Housing Stocks Look Attractive, But The Dynamics Might Change

Includes: CAA, DHI, LEN, PHM, TOL
by: George Kesarios

I have told you to sell housing stocks many times. The last time I told you to do so was back in May (please consider: Housing Is Not In A Bubble, But Housing Stocks Are Not Cheap). Today the stocks mentioned in the previous post have corrected quite a bit and are also taking a pounding today.

As per my previous post, I look at the one year average price target analysts have on these stocks, and only then make a decision if the profit potential is worth the risk of buying and holding these stocks. Today all these stocks have correct quite a bit from analysts one year price target, that I am tempted to rate some of them a buy.

The table below lists the price since my last post, today's price, analysts 12 month target and the profit potential.

Price (May 30)

Price today (intraday)

12 Month Forward P/E

1-YR TRGT Price

Potential Profit

PulteGroup (NYSE:PHM)






DR Horton (NYSE:DHI)






Lennar (NYSE:LEN)






Toll Brothers (NYSE:TOL)






Standard Pacific (SPF)






So the profit potential for holding these stocks or buying them today is not bad. In fact, if analysts have it right and these stocks reach these targets on a 12 month forward basis, then you would probably do better than most hedge funds.

However, there are certain things to keep in mind that might change the fundamentals of housing stocks that might change analyst targets on a forward 12 month basis to the downside.

Part of what has been driving housing over the past few years is the Fed buying billions in mortgage backed and government securities each month. This has kept yields down and has made housing very affordable.

However we now know that this is about to change. The Fed has announced that depending on how the economy is doing, it will curtail these purchases going forward. And since markets are forward looking and discount the future, they have already begun discounting that mortgage rates will rise.

Below is the chart of the average rate for a 30 year average fixed mortgage. As you can see, rates have been going up, despite the fact that the Fed is still buying tons of securities.

(Click to enlarge)

The Fed has said it will curtail purchases when unemployment falls below 7%. And that might happen sooner than later, because the latest jobs report was actually much better than what analysts expected, even thought unemployment didn't fall because more people were looking for jobs.

So in a funny way, the fear of recession by the Fed was very good for most housing stocks, because it made housing extremely affordable because of record low rates. And in a funny way, as the U.S. economy recovers, that might take some of that affordability away as rates rise.

So the question is, do investors buy the above stocks given that rates will rise, even thought the economy might do better?

The answer is not yet. I would wait for the above housing stocks to correct some more and wait to see where 30 year fixed mortgage rates will stabilize. If after all this analysts still have not lowered their price targets, I would be a buyer. For the time being, I continue to recommend staying away from the sector and the above stocks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.