Home construction companies show strong rebound

While the stock market — in particular the Dow Jones Industrial Average — has successfully marched to new record highs in the past week, one select group of stocks was ringing up gains far in excess of the overall market.

America's publicly traded home construction companies with communities in San Diego County have been one of the best performing sectors on Wall Street at a time when residential real estate sales and prices appears to be rebounding from one of the deepest recessions in housing.

“Overall U.S. housing fundamentals continued to improve in the fourth quarter of 2012 and momentum has carried into 2013," said Susan Madison, primary credit analyst with Standard & Poor's Rating Services. "The improved operating environment is due to lower competing inventories of new and existing homes, firming and strengthening household formations and home prices, rising rates for apartment and home rentals, and attractive financing options for qualified homebuyers.”

The S&P report notes homebuilders have been aggressively taking advantage of low interest rates and “voraciously issuing debt in anticipation of growth.” Through mid-February the companies rated by S&P have issued $2.3 billion of debt, following $8 billion in 2012.

But it has been the performance of the companies' stock that has captured the attention of Wall Street.

Stuart Miller, CEO of Lennar Corporation (NYSE: LEN), which has six communities scattered around the San Diego region, commented on the rebound in real estate in the company's most recent quarterly report, saying, “Housing should continue to assume its traditional role in the broader economic recovery, driving employment upward, increasing consumer confidence and helping new homeowners accumulate wealth through home ownership, thus helping to accelerate economic growth.”

Shares of Lennar have recovered substantially from the bottom of the market in March 2009, when the shares dropped as low as $22. At the close Friday, Lennar stock had moved up to $41.72.

Toll Brothers (NYSE: TOL), a developer of luxury homes including three current developments in San Diego County, has also seen evidence of renewed activity at its projects.

“Demand has increased," said CEO Douglas Yearley. "With our first-quarter contracts up 49 percent, and contracts for the first three weeks of our second quarter up 40 percent versus comparable periods in fiscal year 2012, it appears that momentum is building.”

Yearley also noted the company has been able to do something recently it hasn't done for several years: raise prices.

Toll Brothers has also invested $330 million in land deals spread across many of the markets where it is expanding.

Shares of Toll Brothers have followed the market rebound. After dropping to $22 a share in March 2009, the stock has moved back to $35.12, with most of the gains coming in the past six months.

D.R. Horton (NYSEL: DHI), which refers to itself as “America's Builder,” has seen a dramatic improvement in financial in the most recent reporting period.

“This quarter was our most profitable first quarter since 2007," said Donald Horton, chairman of D.R. Horton, which has three communities in San Diego County. "We experienced substantial increases in the number of homes sold, closed and in backlog compared to the year-ago quarter. At the same time, our average sales price has increased due to pricing power, geographic mix and larger average home size."

Shares of D.R. Horton closed Friday at $24.07, up from the March 2009 low of $14.50.

What these three builders, and most others in the industry, agree on is the declining inventory of new and existing homes, especially in markets like the San Diego region. A report from Zillow (NASDAQ: Z) released on Friday showed, nationwide, inventories of for-sale homes declined 16.6 percent in February compared to the same month a year ago.

Locally, the decline was even more dramatic with the supply of for-sale homes falling by 39.4 percent. And, the task before homebuilders in particular daunting.

“The path to permission to build is just too complicated, lengthy, tenuous and choppy," said Gary London, president of the London Group Realty Advisors. "We have too little land left. What land we have is circled by other development, is in smaller increments, and consists of properties once passed over for development in another era because it is too complicated to build on.”