NEW YORK ( TheStreet) -- The housing market has been a bright spot in what has been a tepid economic recovery. That changed over the past two days with weaker-than-expected housing starts and home builder sentiment.
I have been warning that the rebound in home builder stocks was ahead of the improved housing data, most notably with extremely elevated P/E ratios. Even after Wednesday's price decline the twelve month trailing P/E ratios are between 25.2 and 41.1 as shown in today's table of home builder stock data.
While home builder stocks surged, single family housing starts began to struggle at an annual rate of 600,000, and the National Association of Home Builders (NAHB) Housing Market Index (HMI) set a plateau below the neutral reading of 50.
On Wednesday morning, we learned that housing starts fell 8.5% to an annual rate of 890,000 in January with building permits up 1.8% to 925,000. The important single-family starts rose just 0.8% to 613,000, which is slightly above the 600,000 threshold that reflects a neutral housing recovery.On Tuesday morning, we learned that the NAHB HMI slipped to 46 from 47 in February, leveling out below the neutral reading of 50. The causes for the pause includes uncertainty about the job market and home buyer access the mortgage credit. Some builders cited rising costs for building materials, limited availability of labor and desired lots.
Pre-market Wednesday morning, home builder Toll Brothers Inc (TOL - Get Report) reported that they missed EPS estimates by nine cents, earning just two cents. In addition revenue at $424.6 million was well below the average estimate of $502.17 million. This caused a wave of selling among the home builder stocks I have been tracking.