively optimistic on their conference call as well:

“Today’s economic environment and housing market is tenuous at best, and still suggest a great deal of downside risk. But that’s materially better than the absolute hopelessness that has existed for so long,” said CEO Stuart Miller.

“We are well prepared for more downside even while we are beginning to see signs of real improvement.  Although it’s too early to say that the market has stabilized, one can sense that resolution is not far off.”

The comments sent the homebuilder index through the roof yesterday finishing with a 4%+ gain.  Lennar soared nearly 20%.  It was the only real telltale green shoot throughout the day that appeared to have a high correlation to the day’s broad index move.  Strength in housing and the homebuilders is arguably the ultimate green shoot as much of our problems lie in the consumers and their largest asset – housing.

But then today we got more news on the housing front.  KB Homes, a builder of equal size and scope, reported earnings and they were a doozy.  KBH reported a loss of $1.03  – well below the 64-cent loss analysts were looking for.   More importantly, new orders fell by 31% versus last year (up 59% vs Q1) and the cancellation rate improved to 20% versus 28% last quarter.   CEO Jeff Mezger said:

“Looking forward, although key economic indicators remain mixed, we are beginning to see signs that some negative housing market trends may be moderating at both the local and national levels.  Ongoing foreclosure activity, which has increased housing supply and exerted downward pressure on home prices in a number of markets, is also leading housing affordability to record levels. Job market weakness and tight mortgage lending standards continue to restrain demand, yet consumer confidence appears to be growing. While these conflicting market signals make it premature to declare that housing has reached the end of its severe, multi-year correction, they may indicate we are approaching a point of relative stability, especially if the overall economy rebounds and mortgage interest rates remain low.”

The stock is getting hammered on the news and the homebuilder index is off 1.5%.  Interestingly though, the broader stock market could care less and even appears to be making a run at positive territory before week’s end….