Toll Brothers Inc (TOL) and Housing Market Dynamics

The recent easing in some statistics does not necessarily indicate that housing is going to fall apart.  Single-family home starts climbed 20% year-over-year in January, and were slightly higher from December (0.8%).  And building permits in January were up 35.2% year-over-year and 1.8% since December.  It is important to remember that not every permit leads to a construction company actually breaking ground, and just because a company breaks ground doesn’t necessarily mean that the house is going to get sold or even built.  Therefore, we take a look at what else is going on in the housing market.

The National Association of Realtors reported that existing home sales, on a seasonally adjusted basis, climbed 0.4% in January.  That’s another nice sign that things are moving in the right general direction.  Yet, people still aren’t rushing to sell their homes.  The inventory of homes for sale fell 4.9% (the NAR reportedly did not adjust the inventory figures for seasonality).  This is the lowest inventory figure since December 1999, and that could suggest solid opportunities for home builders in the months ahead.

Not ready just yet

Recent weakness in home builders stocks could create an interesting buying opportunity for more-aggressive investors.  For example, shares of Toll Brothers sank roughly 7% over the last month, dropping its P/E ratio to about 11.7, which is a discount to the industry average.

One cannot, however, dismiss the risks present.  Employment is a key factor to a healthy housing market.  Last year, the economy created, on average, 181,000 jobs each month.  More recently, the pace of employment growth has eased, hitting 157,000 in January.  Of course, there is also the potential contraction arising from the sequester, which could derail the improvements in the labor market and hurt the housing recovery.  Personally, I would really like to see a lot more people working, and the pipeline of foreclosed properties to be a bit smaller.  Investors looking for exposure to the real estate market, but perhaps not ready to stomach the home builders, might want to wait to see more signs of life before diving in.

The article Toll Brothers and Housing Market Dynamics originally appeared on Fool.com and is written by Erik Dellith.

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