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Homebuilder stocks show improvement, but housing recovery not expected until 2010

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Most public homebuilder stocks have rallied substantially from recent lows, but experts and analysts remain wary, citing a long, tepid housing recovery as well as continued troubles related to impairments and low demand.

"If you look at the fundamentals of the stocks, you're not going to see something that's extremely healthy," said John Mecklenburg, a 25-year industry veteran and former division president of now-bankrupt John Laing Homes. "I think what you're seeing is a bit of guarded optimism as it relates to the future, a buy-and-hold mentality."

For the handful of public homebuilders with a presence in San Diego, stock prices have showed positive movement since the beginning of this year, whether in a jump of 7 percent by Lennar Corp. (NYSE: LEN) or 155 percent by Hovnanian Enterprises (NYSE: HOV).

It's no surprise, given the recent bit of good housing news combined with a forward-looking, easily excitable market, with government stimulus programs further greasing the skids of rising investor optimism.

Home sales have jumped from May to June: 3.6 percent nationwide and 9 percent in San Diego, according to the National Association of Realtors and the North San Diego County Association of Realtors' HomeDex, respectively.

Median prices in San Diego have also crept up month to month, although they remain down on the national level.

Of course, the recent positive housing industry figures are still low when compared to last year, a trend also reflected in the homebuilding stocks.

Public homebuilders remain deep in the trough created when the market started to slip in 2005. Most show negative performance in a 52-week period and look tragic when compared to their peaks four years ago.

For example, Brookfield Homes Corp. (NYSE: BHS), which builds primarily in California and Washington, D.C., has climbed more than 60 percent since the beginning of 2009 but remains down almost 50 percent from last year and down more than 85 percent from its price in early 2005.

Brookfield, which has properties in Chula Vista, Scripps Ranch and San Marcos, traded around $7 in early August.

Some larger, stronger stocks have fared better. The share price of KB Home (NYSE: KBH), which has local properties in San Diego, Oceanside and Fallbrook, is actually up more than 4.5 percent from a year ago but down almost 80 percent from its height in 2005.

KB Home traded a few dollars below $20 in early August but was known to soar above the $80 mark during the housing boom.

The homebuilder has recovered more than 35 percent since January.

In some cases, however, stock performance has only a little to do with company performance. Homebuilder losses continued to stack up in the second quarter.

Hovnanian took one of the larger losses in its second quarter ended April 30, totaling $118.6 million, or $1.50 per share, which was less than the second-quarter 2008 net loss of $340.7 million, or $5.29 per share.

Centex Corp. (NYSE: CTX), which is expected to merge into Pulte Homes (NYSE: PHM) this quarter to create the largest U.S. homebuilder, turned a profit in its fiscal first quarter ended June 30 on a $410 million tax benefit. Centex posted net income of $85.1 million, or 68 cents per share, compared to a year-earlier net loss of $150.1 million, or $1.21 per share.

Relying solely on profit/loss figures to gauge company health and performance can be misleading, said Alan Nevin, director of economic research for San Diego-based MarketPointe Realty Advisors.

"It's hard to put a finger on real profits," he said. "Frankly, I'm not sure that they have taken all their losses at this point."

Analysts agree that second-quarter impairments were worse than expected, and balance sheet troubles are far from over. Revenues will continue to roll in at lower levels due to lower demand and falling home prices, and companies will continue to write down the value of their land.

"Given our outlook for higher unemployment, still tight credit, rising foreclosures and elevated inventory levels, our estimate for impairment charges to represent another 30 percent hit to builders' book values could easily prove conservative," JPMorgan (NYSE: JPM) analysts Michael Rehaut and Ray Huang wrote in a note to investors.

Experts aren't expecting a public homebuilder to fail anytime soon, though. While their private counterparts are likely doing better and benefiting from the lack of regulatory expenses, the public building companies are survivors, industry observers say.

A housing recovery is expected to begin late this year or in early 2010, with a tenuous rise in housing starts. In the meantime, the best actions homebuilders can take include trimming operating costs, improving their margins and stockpiling cash to better position themselves for the recovery, said Soleil Securities analyst Anna Torma.

"I think the key is for the builders to continue to respond to the pricing that they're seeing on the existing home market so they can continue to sell homes," she added.

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