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Steep rise in home builder stock sales
Report: Big jump in insider stock sales of top home builders prompts concern.
October 4, 2005: 11:41 AM EDT
Sales of stock by insiders at top home builders is prompting some concerns.
Sales of stock by insiders at top home builders is prompting some concerns.
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NEW YORK (CNN/Money) - Insiders at some of the nation's leading publicly-held home builders have increased their sale of their company's stock, according to a published report.

The New York Times reported data from Thomson Financial that shows insiders at the 10 largest home builders by market value, including D. R. Horton (Research), KB Home (Research), Toll Brothers (Research) and M.D.C. Holdings (Research), have sold nearly 11 million shares, worth $952 million, so far this year. That is a huge jump from the 6.8 million shares, worth $658 million sold in all of 2004.

Many of the company's shares are trading at or near record highs, the paper reports, as continued strength in the new home market, fueled by low interest rates, has lifted earnings and sales. The paper said that officials at the home builders say the stock sales are not a signal that they believe the property boom is waning. Instead, most executives said that they were selling because they needed to diversify their personal wealth.

"The stock sales have nothing to do with the state of the market. It has everything to do with diversification," said Toll Brothers chief financial officer Joel Rassman, who has sold 105,000 shares worth $8.1 million. That is almost double the 60,600 shares he sold last year for about $4 million. He said the same is true for other Toll Brothers executives.

"Even after all of the sales that have taken place, (CEO) Bob Toll still owns about $1.2 billion, plus or minus, in company stock and options," Rassman told the paper. "Any investment adviser would tell Bob Toll that he should be diversifying to an even greater extent than he is."

Executives at other companies told the paper they see no downturn in profitability ahead.

"We're still anticipating record earnings for 2005 and 2006," M.D.C. Chief Financial Officer Paris Reece III told the paper. He has sold $11 million in stock this year, double what he sold last year. He said his sales and those of other company executives were tied to options that are expiring in November.

But the paper says that some analysts are not so sure the motivation to sell is so benign. The paper reports that Richard Bernstein, chief U.S. strategist at Merrill Lynch, issued a report in late August saying that insider sales at home builders mimicked what happened in the technology sector before those stocks peaked in 2000.

"People say these companies are closely held and that the executives are trying to diversify, but why now?" Bernstein said to the paper. He added that similar sales levels were not apparent in other top-performing industries this year.

"They could have diversified their holdings 2, 5 or even 10 years ago," said Bernstein.

Many economists have worried that the run up in home building and home prices in itself represents a market bubble, and that a rise in mortgage rates could hit the housing market high. Some suggested the run up in home builder stocks, and the insider sales, could signal another housing-related bubble is about to burst.

"The previous times we've had insider selling that was that high, it was followed by a 20 percent decline in the index of home builder stocks," Mark A. LoPresti, senior quantitative analyst with Thomson Financial, told the paper. The paper reports that since its July 28 peak, the Philadelphia Stock Exchange Housing Sector Index, an index of 21 home building stocks, has dipped 10 percent.

The paper reports that among the insiders selling the most stock is Zvi Barzilay, the president and chief operating officer of Toll Brothers, who sold 460,400 shares worth more than $39 million, the bulk of it in June and July. That was more than four times the 150,000 shares, worth nearly $8.7 million, that he Barzilay sold last year.

Also cashing out is David Mandarich, the president and chief operating officer of M.D.C. Holdings, who the paper reported sold 285,499 shares, worth nearly $25 million, in three days in July, compared with the 192,115 shares, worth $13.8 million, he sold in all of 2004.

At Pulte Homes (Research), the nation's No. 2 home builder, insider sales are down. But even at NVR (Research), the nation's No. 7 home builder that has also seen a drop in sales overall, the Times reports that company chairman Dwight Schar tops the list of insider sales at home builders by selling $88.4 million worth of stock in May. That's still down from the $155 million worth of stock he bought last year, when the paper reports that he spent $70 million on a seven-bedroom, 18-bathroom oceanfront house in Palm Beach, Fla.

For a more in-depth look at the real estate market and what it means for you and the economy, click here.  Top of page

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