Are Big Home Builder Stocks Too Hot?

Home Construction
Photo by: stngls
Home Construction

Improvement in the jobs market, improvement in potential buyer traffic, improvement in existing home sales, no change in record low mortgage rates…no surprise the analysts are starting to upgrade the nation’s public home builders. Not to mention that we’re getting an unusually warm start to the spring market.

“We are raising our targets for the builders, and are upgrading DHI, LEN, and TOL to Outperform (from Neutral), and also upgrading MTH and RYL to Neutral (from Underperform),” wrote Credit Suisse’s Dan Oppenheim in a note this morning, that then sent the stocks of all the builders on a tear.


Not that they haven’t been on a tear since last fall, with the S&P home builder’s index nearly doubling. If that happened even before all this new spring energy in the market, then the obvious question is, how much farther do these stocks have to go? That will depend entirely on the spring results, which we won’t get until summer. We want to focus on new orders and new home sales, but we also need to pay close attention to the distress in the market, since many foreclosed homes are relatively new construction, left over from the building boom barely six years ago.

“There will likely be added supply/competition as more foreclosures come to market following the robo-signing agreement, and a significant backlog of 6.6 million delinquent loans/foreclosures still needs to be worked off (though foreclosure pricing seems to have bottomed and there are plenty of investor buyers of foreclosures),” writes Oppenheim.

He also cites increases in FHA mortgage insurance premiums. FHA is a favorite loan product for first time home buyers, and first time buyers are major clients of the new home builders. And while bargain-basement foreclosures may be hurting the home builders in the short term, the rental boom due to all these foreclosures may actually provide builders with another opportunity.

“Bowing to the realities of today's for-sale housing market, a growing cadre of market-rate builders are warming to the concept of houses as an alternative rental product,” writes Lew Sichelman in National Mortgage News.

That’s right, building houses to rent, not sell. Not so crazy, given rising rents and rising demand. If the multi-family developers can do it, why can’t single family builders?

As for the stocks of the big guys, are they too hot? Most builders are pricing in order increases of 20 percent at least, according to CNBC’s Bob Pisani.

“That seems to be happening, which would leave little room for price run-ups, but remember, this market is very under-owned by a lot of investors, so these stocks could go beyond reasonable valuations very easily,” says Pisani.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick