Trader Talk

The Great Housing Stock Rally of Q4 2011


The great housing stock rally of Q4, many up 50 percent or more: huh?

Housing stocks are stronger Thursday as Pending Home Sales were much better than expected, but let's get real: there's been a housing stock rally going on all quarter.

Here's just a small sample.

Home Builders:

PulteGroup +57.2%

Ryland Group +45.6%

Lennar Corp. +45.4%

DR Horton +39.8%

Building Materials:

CEMEX +70.6%

Eagle Materials +52.3%

USG +48.7%

Masco +46.5%

Why a rally when housing is still in such dire straits? There are signs of a bottom, but not strong signs of a recovery. The rally in builders is particularly strange: there will be high level of vacant units (1.5 million) and high level of distressed sales for some time to come.

Respected housing consultant John Burns told me that the "housing near a bottom" play was the main driver, but also noted that some are buying because housing was a defense play and would be less impacted by a European blowup.

The rally in building materials is easier to understand: apartment construction is strong — renters are increasing, and multifamily construction will be a bigger part of U.S. residential permits for the next several years, Burns says.

Another factor helping: remodeling will be picking up in the coming years as well.

Speaking of Burns, he too feels housing is at a bottom, but with caveats. His most recent report to clients was titled: "Housing is at The Bottom, most likely with a Slow Recovery."

His reasoning:

1) starts, sales and prices have been relatively flat for many months, at lowest levels on record

2) great affordability, low construction, declining resale listings, rising rents.

Why the slow recovery?

1) low entry-level activity due to lack of savings

2) low moveup activity due to difficulty selling existing homes

3) price appreciation will be necessary for many land parcels to become profitable to build

4) 2.4 million excess vacant homes and falling

One interesting point: high vacancy rates will clear as household formations will outpace construction. In 2011, for instance, Burns estimates that 525,359 units will be constructed, but household growth will be 1.296 million. That will begin narrowing considerably by 2014.

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