Surging Homebuilders Have Further Upside: Analyst

Housing stocks are booming, but is the surge sustainable?

Real Estate
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Although Toll Brothers, Lennar, PulteGroup,DR Horton and KB Homeall hit fresh 52-week highs on Friday, one analyst still sees upside for the sector's stock prices, which he described as “lofty.”

“A lot of the easy money has already been made in this sector, but you don’t need to get off right now," said Robert Wetenhall, an analyst at RBC Capital Markets. "We’re just looking for smaller gains as they move into year-end.”

Wetenhall told CNBC's "Squawk on the Street" that he remains encouraged by the sector’s fundamental outlook as housing continues to show signs of rebounding.

“Long term, this sector is going to work," Wetenhall said. "It’s probably going to outperform a lot of other sectors, and we’re still looking for accelerated earnings growth.”

On Thursday, the Federal Reserve said it will buy $40 billion in mortgage-backed bonds per month on an open-ended basis in its third round of bond buying or quantitative easing (QE3). It also extended its pledge to almost zero interest rates into mid-2015 from late 2014.

This move enhances housing affordability, which is necessary for better housing performance and is the tailwind that Wetenhall said they have been looking for.

Megan McGrath, an analyst at MKM Partners, also expects further easing to be a positive move, but she remains cautious.

“I wouldn’t head into the homebuilders today," McGrath said. "I would wait maybe until you see another 5- to 6-percent pullback. Then I might start to buy them again.”

— Written by CNBC.com's Katie Little. Follow her on Twitter@katie_little_.

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RBC Capital Markets makes a market in securities of DR Horton, KB Home, Lennar, PulteGroup and Toll Brothers and may act as principal with regard to sales or purchases.