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Home Prices Rise, but Builders Look Frothy

Beware: The sector's stocks may have gotten ahead of reality


There’s a glimmer of hope for the housing market.

The U.S. economy may be close to stall speed as China slows dramatically and Europe slogs through its own mess, but home prices appear to have stabilized. Heck, they’re even oh-so-close to posting year-over-year gains.

More than half a decade after the housing bubble burst, home prices have risen for two months in a row and very nearly turned positive year-over-year, according to the latest data from the S&P/Case-Shiller Home Price Index.

But that doesn’t necessarily make homebuilder stocks a buy these days. The market, remember, is forward looking, and it’s already bid up shares in the sector amid a stream of improving data, analysts warn.

The good news for homeowners, at least, is that years of consumers paying down debt, a drop in excess inventory and record-low mortgage interest rates may have finally kicked in to arrest the slide in home prices.

The S&P/Case-Shiller index, a composite of prices for 20 major metro areas, rose for the second straight month in May, increasing 2.2% from April. Even better, every city in the index showed gains. Chicago led the pack with a 4.5% increase in May vs. April, with Atlanta and San Francisco not too far behind. But even Detroit — yes, Detroit, the poster child for home-price freefall — showed a gain, even if it was just 0.4%.

The big caveat, of course, is that the April and May data cover springtime — the most seasonally strong months for home sales. If the trend doesn’t continue through summer and fall, well, it’s just another false start.

Meanwhile, on a year-over-year basis, home prices still declined, but only by 0.7%, which blew past Wall Street forecast for a 1.4% drop. True, prices are still falling on an annual basis, but the most recent drop was the best reading in 18 months. See the chart courtesy of S&P below:

“June data for existing home sales, new home sales, housing starts and mortgage default rates were a bit mixed, but all are better than their year-ago levels,” said David Blitzer, chairman of the index committee at S&P Dow Jones Indices, in a media release. “The housing market seems to be stabilizing, but we are definitely in a wait-and-see mode for the next few months.”

However, the stock market sure hasn’t been in wait-and-see mode when it comes to homebuilder stocks and exchange-traded funds. They’ve been rallying sharply on the improvement in house prices, and could very well be poised for a fall, warn Citigroup (NYSE:C) analysts Will Randow and Thomas Insalaco, Barron’s notes.

The SPDR S&P Homebuilders ETF (NYSE:XHB) is up 26% for the year-to-date, and some individual homebuilder stocks have gained even more. Pulte (NYSE:PHM) has jumped 84%, and Toll Bros. (NYSE:TOL) has rallied 47%.

That has the homebuilder sector due for a correction, the analysts say, especially now that we’re in the typically slow summer season.

So if you’re a homeowner, enjoy the good news, at least while it lasts. If you’re an investor, you probably don’t want to initiate a position in the sector at current levels. You might even want to take some profits if you’ve already enjoyed some of these gains.

As of this writing, Dan Burrows held none of the securities mentioned here.

Article printed from InvestorPlace Media,

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