Homebuilders' Valuations Are Extremely Speculative
NEW YORK (TheStreet) -- The housing market has become overvalued fundamentally and overbought technically after astronomical gains since October 2011 and year to date. The construction sector is 8.4% overvalued according to www.ValuEngine.com and my benchmark for the sector, the PHLX Housing Sector Index (HGX), is extremely overbought on its weekly chart, and has been overbought since the week of Aug. 10. The HGX is up a whopping 113.8% since Oct. 2011, and up 52.9% year to date.
I have been tracking the homebuilder stocks since 2005 when I predicted the housing bubble and recommended booking profits on the homebuilders. On June 21, 2005, I wrote this for Realmoney.com, "Homebuilders' Charts Testing Hearts," and included the table of levels shown below.
The takeaway from the table is that all of the homebuilders listed were overvalued by 3.8% for DR Horton to 25.1% for KB Homes back on June 17, 2005. Today the Buy rated homebuilders are 2.9% to 62.0% overvalued. In terms of P/E ratios back in 2005 the range was between 9.1 and 15.1 times forward estimates compare to today's range of 30.2 to 149.1 times. Back in 2005 I described those P/E ratios has high by historical measures. These statistics are reason enough to book profits on homebuilder stocks and for investors to avoid the group for now.
Recent data on the housing market continue to show slow and steady improvements in the market for new homes.
Homebuilder Confidence Rose Again in SeptemberThe National Association of Home Builders reported that their Housing Market Index rose to a reading of 40 in September, a rise of three points from August, the fifth consecutive month of improvement. Even so, the Housing Market Index remains 10 points below the neutral reading of 50, and the NAHB described the release as "still having a long way to go on the road to recovery as several obstacles are slowing our progress." The major concern remains "that unnecessary tight credit conditions are preventing many builders from putting crews back to work."
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV