Oil Spill Update: Some Homebuilders Get Hit Hard

Could the Gulf oil spill put a damper on homebuilder stocks? We simply don't know yet. That's basically what an analyst's report out of Citigroup says about the effect of BP's Deepwater Horizon oil spill on publicly traded builders, according to The Wall Street Journal.

Those builders could potentially see shares decline if the spill taints the beachfront communities where they build. And of all the U.S. public homebuilders, which might carry the most spill exposure? The report claims it's Meritage Homes, Inc.

The report also is an interesting look at yet another way that the largest oil spill in the history of our nation has rippled out to areas of the economy besides tourism, real estate, oil production and the fishing industry.

Citi home building analyst Josh Levin says his methodology was "somewhat crude." Levin used builder websites to pinpoint which U.S. builders are building the most in Gulf coastal areas. Levin visited each homebuilder's website and counted the number of active selling communities along the Gulf Coast.

He then divided the number of each homebuilder's Gulf Coast communities by the total number of active selling communities outside the Gulf (those found in other regions of the country) that were also listed on its website. Levin noted something else interesting: The total number of active selling communities listed on a homebuilder's website differed radically from the total community count provided by the homebuilder to the investment community on its most recent earnings call. That is not to assume, he said, that anything nefarious is going on. The beauty of mathematics: Relying on this website data, he was able to assign a numerical percentage of exposure to each homebuilder hammering away on beachfront cottages from Houston, Texas to Sarasota, Fla.

At this point, the entire Gulf Coast has been affected by the spill, with tar balls washing ashore on beaches from Galveston to the Redneck Riviera. Folks at Alys Beach near Destin, Fla. tell me they are getting small spots of oil but the cleaning crews are on-the-spot immediately, cleaning the beach. But what Levin was looking for was those builders who might have too much Gulf exposure, folks like the Jacksonville, Fla.-based St. Joe Co., the second largest landowner in the state of Florida, who practically owned the Gulf beach house market there. St. Joe's stock shares did take a hit from the spill initially, and the company says it is now focusing on commercial development rather than residential.

The homebuilders with the most exposure to the oil spill mess are Meritage Homes, with 32 actively-selling communities in the Houston area out of 147 total U.S.communities, giving it a potential 22 percent exposure; Beazer Homes USA, all over Texas with 27 Lone Star state communities and seven in Florida, yielding a 19 percent exposure. Other biggies include major Texas builder DR Horton, Inc. at 17 percent; Lennar Corp., at 15 percent; The Ryland Group, Inc., at 13 percent; and KB Homes, at 11 percent.

But I wonder if Levin noted another article in The Wall Street Journalurging investors keen on homebuilder stocks to look at who's building in Texas, applauding the state as the poster child of real estate recovery? The oil spill did not seem to dampen the author's positive stand on investing in Texas real estate, especially new-home construction, because of, among other things, our thirst for housing:
"Among those with the best prospects is Texas, which barely participated in the real-estate bubble. Home prices in Dallas, for example, are down only 7 percent from their peak, according to S&P/Case-Shiller.... Texas's greatest advantage may be housing demand. Its population grew by 3.9 million, or 19 percent, last decade, leading to a natural increase in households. The economy is stronger than in most parts of the country, with unemployment also holding at 8.3 percent, below the national rate."
Why so bullish on Texas? Not only did we not, for the most part, have a real estate bubble (individual neighborhoods did), but we also have no state income tax and we enacted stringent consumer protections in real estate after the 1980s. For example, Texas limits home equity loans to 80 percent of the total mortgage debt of the home's fair market value. Example: You own an $80,000 home. You have $50,000 in equity, you can borrow $34,000 against that home -- no more. That way, people can't bet the ranch and use equity to buy multiple homes. We pay some of the highest property taxes in the nation, which also tempers home prices. It's worth noting that Florida also has no state income tax.

"Since it is not yet known what impact the oil spill will have on the various Gulf Coast economies over the intermediate and longer term," wrote Levin, "we find it difficult to draw actionable investment conclusions from our analysis."

Or maybe just look at the whole picture.

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