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Enthusiasm builds for homebuilders

April 13, 2012

There appears to be a case of spring fever for the homebuilder industry.

KeyBanc upgraded its ratings on three homebuilders Friday, saying it sees potential for growth as hiring picks up in the U.S. And Fitch Ratings said that builders and investors are increasingly enthusiastic about improvements in the housing market.

This excitement could pass quickly, though.

Housing data in 2012 have not kept pace with optimism from builders and investors, Fitch said in a special report on the homebuilding and construction industry. It expects the recovery to occur in fits and starts.

Investors are betting that continued low interest rates, improved job prospects and more responsible spending and saving by consumers may pay off for the industry in the long run. Additionally, changes to lending policies for some federal programs will tighten the availability of some loans but may also reduce the risk of lending to riskier candidates, thereby potentially reducing future foreclosures that have weighed on the market.

That hopeful thinking has helped drive renewed investment in the industry. The Standard & Poor’s index tracking homebuilder companies is up 59 percent since the end of September, including a 23 percent rise in 2012.

Because the housing market has historically been a key driver of economic recoveries, investors are looking for any early positive signs. But the overall market remains depressed. Home prices and sales fell in 2011.

There are some indicators of improvement: January and February made up the best winter for re-sales in five years, when the housing crisis began. And builders in February requested the most permits to construct homes in more than three years.

Fitch said it expects that in 2012, new single-family home sales will grow 8 percent this year while the pace at which builders break ground on new single-family homes will improve 10 percent. That’s in comparison to 2011 when those new home starts fell 8.5 percent and new home sales fell 5.9 percent, according to Fitch.

It’s a recovery, but a modest rise off a very low bottom, according to Fitch. The economy is still strained, tempering the housing market. Consumer confidence has improved but remains well below the norm. And employment growth is moderate but potentially volatile. Meanwhile policymakers can do little to boost the economy, according to the Fitch report.

KeyBanc analyst Rodny Nacier acknowledged the fundamental risk of betting on homebuilders in this still uncertain economy in a research note Friday. But he remained confident that job growth would be a means to drive industry growth. He upgraded his ratings on Lennar Corp., Toll Brothers Inc. and PulteGroup Inc. to “Buy” from “Hold”.

The homebuilder’s index was down 1 percent in trading Friday amid a broad market drop. Lennar’s shares, which have more than doubled since October, fell 39 cents, or 1.5 percent, to $26.11 on Friday. PulteGroup’s shares fell 12 cents to $8.54. They have been on a steady increase since the fall. Toll Brothers Inc. shares have followed a similar trend but fell 20 cents to $22.95.

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