BOSTON (Dow Jones) -- Banc of America Securities upgraded the home- construction sector to neutral from cautious Thursday in a sign the embattled builder stocks may be finally be finding a floor.
"We are seeing improvement in traffic, affordability and construction -- it was deterioration in these factors that led us to become more cautious in 2005," wrote B. of A. analyst Daniel Oppenheim in a research note Thursday.
Yet the analyst cautioned he doesn't foresee a "smooth upward move" but expects "choppiness over the next 12 to 24 months based on excess inventory, as it will take time to work through the oversupply."
Among individual stocks, Standard Pacific Corp. (NYSE:SPF) (SPF) was raised to buy from sell, while Meritage Homes Corp. (NYSE:MTH) (MTH) , NVR Inc. (AMEX:NVR) (NVR) , Pulte Homes Inc. (NYSE:PHM) (PHM) , Ryland Group Inc. (NYSE:RYL) (RYL) and Toll Brothers Inc. (NYSE:TOL) (TOL) were boosted to neutral from sell.
Oppenheim sees evidence of more home-buyer traffic for real-estate agents, which he views as a leading indicator of sales and pricing.
Meanwhile, housing affordability is improving on lower mortgage rates and prices, as well as higher incomes, he noted. Mortgage lender Freddie Mac (NYSE:FRE) (FRE) Thursday reported the 30-year fixed-rate mortgage averaged 6.14% for the week ended Nov. 30, down from 6.18% the previous week. At the same time last year, the rate averaged 6.26%.
Additionally, Oppenheim said home builders have shown more discipline, "which should help inventories and ease construction costs." Yet he noted inventories of homes for sale and interest rates are the "wild cards" that could further pressure the sector.
Many economists are keeping a close eye out for any signals of a leveling in inventories as a sign the slumping housing market has hit a bottom. Home-builder executives say they've been surprised by the magnitude of the current downturn because it wasn't triggered by an economic shock or a spike in rates, but rather by an inventory glut and weakening buyer confidence.
Wall Street analysts saw mixed signals in the October data for new and existing home sales released earlier this week.
Home-builder stocks have suffered through a tough 2006 but the shares have recovered somewhat recently. Still, through Wednesday's close, the Dow Jones U.S. Home Construction Index (DJ_3728) was off about 31% from its latest 52-week high set in January.
On Thursday, Oppenheim at B. of A. also raised his target prices on several builder stocks based on improvement in traffic, affordability and costs.
M.D.C. Holdings Inc. (NYSE:MDC) (MDC) , WCI Communities Inc. (WCI) , Lennar Corp. (NYSE:LEN) (LEN) , Hovnanian Enterprises Inc. (NYSE:HOV) (HOV) , D.R. Horton Inc. (NYSE:DHI) (DHI) , Centex Corp. (NYSE:CTX) (CTX) , Comstock Homebuilding Cos (NASDAQ-NMS:CHCI) . (CHCI) , and KB Home (NYSE:KBH) (KBH) saw their target prices lifted.
(END) Dow Jones Newswires 11-30-06 1335 Copyright (c) 2006 Dow Jones & Company, Inc.
