Home Starts Are Highest in 5 Years but Construction Stocks Struggle to Hold onto Gains

Brittney Barrett  |

 The housing market has been depressed for so long that related equities are often overlooked. They returned to focus today; however, when the Commerce Department announced a 15 percent rise in housing starts for September, the highest surge in 17 months according to the data. The increase was driven largely by a rising demand for rental homes and units as well as rebuilding after Hurricane Irene.

53 percent or 227,000 of the starts were buildings with five or more units, the most impressive showing for this category in 5 years. Meanwhile, the construction of single-family starts added just 1.7 percent to 425,000, which has been somewhat typical. The level of difficulty currently associated with acquiring the necessary credit will likely continue to widen this disparity.

Higher rental demand can be predicted to hold up in spite of low home prices and even lower mortgage rates. Buyers, new and old, have observed the ongoing descent of home prices and are reticent to re-enter the market, even if they are able to attain a suitable mortgage.

The most recent statistics show a 10.2 percent rise in starts from September of last year and best level since before the expiration of the homebuyer tax credit. The Commerce Department said total starts equaled 658,000. While this is a considerable improvement from last year, the peak of the housing market in 2005 saw 2.07 million starts in its best month.

Still, it was enough to bolster shares of some construction stocks in early trading including Pulte Group Inc. (PHM), D.R. Horton Inc. (DHI) and KB Home (KBH) included. Shares of the companies reversed later in the day with the broader market; however.  The reversal of KBH later in trading seemed surprising given the content of the report. Home building in the West, among the regions KB operates was highest, up 18.1 percent to a three-year-high.

One major construction outfit that seemed to have a firmer grip on its gains was Gafisa SA (GFA). The rise of the Brazil based homebuilding and real estate operation actually had little to do with the housing report. Instead, the company rose on the basis of gains in third-quarter sales, which restored some lost confidence that construction in Brazil would be able to withstand slowing economic growth in the nation.

Domestically, it was smaller companies including M/I Homes (MHO) that made some of the strongest gains for the day. MHO ranked the lowest in price to book ratio within the sector indicating that if investors are willing to take a risk on the flailing sector, the price has to be right.

A related company that also managed to hold onto its strength in the session was United Rentals Inc (URI). The equipment rental outfit announced that its third-quarter profit tripled alongside a double-digit increase in rental revenue. United Rentals credited the rise in profit not only to more construction but also for a new preference among construction companies to rent their machines rather than purchase them.

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