Soaring Housing Stocks in Perspective
The approach of a new milestone going forward often prompts us to look back to from whence we came; potential new highs in the stock market are no different, especially when it comes to housing, the sector that is largely blamed for bringing down the markets in the first place.
As the Dow approaches 14000 and the S&P 500 matches its October 2007 peak, stocks of the nation's home builders continue on what looks like an unstoppable trajectory skyward. But is it?
Nearly half of the components in the PHLX Housing Sector Index, which includes the public home builders as well as home remodelers and housing components, are up more than 50 percent since the overall stock market peaked. The index is trading at its highest level since August of 2007. But we have to go back further with the builders, because they peaked well before the greater market, signaling the trouble ahead.
(Read More: New Housing Fears: Home Prices Rising Too Fast?)
The PHLX index closed at an all-time high on July 18, 2005. It then dropped a staggering 81 percent to a trough in March of 2009. It has made a remarkable comeback in just the past year and a half but is still 34 percent below that peak in 2005. Only one component of the index, Texas-based Lennox International, a provider of climate control solutions for heating, air conditioning and refrigeration markets, is above its 2005 peak.
The overall quick pick-up in the home builders has some calling the stocks overvalued. They did, in fact, take a pause last fall, as some analysts downgraded various builders as being too hot for the fundamentals. Then come December, they began climbing again.
"Just because the stocks are overvalued doesn't mean they are not going to go up more," says David Goldberg, a housing analyst at UBS. "It's a momentum play."
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Goldberg warns, however, that there is a lot of growth baked into these stock valuations for 2013, expectations that may be tough to meet. Big builders like Lennar and DR Horton continue to report growth in new orders, but in their latest reports that growth didn't meet expectations, and the stocks responded accordingly.
"If you're betting on a deeply sloping line that keeps going up, you get very sensitive to slowing growth rates," notes Goldberg.
Expectations for housing starts and new home sales are both in the 20 percent range for 2013. Granted they are both coming off very small volumes historically, but those are still big expectations to meet. They very well could exceed those expectations, given the sheer optimism in the housing market today, but investors going in should still pay attention to fundamentals and to diminishing, but still-existing, headwinds.