Home Prices, Homebuilder Stocks Move in Opposite Directions: What Gives?

Includes: HOV, ITB, OHB, XHB
by: Everyday Finance

Single Family Home prices fell an astounding 14% in March from 2007, while consumer confidence breached a 16 year low this month. The S&P Case-Shiller housing composite index of 20 cities from today showed prices of previously owned homes fell 2.2 percent in March, continuing their descent. You'd think this would be a bad year for the homebuilders, right?

Markets Over-react

Just like we saw with the amazing opportunity in financials earlier in the year (which is perhaps to be revisited at these levels again), the stocks were punished so severely that the valuations in virtually any context began to look absurd. This dichotomy with housing stocks is now normalizing itself, as new home sales actually started to show a glimmer of hope this month. In a year with headlines like this, year to date, Hovnanian (NYSE:HOV) up 11% and Orleans (OHB) is up 33% vs. a loss for the S&P of 5.7%. HOV was up close to 4% today alone.

Case, the namesake of the Case-Shiller index actually stated today that said more auctions of foreclosed properties will hasten the reduction of inventories from record levels and may lead to a faster housing recovery.

"I think we're going to see some signs of life in the next few months,'' Case, an economics professor at Wellesley College in Wellesley, Massachusetts, said in an interview with Bloomberg Radio. "The market is beginning to clear somewhat. There is some good news in this.'' This is rather out of character for Case based on his past statements; perhaps he's on to something.

Could this be a catalyst for further jubilation in the housing stock sector? Some of the easy money has been made in housing stocks to date, but they are still sharply off their prior highs. While it is unlikely we'll see their all-time highs in the next few years, they can easily outperform if the housing market even begins to meet expectations.

Disclosure: The author has no position in any stocks mentioned in this article.

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