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TheStreet Open House

Sell Downgrades Weaken Homebuilder Foundations

NEW YORK ( TheStreet) -- The housing market has been a bright spot in a slowly growing economy, but it now seems like this industry has paused. Today I update my profiles for eight homebuilder stocks I have been following, and all have been downgraded, seven now have sell ratings according to www.ValuEngine.com.

In my post on Feb. 21, I wrote Home Builders Hammered by Housing Data where I showed my buy-and-trade strategies for these eight homebuilders. Six of the eight were rated buy despite overvalued valuations and elevated price-to-earnings ratios, hence a recommendation to reduce positions on strength.

Today the construction sector is 23.6% overvalued with the building-residential/commercial industry, which includes the homebuilders 37.1% overvalued. The industry P/E is an elevated 29.5.

This morning we learned that housing starts rose by 0.8% to an annual rate of 917,000 in February with building permits up 4.6% to 946,000. The important single family starts rose 0.5% to 618,000, which continues a trend above the 600,000 threshold that keeps the housing recovery continuing at a modest pace.

On Monday morning we learned that the National Association of Home Builders Housing Market Index slipped to 44 from 46 in March, pausing below the neutral reading of 50. Notice that on the chart below single family starts lag the HMI significantly. The NAHB indicated that the reasons for caution include; "frustrating bottlenecks in the supply chain for developed lots along with rising costs for building materials and labor. At the same time, problems with appraisals and credit availability remain considerable obstacles to completing deals."

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