Homebuilders Hurt More than Helped by Sandy

hurricane sandy satellite image The shares of homebuilders climbed initially on the view that they might benefit from the Hurricane Sandy rebuilding effort. However, I believe homebuilders operating in the Northeast will be hurt more than helped by the storm. I think the movement lower by the shares before the close Friday, negating much of the week’s prior gains, is indicative of that. Yet, some of the companies involved managed to retain a portion of their paper profits on the week, and so there remains opportunity to close out profits on any relative short-term bets.

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Homebuilders and Hurricane Sandy The shares of the SPDR S&P Homebuilders (NYSE: XHB) climbed 3.3% through the week, as investors frenziedly sought Hurricane Sandy stock plays. The idea behind buying homebuilders on the storm event is that a rebuilding effort would drive business. However, I think the costs of business disruption should overrun any benefits investors chased initially. Rather than buying homebuilders on the storm catalyst, I think investors would be better served buying the builder supply stores, since they will attract demand for all sorts of supply and repair needs. See my linked to article here, as I believe two important stocks remain attractively valued today.

Let’s look at how the homebuilders with Northeast U.S. operations did last week. I have listed the performance for the week plus the performance for last Friday so you can see how much of a reversal occurred on what I believe is a better understanding of where value will be created and where it will be destroyed in stocks because of the hurricane.

Company & Ticker10/26/12 – 11/02/12
Toll Brothers (NYSE: TOL) -4.8% (Friday -3.3%)
PulteGroup (NYSE: PHM) +0.5% (Friday -2.3%)
D.R. Horton (NYSE: DHI) +1.3% (Friday -3.7%)
Hovnanian (NYSE: HOV) +10.5% (Friday +4.9%)
Beazer Homes (NYSE: BZH) +0.2% (Friday -2.2%)
Lennar (NYSE: LEN) +0.8% (Friday -2.6%)
MDC Holdings (NYSE: MDC) -1.5% (Friday -8.4%)
Comstock Holdings (Nasdaq: CHCI) Unch. (Friday -1.4%)
NVR Inc. (NYSE: NVR) +0.3% (Friday -1.5%)

Some $10 billion in property damage is expected at minimum due to the storm, but that includes damage to boardwalks, storm walls, piers, roads, bridges, tunnels, other transportation channels and industry including subways and airports, etc. Let’s be clear that $10 billion in new homes will not be built as a result of Hurricane Sandy. Also, in many cases, wealth has been destroyed and will not be restored, meaning an equal value home may not replace what once existed in every lot. Also, reconstruction that does occur may occur over a long period of time and have a diluted impact for the construction industry, as in many cases, homes near the shore line are second homes or rental properties or are owned by resource constrained entities.

For a builder to benefit, they would have to buy up individual lots of destroyed area, which is much more tedious than the effort they usually undertake to buy vast acres to develop upon. For some builders, especially those which build multi-family structures, opportunity may better exist. Some may not be willing to undertake the task due to the weather, despite the long history of relative calm in the area. Two hurricanes have now endangered Northeastern shores (and some) over the past two years, and so prospective developers may consider the possibility of a shift in weather risk to a more active period for the Northeastern U.S. Finally, the areas of completely destroyed homes are going to be relatively limited, and the rebuilding may be greatly undertaken by current owners and local contractors. In some cases, perhaps opportunity will exist for the large publicly traded builders, but with a limited opportunity and a pool of possibilities, it is clearly a speculative gamble to go long builders generally on the Sandy catalyst alone. I reiterate, go to the construction supply stores for the best bang for your buck.

Furthermore, the power outages, heavy rainfall and other disruption to the basic daily operations of these businesses are important. Potential buyers have been perhaps impaired due to damage borne at currently owned properties, or due to other costs. Business has certainly been disrupted by the shortage of gasoline in many parts of the region and other blockages to normal daily life. Construction in process has likewise been disrupted, perhaps by damage or flooding, and certainly by the storm itself. Days lost in the construction process do not earn credit at lenders’ for interest expenses. So costs to builders operating in the region are two-fold, on the demand side and in operations. When all these things are taken into account, we see there is certainly no blank benefit created by the destruction caused by the storm.

Builders have come a long way from the pit of the real estate collapse, and are now benefiting from market share wins and a scarce supply of new construction. But any of last week’s gains that came on the Sandy catalyst should work their way out of these stocks. On an individual corporate basis, we may discover that some companies find later benefit, and we’ll explore these possibilities in the future. Please feel free to keep us informed of any such specific and detailed efforts and we’ll consider researching and reporting of any related and important impact.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

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