Oh, Those Pesky Facts

 | Mar 19, 2014 | 11:17 AM EDT
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What do you do when the facts simply refuse to fit the downbeat story? One thing we know about the economy after the fall is that housing has either slowed or stalled out entirely, a victim of higher interest rates, affordability and a sense that mortgage money remains hard to come by. Plus, we've been hearing endless horror stories about one-fifth of the country that was robust, the one-fifth of the country that is California.

Then along comes KB Home (KBH), a builder that is synonymous with California, and it delivers a beat-the-band top line, bottom line, every line and number that calls into question the entire negative housing thesis. It's just inexplicable, and as much as the theorists want to throw this number to the wolves of distortion and hubris, there's nothing you can do about a stock that won't fit with the negative story.

Now, there is a component of KB Home that is intrinsic to the company, which his genuine margin expansion. We are so used to homebuilders making less and less on homes because of the high price of land and the raw costs of what goes into a home and who labors over them, that we had a kind of built-in disappointment factor.

Yet, again, KB Home puts the lie to that negative twist in part because pretty much everything that goes into a home has come down in price. Think about the collapse of copper, and the waning of lumber and sheet rock. The land was bought cheaply, as well, and in great places, and labor-price escalation is a thing of the past.

S&P/Case-Shiller, the acknowledged keeper of the housing flame with its episodic and habitually late home-handicapping, says pricing is escalating. However, the more accurate national daily sample from Zillow (Z) is showing a much lower price increases. Sorry, Nobel laureates, I am going with the boots-on-the-ground digitized empirical analysis of Zillow.

What does it all mean? First, the complex that trades with housing -- everything from Home Depot (HD) and Lowes (LOW) to Sherwin-Williams (SHW), Masco (MAS), Stanley Black & Decker (SWK) and Fortune Brands Home & Security (FBHS) -- a group that's been in pause mode, is able to trade higher. That's vital, because other than Williams-Sonoma (WSM), this housing-related cohort has been a real drag in the last few weeks. Witness how shares of Owens Corning (OC), with that company's incredibly strong quarter, recently peaked on that terrific report.

Second, there's a larger issue: We have to call into question the whole failed-housing-engine thesis that has been used to sense that housing is finished as a driver for the larger economy. Instead we must fall back to the tried-and-true Warren Buffet analogy that the household formation pick-up is secular in nature and isn't going away.

Of course, we know that the much bigger Lennar (LEN) is due to report Thursday, and perhaps KB Home is unique in its strength. But Lennar CEO Stuart Miller has been a stalwart bull even as other homebuilders had been in hope mode about the spring selling season, so I bet a one-two punch could be in order.

Housing: I's not lost. It's found. Darned facts just play havoc with what the bears had assured us would be a buttressing of the new negativity of 2014. Frustrating? How about terrific?

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