Home Prices Are Sustainable, Says McGrath of MKM Partners

HUDSON: Ahead of the HP news, it was a lackluster day for U.S. stocks, despite home sales showing more strength in America. The Dow Industrials fell 27 points continuing below 13,000, the NASDAQ lost 15, the S&P was off 4.5. Now the losses came despite reports of fresh strength in the housing market. Sales of previously owned homes rose 4.3 percent last month. The jump was well above what economists were expecting. And the supply of homes on the market – inventory is getting back into a more normal reading of six months or so. Megan McGrath is a senior analyst at
MKM Partners, where she covers homebuilders with us tonight from the NASDAQ. So, Megan, improving home sales. Is it sustainable as we move into the spring selling season?

MEGAN MCGRATH, SENIOR ANALYST, MKM PARTNERS: Yes. We absolutely think that it is sustainable. We`re forecasting about 9 percent growth in existing home sales this year and a little bit better even in new home sales. So today`s reaction I think was a little bit of high expectations catching up with reality. And the reality is that things are getting better. They`re just getting better at a pretty moderate pace. So if we take out some of the choppiness from the month to month numbers and that was also a problem today, home sales were up about 2 percent, versus the
prior month. So we`re making progress. We`re just making very slow progress.

HUDSON: Before I ask you about one particular home builder, any sense that the pace of that progress could pick up as we move into the warmer months?

McGRATH: It actually has been picking up the last couple months so we first saw flat and then up a little bit last month and then up about 2 percent this month. So again, we`re making slow progress and this has been a slow part of the year. We are starting to hear from some of our contacts that things are picking up in certain geographies. Toll Brothers (NYSE:TOL) today on the earnings pointed to a few geographies that are starting to look better, so there`s currently hope.

HUDSON: You mentioned Toll Brothers (NYSE:TOL). Let`s take a look at those earnings that it did release today. It was a disappointment in terms of its bottom line because it was a result, not an earning. It actually lost money when it was expected to make money, but it also delivered fewer homes, saw more home buyers cancel their contracts in its fiscal first quarter. Is that a worrying trend?

McGRATH: Yes, so the interesting thing about Toll`s quarter, they lost about two pennies and we were looking, consensus was looking for about a two-penny gain. So a slight miss there. We`re not that concerned about the cancellations. They did bump up a little, but (INAUDIBLE) are still pretty good at about 6 percent. The interesting thing for Toll`s earnings was their backlog conversion rate dropped and that`s the number of homes
that they closed versus the orders they had in the pipeline. That dropped to the lowest number we`ve seen since January of `09. The company attributed that to their high rise business, that those towers are closing at a slower pace mostly in the New York metro area than previously. So the good news there is it`s not a, resurge (ph) of the broader market. That`s relatively specific to Toll and the company also said they are expecting two new units to start closing sales in the next two quarters so, that conversion rate should lift over the next two quarters.

HUDSON: Some optimism there for Toll Brothers (NYSE:TOL). Do you own shares yourself Megan?

McGRATH: We do not.

HUDSON: Megan McGrath along with us. She is a home building analyst with MKM Partners.

McGRATH: Thank you.


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