January 30, 2013 / 9:21 AM / 5 years ago

BREAKINGVIEWS-Homebuilder IPO may add to recovery exuberance

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Daniel Indiviglio

WASHINGTON, Jan 29 (Reuters Breakingviews) - A new public-market entrant may add to U.S. housing recovery exuberance. On the same day U.S. home prices posted their biggest monthly jump in over six years and homebuilder D.R. Horton (DHI.N) delivered a monster quarter, developer Tri Pointe supersized the initial public offering it’s planning this week. Would-be buyers of the shares should beware getting swept up in premature euphoria.

The housing market seems to have clearly bounced from the bottom. Underscoring the rebound, the S&P/Case Shiller composite index reported on Tuesday that November home prices gained 5.5 percent from a year earlier. It was the biggest gain for the closely watched, 20-city gauge since August 2006.

New home sales are on the rise, too. Last year marked the first annual increase since 2005, according to Census Bureau data. And the National Association of Realtors said a mere 4.4 months of supply was available in December, the lowest since mid-2005.

It’s no wonder the likes of D.R. Horton are surging. With $1.2 billion in revenue, the company had its biggest fourth quarter since 2007. The results drove its shares up almost 12 percent to a price first seen in 2004, when the housing glut was climbing toward its peak. Other stocks tied to residential real estate, like retailer Home Depot (HD.N) and paint maker Sherwin-Williams (SHW.N) have soared more than 50 percent over the last year.

Tri Pointe Homes looks ready to capitalize on the resurgence. It just added 2 million shares, or 17 percent more, to its upcoming IPO, which is expected to price on Wednesday. And yet the company hasn’t yet generated a profit. Even with considerable 2012 revenue growth, its targeted price to revenue ratio would be near 20 – an order of magnitude higher than D.R. Horton‘s.

While there are plenty of positive signs for U.S. housing, its trajectory is far from certain. New home sales remain half what they were in the late 1990s and less than one-third from their peak. New stricter mortgage regulations could also stunt sales. And about 1.2 million homes are stuffing the foreclosure pipeline, analyst CoreLogic says. Just because there isn’t a housing bubble doesn’t preclude one from forming in housing-related stocks.


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- Tri Pointe Homes, which builds houses and planned communities in the United States, said on Jan. 29 it expects to sell 13.7 million shares, 2 million more than previously expected, priced between $14 and $16 apiece.

- Separately, U.S. home prices increased 5.5 percent in November from a year earlier, the biggest increase since August 2006, according to the S&P/Case Shiller composite index of 20 metropolitan areas released on Jan. 29. The gain also marks 10 consecutive months of rising prices.

- Homebuilder D.R. Horton on Jan. 29 reported that its quarterly profit more than doubled from a year ago. The company’s revenue grew by 39 percent in the fourth quarter to $1.2 billion, higher than what analysts had been expecting.

- Reuters:

    U.S. home prices see best yearly gain since 2006 [ID:nL1N0AY5B0]

    D.R. Horton’s profit soars as prices rise; orders jump [ID:nL4N0AY4DV]


    Reform at last [ID:nL1E8NL5JE]

    Landlords limited [ID:nL1E8LOA4V]

    Bull Market [ID: n L1E8LBBMZ]

    - For previous columns by the author, Reuters customers can click on [INDI/]

    (Editing by Jeffrey Goldfarb and Martin Langfield)

    ((daniel.indiviglio@thomsonreuters.com)(Reuters messaging daniel.indiviglio.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS HOUSING/IPO

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