The Zacks Analyst Blog Highlights: PPG Industries, Plum Creek Timber, Masco, Berkshire Hathaway and D.R. Horton

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Oct 19, 2011, 09:30 ET

CHICAGO, Oct. 19, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: PPG Industries (NYSE: PPG), Plum Creek Timber (NYSE: PCL), Masco (NYSE: MAS), Berkshire Hathaway (NYSE: BRK.B) and D.R. Horton (NYSE: DHI).

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Here are highlights from Tuesday's Analyst Blog:

More Confident Homebuilders

The nation's home builders are more confident about conditions in their industry than at any time since the home buyer tax credit was in full swing. But that's not saying too much.

The National Association of Homebuilders Index rose four points to 18. That is the biggest gain and the highest level since April of 2010. It is important to put that gain in the proper context. This is a "magic 50" index, so any reading below 50 indicates that more homebuilders see conditions as poor than good. By this measure, conditions have been poor since early 2006.

The overall index is made up of three components. The first measures current sales conditions. That index rose four points to 18. The sub-index measuring their expectations of conditions for the next six months is in the best shape, rising seven points to 24. The sub-index that measures traffic of prospective homebuyers in model homes was up three points to 14. The absolute levels on all three indexes remain awful, but this is a very nice move in the right direction.

Results by Region

Regionally, three of the four census regions saw improvement. The West saw a very impressive spike of nine points to 21. That is the best condition have been out West since August of 2007. The all-important South region also showed a significant improvement, rising 4 points to 19. The South typically makes up over half of all housing starts. The Midwest also saw a four point improvement, but only to 15. The Northeast, which is by far the smallest and the least important of the regions when it comes to housing, was also at 15 -- unchanged on the month.

The Importance of Residential Investment

We would need many more months of the sorts of gains we saw this month to declare that the home building industry has returned to health. Still, this represents very important progress. If we can get residential investment going again, the rest of the economy will tend to follow.

In every recovery since WWII, it has been the homebuilders that have led the economy out of the swamp. The fact that this time around residential investment has been a brake on growth, rather than an engine of growth is a key reason why this recovery has been so sluggish.

Residential investment is usually the leading sector because it is normally exquisitely sensitive to interest rates. It is a very high-ticket item, and one that is highly leveraged. However, falling prices for existing homes have made it very hard for the homebuilders to compete. A used home is a very good substitute for a new home.

Buying a used home, though, does little in the way of generating economic activity. Yeah, you might slap a new coat of paint on the walls, which might be good for a company like PPG Industries (NYSE: PPG), but new homes also need paint. They also need lumber, wallboard and plumbing fixtures. New homes stimulate demand for all those products, and thus power sales at a wide range of firms from Plum Creek Timber (NYSE: PCL) to Masco (NYSE: MAS) or even Berkshire Hathaway (NYSE: BRK.B).

Homebuilding is also a very important source of jobs. Those jobs are relatively high paying, especially for those who do not have a lot of formal education. As those carpenters, roofers and plumbers have paychecks, they spend them and thus stimulate demand -- and employment -- through the rest of the economy. Residential investment is thus about much more than just the EPS of D.R. Horton (NYSE: DHI).

Mortgage Train Still Derailed

The mortgage transmission mechanism for reviving the economy seems broken. Record-low mortgage rates have not stimulated new homebuilding. It has not even caused that much re-financing of existing mortgages. Currently 22.5% of all mortgages are underwater, and thus locked out of refinancing. If those homeowners were able to refinance, it would free up typically hundreds of dollars a month, that the homebuilders could spend on other stuff.

Being underwater also means that people are locked into their current homes. They can't buy a new home if they can't sell their old one. Fortunately, the number of people who are underwater has started to fall, but only very gradually. That, however, might be playing a role in the somewhat higher levels of confidence show by the home builders.

Tomorrow we will get a clue as to if the more optimistic view of the world from the homebuilders is grounded in reality or somewhere else. Housing starts are expected to rise to an annual rate of 595,000 in September from 571,000 in August. Building permits are expected to be reported at 610,000 annual rate, down from 620,000.

The 17 lowest months on record for housing starts have all been within the last 17 months. The records go back to 1963, and it the consensus is met, it will be 18 out of 18.

The improved level of confidence among the homebuilders does not mean that residential investment is going to start driving the economy forward. However, if it just stops being a brake, that will be a substantial improvement.

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