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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 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, "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 September

The 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."

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