Crowded Houses: Fund Managers Gorge on Homebuilders

Warning to investors in the housing sector: When house parties get overcrowded, that's usually right before things turn ugly.

The relentless, bear-defying strength of the homebuilding stocks -- the Dow Jones Home Construction Index is up 192% over the past two and a half years -- has attracted a lot of recent attention, and cash, from mutual fund managers.

But the latecomers may be chasing performance, getting into a white-hot sector just before it cools. While many skippers say the companies remain good values, others say the sector's earnings are at a peak, and stocks have nowhere to go but down.

In the first quarter of 1999, homebuilders were wallflowers to most managers, who were loading up on technology. For instance, just 27 funds owned positions in Beazer Homes (BZH). Today, 121 own a stake in the builder.

And over the past quarter the number of buyers has surged, according to data compiled by mutual-fund tracker Morningstar for TheStreet.com. From the second quarter to the third quarter, the number of funds that owned Lennar (LEN) increased 34%, while ownership in KB Homes(KBH) and Beazer increased 24% and 29%, respectively.

Beazer Boom The number of funds owning the homebuilder's stock has soared, while its P/E has remained fairly steady

Source: Morningstar, Bloomberg

Centex Rising Mutual-fund ownership in Centex has surged as well

Source: Morningstar, Bloomberg

KB Home Funds have piled into this homebuilder

Source: Morningstar, Bloomberg

Lennar Lennar has gained many fund skippers' favor as well.

Source: Morningstar, Bloomberg

Passion for Pulte The big homebuilder turns up in a growing number of portfolios these days

Source: Morningstar, Bloomberg

"Homebuilding is one of the few sectors that have worked over the last two years. The single-digit price-to-earnings multiples look attractive at first blush. So I'm not surprised fund managers are pouring in," says Todd Voigt, senior analyst at Cliffwood Partners, a Los Angeles real estate investment firm that has been short-selling several homebuilders. "But we feel they are at the peak of their earnings cycle, so we are very bearish about valuations."