Is the Market Ignoring the Dismal New Home Sales?

What's the matter with this market? Just one day after we learned that the January new home sales has hit a half-century record low, the stocks for homebuilders have mostly recovered?


In fact, some have shown a gain today. HOV is up 1%. KBH is up a fraction. Most outrageous of all: SPF is up by 5%. How can that be?

Is the market just ignoring the gloomy employment picture and the dismal sales data indicative of a housing market ready to fall off a cliff again?

Some have argued that millions of "shadow inventory" are on their way to foreclosure, which is bound to put a downward pressure on home prices over the next quarters or years. There won't be any housing recovery and homebuilders and banks are logical candidates for short sale. If that's the case, perhaps many more "John Paulsons" are about to be made!

Trouble is, we all have learned that the real John Paulson has been buying banks (BAC, C). That's a bet that the housing problem and the commercial real estate problem will at least be contained.

Perhaps the market is right to ignore the new home sales statistic, as long as it has confidence in the Fed to keep the interest rate low. After all, the statistic comes with a huge standard error that you can almost run a horse through it: + or - 15% for that 11.2% decline. That means, you may as well believe there was an increase from December if you'd like. Investors can't really make much out of the striking headline, can they?

We should probably pay more attention to the earnings releases and conference calls from the builders. Many of them, including Toll Brothers (TOL) today, have reported improved operating data for recent months. Most have also cautioned about the very challenging environment ahead, with the expected high unemployment rate and high foreclosures.

SPF's market reaction today is particularly interesting. The only news is that their Carolina division has announced an acquisition of a condo community called Glenmore. The size and the term were not disclosed. We only know that the floor plans have been downsized. This is likely a good move: picking up some stalled developments and remaking it at lower price points. But that would not justify a 5% move for the stock.

Perhaps this last sentence is what's catching investors' attention: "Glenmore is the first of several new Standard Pacific Homes communities to be announced in the Charlotte and Raleigh markets in the very near future."

North Carolina remains a relatively healthy sub-market, dominated by Pulte Homes (PHM). SPF has some presence, but not as much as in California. The expansion looks like a major ramp-up effort consistent with the company's turnaround strategy. While Pulte is still busy integrating with the old Centex, Standard is able to pick up or start a series of communities that fit its criteria.

Hmm, so much for the headline statistic. Mr. Alpha lies elsewhere.


Disclosure: Long SPF, LEN