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Buy Housing Stocks, Expert Says

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By WALTER HAMILTON, Los Angeles Times

Published: September 25, 2007

Like other Southern Californians, John Bollinger has witnessed the brutal downturn in the housing market.

That didn't stop the Manhattan Beach money manager from giving his clients this advice last week: Buy housing stocks.

'If you look back five or six years from now, people will say, 'Wow, those are great stocks to own,'' Bollinger said. 'And if you explain to them the price at which you bought, people will think you're lying.'

It take guts to recommend shares of home-building companies right now. Not only is housing in the throes of a historic contraction, most experts say the deterioration of the market isn't over.

The government reported last week that construction of new homes plunged 19 percent in August from a year earlier, marking the lowest pace in more than 12 years.

The carnage in construction stocks has been breathtaking.
Centex Corp. closed Friday at $27.17, down from almost $80 in early 2006. D.R. Horton has fallen from almost $42 to $14.10. Lennar Corp. has slumped to $25.32 from more than $66.

Shares Recover Before Industry

Bollinger's buy recommendation is rooted in a long-established stock-market dynamic: A company's shares usually recover long before its business or financial results do. By the time a recovery is widely apparent, the best bargains are gone.

'The news is going to remain negative long after the bottom for the stocks has been seen,' said Paul Desmond, president of Lowry Research Corp., a stock-research firm in North Palm Beach.

How long? Desmond estimates that earnings reports and industry news won't show improvement until six to nine months after a recovery is under way.

So the question is whether a rebound will come soon enough to invest in housing stocks now. Many analysts say it's still too early to invest in the industry, arguing other sectors will do much better in the next couple of years.

The performance of builder stocks last week illustrates how hard it is to identify the time to buy. A Standard & Poor's Corp. index of 16 home builders jumped 6 percent on Tuesday after the Federal Reserve cut its benchmark interest rate.

It fell 6 percent two days later, though, and is now lower than before the Fed move.

'Housing stocks are going to be at best a mediocre investment for a long time,' said Phil Roth, a market analyst at New York brokerage house Miller Tabak & Co. in New York.

You Can Do Better, Others Say

The stocks have been hurt in recent days by a jump in interest rates on long-term Treasury bonds, which influence the rates on fixed-rate mortgages. Although the Fed can control short-term interest rates, the bond market determines yields on long-term Treasuries, which rose after the Fed's rate cut, in part from fears that it would fan inflation.

Beyond that, many experts say, investors can make money faster in other groups where stocks are rising.

Housing stocks will recover slowly, said Louise Yamada, head of a stock-research company in New York, because many investors bought after prices declined only to watch them sag further. They'll anxiously sell on signs of a rebound, dampening any rallies, she said.

For example, Yamada said she wouldn't buy Centex shares now, even if they started moving up, 'because all the disappointed investors who didn't sell at $60 and didn't sell at $40 are going to sell on a bounce.'

Still, some experts say the worst may be over for housing stocks.

Douglas Kass, the head of Seabreeze Partners, a hedge fund in Palm Beach, made money by selling 'short' many housing stocks in the past two years. In a short sale, investors borrow shares and then sell them, betting that they will be able repay the debt by buying the stock at a lower price.

Kass closed out his short positions this year because he figured the sector wouldn't fall much lower.

'The market has basically discounted the problems,' Kass said.

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