Housing Stocks' Recent Runup -- Sustainable?

Includes: DHI, LEN, MDC, PHM, TOL
by: David Jackson

Excerpt from our One-Page Annotated News Summary:

HEARD ON THE STREET: Whistling Past Housing's Graveyard? (Wall Street Journal)

Summary: Home builder stocks have risen about 15% since July 18th, just before the Fed announced a pause in its two-year string of rate increases. Bulls argue: (1) the stocks are cheap -- Pulte, Lennar, Horton and Toll Brothers trade at less than 6x earnings, (2) the stocks have stopped reacting to bad news, (3) housing inventories may have peaked in some markets, (4) year-over-year comparisons will get easier in Q4 and 2007 Q1, and (5) cancellation rates should fall in Q4. Bears argue that (1) fundamentals are horrible, (2) news isn't improving and there's no visibility when it will improve, (3) companies are still reducing earnings estimates, (4) valuations are unattractive, particularly given the recent run-up in the stocks, (5) book values may be reduced downwards as land values are re-assessed, and (6) profitability will deteriorate as builders develop land bought recently at higher prices. The article's conclusion seems to be negative for the homebuilder stocks.
Related links: Full articleDon't Believe Advocates of a Soft-Landing for HousingNAR Housing Report: Declining Home Prices Induces Heavy SpinContrarians Moving Into U.S. Housing StocksBill Miller on Why Housing Stocks Are a Buy
Potentially impacted stocks and ETFs: Stocks mentioned in the article: Lennar Corp. (NYSE:LEN) just cut estimates again; Banc of America recently downgraded Pulte Homes Inc. (NYSE:PHM) and D.R. Horton (NYSE:DHI); Credit Suisse upgraded M.D.C. Holdings Inc. (NYSE:MDC) due to its lean land inventory; Pulte, Lennar, Horton and Toll Brothers (NYSE:TOL) trading at low P/Es.

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