On October 19, I told you that I thought that housing stocks were priced to perfection. As such, they have no upside at all, because every possible good scenario was baked in the cake.
Indeed, many of them have corrected since then. Toll Brothers (TOL) for example was around $36 and today under $30.
Today I am telling you to sell them. There are score of reasons. First and foremost is, that housing construction will not return anytime soon to the volume of several years ago.
This chart bellow displays building permits and competed one family houses. In short, in order for home builders to make money, they have to build homes. It's that simple. The volume of new building is nowhere near it was several years ago and I don't think it will return to those levels any time soon.
Below is a chart of quarterly revenue of some of the biggest home-building stocks. More or less it confirms the above charts, meaning that volume is not what it used to be.
TOL Revenue Quarterly data by YCharts
And as I said in my previous note on housing, the stocks in this space have simply risen too fast and are running ahead of themselves. There is a big disconnect between valuations and the actual business.
For example, looking at PE ratios, Toll Brothers has 55, Lennar (LEN) 13 but has a forward PE of 23, DR Horton (DHI) a 6.7 PE with a forward PE of 13 and Pulte Group (PHM) 36. KB Home (KBH), Hovnonian (HOV) and Beazer (BZH) still have a negative PE.
Also please notice the chart below - home ownership is still falling. This means that less and less people own a home. That's not exactly evidence of a housing bull market.
Granted these companies have come back from the dead and housing has stabilized, but stabilized does not mean that these stock have the right to return to the bubble valuations of the housing bubble. Ara Hovnanian says that housing has a long way to go. We are not even close to the 40 year average housing starts of 1.4 million units.
In addition, the question as to what will happen with the U.S. Fiscal cliff, is not exactly inspiring for people can go out and fill up on housing. Remember, about 30% of all mortgages are still underwater. Unemployment is still not in the single digits.
But there is another reason why you should get out of housing now. Most of the charts look like they have fallen over a cliff of their own.
DR Horton Inc.
Toll Brothers Inc.
Hovnanian Enterprises Inc.
These are not bad companies, just expensive companies and have had a good run up. If you own these stocks, I would seriously consider selling and taking profits. It's not every day you get a chance to cash in a winning lottery ticket.
Furthermore, stocks priced to perfection are not exactly ideal candidates to make money in any market, especially in this market. With Europe in recession and the unknown factors of the fiscal cliff ahead of us, coupled with the fact that these companies are fundamentally expensive, selling and cashing in is a wise move.