The Wall Street Journal

29 June 2011

Pending Home Sales are Expected to Show a Rebound in May.

Housing markets haven’t found a bottom so much as a temporary foothold.

The S&P/Case-Shiller gauge of home prices in 20 major cities, released Tuesday, showed a monthly gain in April—its first such increase since July 2010. A pair of reports due Wednesday may build on that, creating a rare stretch of decent news for the beleaguered market.

Pending sales of previously owned homes—a leading gauge of closings—are expected to rebound by at least 10% in May after falling 11.6% in April. Meanwhile, home builder KB Home, the nation’s fifth-largest by 2010 sales, will be out with fiscal second-quarter results that may show some signs of stabilization after a nasty first quarter.

When it comes to U.S. housing, though, good news is relative.

On a yearly basis, the Case-Shiller index is down about 4%. Capital Economics reckons prices won’t start rising consistently until 2014. Despite rock-bottom interest rates, mortgage applications remain tepid. Moreover, the glut of roughly 4.5 million homes in some stage of delinquency or foreclosure will continue to stalk the market.

As for KB Home, it is expected to post a loss of about 32 cents a share for its May quarter, according to analysts polled by Thomson Reuters, on a 31% yearly drop in revenue. That is hardly encouraging.

But there may be some glimmers of hope in the results.

Ticonderoga Securities expects KB’s orders to post a year-on-year increase for the first time in five quarters. It also expected the average sales price to rise nearly 4% from the February quarter. Meanwhile, ITG analyst Demir Gjokaj says a drop in “spec” inventory, or homes built without a buyer, and an increase in the number of its communities should help support revenue and profit margins going forward.

They had better: KB has one of the highest debt-to-equity ratios in the sector. And its shares have taken a beating; they have fallen 26% in the wake of its last earnings report.

So any worsening in housing trends, particularly in California or Texas, could send it into another tailspin.

And perhaps the biggest hurdle for KB—and the sector more broadly—is the disappearance of first-time buyers.

Unless they reemerge in the months ahead, the housing market is likely to again slip.