The housing market is improving.  Foreclosures are slowing.  Sales are up, at least in middle income housing.   BUt homebuilder stocks may be in a far different boat ahead.  There is some comfort that those companies which have survived to date are likely to survive 2010 and beyond.  That is why the gains have been exponential from the March 2009 lows in many stocks.  But some recent analyst calls in the sector may only highlight some of the risks in remaining bullish in homebuilders despite the notion that the recovery news is now already happening.

The standout calls today were in KB Home (KBH) and in Pulte Homes (PHM).  As it happens, homebuilder stocks are almost never in a standalone basis when being compared to each other. The downgrade came from Credit Suisse and was brought on by valuations and on the coming expiration of the homebuyer tax credit.  So one is on the performance of the past and the other is over a possible slowing of the recovery trends starting in May.  Credit Suisse worries this makes the stocks look rich after a stellar outperformance compared to the market off of lows.  KB Home may be more vulnerable due to the notion that close to 80% of its sales are from first-time buyers.  Pulte has at least some similar trends and the firm is worried of a premium valuation.

KB Home (KBH) is down after it was lowered to Neutral from Outperform by Credit Suisse.  KB was also started as a Hold at Stifel Nicolaus.  KB Home is down 2.6% at $16.55 in early afternoon trading.  While its 52-week range is $11.15 to $20.70, the March 2009 low was actually just under $8.00.

Pulte Homes (PHM) was cut to Underperform from Neutral at Credit Suisse.  Stifel Nicolaus also initiated coverage here with a highly unloved “Sell” rating.  Pulte is down 2.1% at $11.20 in early afternoon trading.  While its 52-week range is $7.84 to $13.59, the March 2009 low was actually just under $8.00.

MDC Holdings (MDC) was also started with a “Sell” at Stifel Nicolaus.  MDC is down 2% at $34.12 in early afternoon trading.  While its 52-week range is $26.81 to $39.20, The March 2009 low was actually just under $23.00.

There are new concerns that the latest waves of foreclosures are just about to hit the market that have been in the shadow inventory of the housing market.  The long and short of the matter is that the housing sector may have already priced in the return of at least some normalcy.  But a return to operating profitability (as opposed to profits from tax benefits) is still a ways out.

Thomson Reuters expects both Pulte and KB to return to operating profits in Fiscal 2011 with estimates at $0.27 EPS for Pulte and $0.65 EPS for KB.  

To show that these are not alone, the SPDR S&P Homebuilders ETF (XHB) trades at $17.27 today, and its 52-week range is $9.04 to $17.36.  Its low in March 2008 was $8.00, so this ETF which tracks the sector is up over 100% from the March 2009 lows.  The S&P 500 is up over 80% from its March 2009 lows.

Of the homebuilders, those which can get back to profits from operations the soonest are likely the ones that investors will continue to keep their funds in.  Unless the markets remain in a continual one-way up trajectory, chances are that long-term investors will get a shot to look at many of the homebuilders at lower prices in the coming weeks.

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