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4 Downgrades Hit Home Builder Sector

Stocks in this article: DHI HOV KBH LEN PHM RYL SPF TOL

NEW YORK ( TheStreet) -- On Tuesday we learned that the National Association of Home Builders Housing Market Index rose another two points to 47 in December.

This was the eighth consecutive monthly gain to the highest level since April 2006, but the index has been below the neutral reading of 50 since May 2006.

While data for the housing market continues to improve, overly tight mortgage lending standards are preventing many families from buying a new home. The component of the HMI that measures "traffic of prospective buyers" increased by just one point to 36.

The NAHB HMI peaked at 72 in June 2005, and the home builder stock bubble popped in July 2005. The record low for the HMI was 8, set in January 2009, and the home builder stocks bottomed with the broader market in the first week of March 2009.

Wednesday morning we learned that housing starts declined 3.0% in November to an annual rate of 861,000 units. The important single-family starts fell 4.1% to a 565,000 annual pace.

Notice on the graph below that the rise in the Housing Market Index is way ahead of the rise in new single family starts, which fell back below 600,000 in November (not shown).

With the Santa Claus rally gathering momentum this week stocks have become less attractive fundamentally. At we show that 50.3% of all stocks are undervalued, which means that 49.7% are overvalued. Twelve of 16 sectors are overvalued, eight by double-digit percentages led by the construction sector, which is overvalued by 20.2%. The building-residential and commercial industry is overvalued by a staggering 35.3%. Six of the eight home builder stocks I track are overvalued by 25% or more.

The last time I profiled these home builders was on Nov. 28 in Homebuilders Are Risky Bets Despite Positive Data, and since then four of the eight have been downgraded by ValuEngine.

As I mentioned on Nov. 28, the home builder stocks had been moving sideways since the middle of September, but that changed this week as the PHLX Housing Sector Index (HGX) broke out of that trading range, led by four of the eight stocks profiled today.

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