Investment Contrarians

Why You Need to Seriously Look at Housing Stocks

By for Investment Contrarians |

housing marketYou can still buy cheap homes in America if you don’t mind living in cities like Detroit, Pittsburg, Rochester, Memphis, or Cleveland. Unbelievably, in Detroit, you can even buy a home for under $100.00 if you don’t mind living in an area that is extremely depressed.

On the other end of the housing spectrum, there’s New York City, but to live there, you would need to dip deep into your pocketbook, as the median home price was $1.1 million for the period between July and September 2012, according to Trulia.com (source: www.Trulia.com, October 18, 2012).

Wherever you live, it’s clear the housing market is displaying much-improved industry metrics. We just saw a blow-out in housing starts and building permits on Wednesday.

In September, there were an impressive 872,000 starts, 13.5% above the 768,000 estimate and the upwardly revised 758,000 in August. Also lending support to the housing market recovery was an equally strong building permits reading of 894,000 in September, well above the 815,000 estimate and the revised 801,000 in August. (Source: Yahoo! Finance with data supplied by Briefing.com.) In my view, the strong readings indicate that builders are expecting a good flow of buying in the housing market.

Moreover, representing another key piece of the housing market, home prices are edging higher, with the S&P/Case-Shiller index, comprising of the 20 largest U.S. metropolitan cities, increasing a better-than-expected 1.2% in July; this represented the sixth straight month of increases.

The improvement in the housing market is also showing in the results of numerous homebuilder stocks.

Homebuilders are continuing to deliver better results. Toll Brothers, Inc. (NYSE/TOLL) blew away the consensus earnings estimates in its fiscal third quarter after reporting $0.36 per diluted share, double the estimate of $0.18 per diluted share. Revenues surged 40.6% year-over-year. The backlog of homes surged to 2,559 units, up 44.0% year-over-year. (Source: “Toll Brothers Reports FY 2012 3rd QTR and 9 Month Results,” GlobeNewswire, August 22, 2012.) In the case of Toll Brothers, much of the easy money has been made for now. Toll Brothers was given a hefty valuation of 31.7X the earnings-per-share (EPS) ratio for fiscal year 2013, supported by a price/earnings-to-growth (PEG) ratio of 2.9. The stock has moved down from its high of $37.08 on September 21.

The technical analysis chart of the S&P Homebuilders Select Industry Index (NYSE/XHB) shows the upward trend from the October 2011 bottom to the current high. The upward break at the $22.00 level was bullish due to the topping action that was evident.

SPDR S&P Homebuilders Index ETF Chart

Chart courtesy of www.StockCharts.com

The NAHB Housing Market Index report was encouraging at 41 in October, but the reading still indicates that more builders have a poor view than a positive view toward the housing market. The 50 level is the midpoint—not reached since April 2006, which is over six years ago.

Yes, there are still some concerns regarding the housing market, but I expect housing to continue to improve, especially if the jobs market improves.

At this juncture, if you hold some of the hot homebuilder stocks, I would be taking some money off the table after the run-up in the housing market stocks.

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