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Slower Starts Should Cool Homebuilders

And that would help create some buys in this overextended sector

The latest housing starts report was released Tuesday morning, and as so often in recent years, the data offered both positive and negative signs.

According to the Commerce Department, the number of housing starts declined 1.1% in February, from the previous month, for an annual rate of 698,000 units. On the other hand, building permits jumped 5.1%, to a 717,000-unit annual pace, besting economists’ expectations of a 690,000-unit rate. This was the highest level for permits in over three years.

Another positive was that even with February’s dip versus January, residential construction starts were actually up over 34% from a year ago.

As I have noted before on InvestorPlace, building permits aren’t as important as actual starts, because not all permits will eventually lead to new homes being built. It’s the equivalent of a pending home sale versus actual closed sales.

And when the new starts numbers are broken down, a familiar pattern emerges: Single-family residential construction was down 9.9%, while multifamily starts were up 21.1%. Thus, builders are expecting the booming demand for rentals to continue, while home ownership demand remains slack.

Wall Street wasn’t impressed with the latest numbers, and most of the homebuilder stocks were lower in morning trading. Beazer Homes (NYSE:BZH) is down 2.7%; Ryland (NYSE:RYL) down 1.6%; D.R. Horton (NYSE:DHI) down 1.5%; KB Home (NYSE:KBH) down 0.9%; and Toll Brothers (NYSE:TOL) down 1%.

Clearly, these “schizophrenic” results aren’t giving investors a warm fuzzy feeling about the immediate future for real estate.

Looking Forward in 2012

However, I continue to like the homebuilders group for the long term, and would be a buyer on any decent pullback. Despite today’s mixed results on starts and permits, the industry still has many positives, such as:

  • Fannie Mae recently began selling large numbers of foreclosures to private real estate hedge funds to create rental properties. Bulk sales will deplete the foreclosure inventory.
  • Mortgage interest rates continue at historically low levels, with the national average for the 30-year fixed-rate loan around 4%.
  • Home prices in many areas of the country are now cheap enough to where it costs less to own than to rent. Historically, this has usually led to an increase in home ownership. Interestingly, this flies in the face of the recent surge in multifamily starts.

Homebuilder success and the U.S. unemployment rate will continue to be linked together closely as 2012 progresses. The next jobs report is due in early April, and as always, that can have a big effect upon the real estate-related stocks.

But until we see real growth in employment numbers, I wouldn’t chase the homebuilder stocks. However, in this uptrend, they can be traded by buying on pullbacks to their 50-day moving averages.

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Courtesy of

You can see this pretty clearly on the chart, Lennar (NYSE:LEN) has been one of the stronger homebuilders recently, but it really appears to be quite overextended at current levels and in need of some correction. I wouldn’t be a buyer unless the price comes back near the 50-day moving average, currently at $23.23.

So, perhaps this weak housing starts report will lead to a pause that refreshes for housing stocks. That would be a positive for the long term. I continue to like this sector, and as long as you buy homebuilders on pullbacks, you’ll do quite well to own them in 2012.


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