Market Insider

Homebuilders May Not Be Out of the Woods Yet


While housing reports this year have generally pointed to an improving recovery in the real estate market, the growth remains at an anemic pace, translating into choppy moves for housing stocks for the foreseeable future.


Homebuilders declined in 2011 for the third consecutive year amid disappointing real estate market conditions. Following the decline, some analysts are betting that the dismal performance would leave room in the New Year for an eventual recovery.

Meanwhile, homebuilders took a breather Thursday, hurt by a weaker-than-expected housing starts data, overshadowing the previous session's rally helped by a strong builder sentiment index, as the market struggled to digest and make sense of the industry's mixed results.

“We’ve certainly bottomed in housing [but] the debate right now is how robust is the recovery…It’s a modest recovery, but things have stopped getting worse,” said Jack Micenko, analyst at Susquehanna Financial Group.

The seasonal trade for homebuilders typically takes place in November through March, explained Micenko, adding that he expects a “pronounced” rally in the first half of the year.

Micenko picks include Toll Brothers and Lennar .

Meanwhile, UBS lowered its rating on D.R. Horton , Lennar and Toll to “neutral” from “buy,” while slashing KBHome and Meritage to “sell” from “neutral,” adding that the rate of housing recovery won't be sufficient enough to justify the sector upside.

“Housing seems to be in recovery, but it’s just not fast enough given what’s baked into the stocks at this point,” said David Goldberg, analyst at UBS who initiated the downgrades.

For “more optimistic” investors, however, UBS suggested focusing on higher beta names such as Pulte Homes and Standard Pacific.

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