Struggling Home Builders See Stocks, Projections Rise

U.S. home builders saw their stocks rise as mortgage rates fell to a 10-month low and investors predict the return of home buyers (particularly first-time buyers) to the market.

The Standard & Poor’s home building index rose 2.6 percent, with Standard Pacific leading the way with a 4.2 percent gain after orders rose and cancellations fell. D.R. Horton shares gained 3.8 percent and Ryland, the largest builder for first-time buyers, increased 3.5 percent, according to Bloomberg Media.

The average 30-year, fixed-rate mortgage fell to 6.14 percent last week, down from a 2006 peak of 6.8 percent in July and the lowest level since January, according to Freddie Mac.

Applications to purchase homes rose to a seven-month high, the Mortgage Bankers Association reported Wednesday. Earlier this year, home mortgage forecasters including the Mortgage Bankers Association, predicted borrowing costs would rise through the end of 2007.

“The rally thus far has already occurred sooner than many expected, and we believe the group is about to accelerate its ascent,” said Stephen Kim, analyst at Citigroup.

The builders themselves were equally optimistic.

“Our October orders had seen a modest improvement,” said Andrew Parnes, CFO of Irvine, California-based Standard Pacific. “Order cancellations were in the low 40 percent range in October and November, compared with 50 percent in the company’s third quarter.”

Toll Brothers Inc., the largest U.S. builder of luxury homes, yesterday reported a 44 percent plunge in net income in the three months ending October 31. With fewer consumers able to afford the mortgage loans needed to buy its homes, and a glut of inventory further dampening the market, the builder has been hit hard. But CEO Robert Toll said demand is improving in some regions.

“We may be seeing a floor in some markets where deposits and traffic, although erratic from week to week, seem to be dancing on the bottom or slightly above,” Toll said.

Some housing experts are cautioning the housing market has not yet hit bottom. Frank Nothaft, the chief economist at Freddie Mac, said that it is about two-thirds through its correction.