Mr. Sroka: The homebuilding stocks as a group are outperforming the S&P 500 year to date. However, with the index down 19% that may not necessarily be saying much. The eight homebuilding stocks in my coverage have had mixed returns individually. Year to date, Lennar (LEN), KB Home (KBH) and Pulte Homes (PHM) have all posted positive returns. Beazer Homes (BZH), Centex (CTX), D.R. Horton (DHI), M.D.C. Holdings (MDC) and Toll Brothers (TOL) have posted negative returns, but these are more modest declines than the market as a whole. The negative returns are due to a combination of their having had a very good year in 2001 and succumbing somewhat to the greater market weakness here in 2002, despite upward revisions in their earnings forecasts.
TWST: What is your estimate for the market going forward into
2003?
Mr. Sroka: For the housing market, in general, I think we should
see housing starts for the foreseeable future in a range of 1.5
million units to 1.7 million units annually. This includes both
single family and multi-family housing. My basis for saying that
is I think that there is a base demand for 1.5 million housing
units due to household formation growth and housing stock
replenishment. On the top end, I don't think there is financing
capacity in the industry to fund construction and fund builders
to produce much more than 1.7 million units annually.
Additionally, stricter state and local government regulation to
control growth should keep a lid on annual production levels.
What is interesting about this outlook is that it represents
about a 12% peak-to-trough change or a plus or minus 6% change
from a 1.6 million unit centerline. That's a lot less cyclical
environment than housing has experienced previously, when you
often saw 20% or higher peak to trough changes in the industry.
Tickers included in this excerpt: BZH, CTX, CXP, DHI, KBH, LEN, MDC, PHM, TOL
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