Is It Too Late to Buy Homebuilder Stocks?

Red-hot rally suggests the easy money is long gone

Some mixed news on the housing front Wednesday was the latest bit of evidence that red-hot homebuilder stocks might have gotten ahead of themselves.

Yes, more than six years after the housing bubble popped, the data finally appear to be flashing a definitive bottom in both home prices and demand.

Fiscal Cliff: Nothing to Fear But Fear Itself
Fiscal Cliff: Nothing to Fear But Fear Itself

But shares in some homebuilders have more than doubled in the past year, raising the question: Are stocks in the sector forming a new bubble of their own?

In a rare miss in an otherwise strong stream of housing data, sales of existing homes came up short of Wall Street estimates Wednesday. The annualized sales pace of homes already on the market rose a seasonally adjusted 2.3% to 4.47 million units in July, the National Association of Retailers said. Although that was an improvement over June’s figure of 4.37 million units, it missed economists’ estimate for 4.55 million.

At the same time, Toll Brothers (NYSE:TOL) had some unambiguous good news Wednesday: It easily beat Wall Street’s quarterly earnings forecasts, as profit rose 46% on double-digit revenue gains.

Toll makes new homes for luxury buyers in the Northeast and mid-Atlantic, so it’s not exactly a barometer for the national market — but it did add to the evidence of a much improved housing market.

“We are enjoying the most sustained demand we’ve experienced in over five years,” CEO Douglas Yearly said in a statement. “We believe the housing recovery is being driven by pent-up demand, very low interest rates and attractively priced homes. Customers who have postponed buying for a number of years are moving into the market.”

That’s a sentiment echoed by some key bellwether names.

PulteGroup (NYSE:PHM), which is a better indicator of the health of the national housing market, swung to a profit in the most recent quarter on double-digit revenue gains. New home orders and higher selling prices helped fuel the better performance.

Stocks, however, are forward looking, and have been baking in the housing upswing for some time. That means if you’re not already holding a position in homebuilders, it might be too late.

The popular homebuilders exchange-traded fund, SPDR S&P Homebuilders (NYSE:XHB), is up 35% year-to-date versus a 12% gain for the S&P 500. More amazingly, the ETF has leaped 72% in the past 52 weeks, beating the broader market by a whopping 50 percentage points!

That has left the ETF at fair value, by fund researcher Morningstar’s estimates. XHB currently is trading north of $23, but Morningstar says you should only consider buying when it retreats to about $18. In other words, it would need a full-blown 20% correction to make the valuation compelling.

A number of individual stocks look to be stretched even further. PulteGroup has more than doubled in 2012 and jumped 270% in the past 52 weeks. Hovnanian (NYSE:HOV) is up 80% year-to-date, while Lennar (NYSE: LEN), KB Home (NYSE:KBH) and Toll Brothers are up more than 60%.

True, we’ll get more news Thursday with the release of new home sales, and the Street is expecting further gains. But the recovery in the housing market is hardly a secret. The fast money has been bidding up the stocks for more than a year. That makes valuations suspect and raises the risks of a sell-off.

The idea, remember, is to buy low — and the easy money looks like it already has been made.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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