How to invest in the coming housing market rebound
February 13, 2012|Dave Carpenter, AP Personal Finance Writer
The housing market recovery hasn’t taken off yet, but a rally in its stocks sure has. The Standard & Poor’s homebuilders index is up 60 percent since October. Given that stock prices tend to anticipate business trends, does that mean a housing market rebound is imminent during the spring home-selling season?
Not necessarily. The biggest sustained rally in homebuilding stocks in years and recent upbeat home sales data, however, have injected some long-absent optimism into the outlook for housing. Sales of previously occupied homes rose for three straight months at the end of last year. The glut of houses on the market is diminishing, down to 2.4 million previously owned homes on the market in December from 3.8 million in June. And buyers are slowly regaining a little bit of confidence.
“The housing market enters the spring selling season in absolutely the best shape it’s been since 2005,’’ says analyst Eric Landry, who follows homebuilding stocks for Morningstar. “Sales will still likely be below normal, but inventories are in the best shape they’ve been in years.’’ The government’s landmark $25 billion settlement of foreclosure abuses is the latest dose of good news. Financial analysts see it as helping to clear the way for builders to gear up construction activity.
The CEOs of some of the biggest homebuilders said during earnings conference calls this month that the housing market has stabilized. But they were cautious about making any bullish forecasts.
Major improvement in the industry won’t take place until next year, according to a forecast by the chief economist of the National Association of Home Builders, David Crowe. More important for investors, the big run-up in stock prices in the last four months makes a correction likely soon. Homebuilding stocks have a history of declining after rising in the months ahead of spring selling season. The current rally is seen by some as the opening act in a multi-year recovery for the stocks. Low interest rates, more affordable home prices and pent-up demand should help them rise further.
But the stocks are no longer cheap. Most are currently trading at roughly 1.5 times book value — considered the best way to value this group. Book value is the value of a company’s assets if it were to be liquidated. Their current value strongly suggests they are overpriced.
Investors would be wise to keep an eye on housing-related stocks. With prices having shot up, though, they should exercise caution. Waiting for a pullback and buying after spring home-selling season, if the industry still has momentum, makes more sense. That should put investors in much better position to profit from the coming rebound.
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