Sentiment in Homebuilders ‘Gone Wild’, Pros Say Steer Clear

While famed investors Warren Buffetand Marc Faber have attracted attention in recent weeks with buy recommendations for physical property in the U.S., strategists caution against gaining exposure to real estate builders’ stocks, calling the recent gains unjustified.


“I think the sentiment improvement in homebuilder stocks is… an example of sentiment gone wild. (It’s) a classic case of how investors get trapped into headlines and then get too enthusiastic,” Michael Yoshikami, CEO & Founder of Destination Wealth Management, told CNBC.

“(Firstly) there's a massive glut of homes on balance sheets of banks. Secondly, one out of four people in neighborhoods would sell their house if they could, which means there's a tremendous amount of supply sitting out there,” he added.

Homebuilder stocks have been in favor with investors this year as existing home sales and buyer traffic improved. The S&P Homebuilders Select Industry Index has risen over 20 percent this year, ahead of the 9 percent gain for the S&P’s 500 Index.

Stocks got a further lift last week after Credit Suisse raised its targets for builders including D.R. Horton , Lennar andToll Brothers , to “outperform” from “neutral.”

Pat Dorsey, Vice Chairman, Director of Research & Strategy, The Sanibel Captiva Trust Company agrees that investors should stay clear of the homebuilder stocks, calling their business model “horrible”.

“It's a commodity business; you have price takers, tons of capital on your balance sheet.”

Dorsey says a better way to bet on a recovery in the U.S. housing market, is to invest in home improvement retailers such as Home Depot or Lowe's. However, he notes that they have become too expensive, after rising over 50 percent in the last 6 months.

“Home deport or Lowe's are much more competitively advantaged but frankly, the trade's done,” he said.

Yoshikami, however, doesn’t agree that Home Depot and Lowe's are a good alternative, noting that part of their earnings rely on home equity lines, a form of credit in which the consumer’s home serves as collateral.

“Even though they've had significant advances, most of their earnings, pre-2008, was really from home equity lines, so I'd even be cautious about investing in that sector at all,” Yoshikami said.