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A look at what homebuilders (XHB) are saying suggests there is something real behind the rally...

A look at what homebuilders (XHB) are saying suggests there is something real behind the rally in their stocks; the three big builders reporting last week - MDC, SPF, BZH - said closings and net new orders rose nicely Y/Y and from two years earlier. But shares are much more expensive; investors buying home builders now should be comfortable buying the broader economy and stock market.
Comments (5)
  • Paulo Santos
    , contributor
    Comments (18203) | Send Message
     
    Housing has bottomed, but the homebuilders have rallied so many times discounting the housing recovery, that they're now mostly too expensive even for a housing recovery.
    7 May 2012, 05:41 PM Reply Like
  • J 457
    , contributor
    Comments (951) | Send Message
     
    I'm with you Paulo. I follow these builders stocks closely and have watched them from peek to trough. No way can I see PHM maintaining current valuation with flat to negative earnings. Same applies to KBH, LEN, DHI, SPF, MTH, TOL, RYL, MDC- they are all way ahead of themselves. Wouldn't surprise me at all to see 30-50% or more decline in next few months. I especially see MTH as bloated considering their earnings, or lack thereof.

     

    Funny how people can run from coal and NG at decade lows yet somehow still see builders (with constant quarterly losses) as favorable.
    7 May 2012, 09:06 PM Reply Like
  • Paulo Santos
    , contributor
    Comments (18203) | Send Message
     
    But I wouldn't short them either, since housing has indeed bottomed.
    7 May 2012, 09:23 PM Reply Like
  • WallStreetDebunker
    , contributor
    Comments (2379) | Send Message
     
    Paulo,

     

    Nearly all financial pundits are calling a housing bottom now. I'm surprised to see you go with this near-universal consensus, especially since the data beneath headlines is far worse than the mainstream media is stating.

     

    I'm not sure if you think home prices or home sales are bottoming, or both. Perhaps home sales volume has bottomed, but home prices (after adjusting for inflation) are unlikely to have bottomed, except in specific cities and regions that have unique characteristics conducive to price increases.

     

    It won't take much to see another leg down in prices:

     

    -A surge in shadow inventory released to the market by banks
    -A rise in mortgage rates from historical lows
    -Continuation of the jobless economic recovery, or worse, a recession in the next year or so.

     

    After the peak of the housing cycle ending in 1989, home prices did not rise (adjusted for inflation) for nearly eight years. It has been only six years since the mother of all housing bubbles popped, and we haven't even dropped below the inflation-adjusted pre-bubble trend in home prices going back 40 years.

     

    http://bit.ly/rroJDX

     

    In practical terms, the stock sector involving residential real estate (and related retailers) is overpriced. There's a momentum mini-bubble in many companies like SHW, CPWM, RYL, TPX and many others.

     

    Take a look at what happened to TPX stock in the last few weeks. It has declined dramatically (over 40%) mainly because the company lowered annual estimates by a few percent. This type of reaction is common only in stocks that are overvalued momentum darlings.

     

    Another asset that has nearly universal consensus is long-term bonds. It's hard to find a pundit who thinks rates can decline more. This has been going on for many years now, and like residential housing bottom callers, the consensus of pundits has been wrong 100% of the time.

     

    My guess is that the housing market will not bottom at least until the next recession is announced by the major media (probably six months after the recession has actually begun).
    7 May 2012, 10:36 PM Reply Like
  • Paulo Santos
    , contributor
    Comments (18203) | Send Message
     
    I think new home sales and nominal prices have bottomed.

     

    But since homebuilder stocks have discounted several recoveries in the past, they're too expensive and any bad news can sink them hard.
    7 May 2012, 10:49 PM Reply Like
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