NEW YORK ( Stockpickr) --The verdict is in: The housing market is officially in bloom.
At least that's what the share prices of the major homebuilders are signaling. These stocks have posted such stunning gains over the past few years that you'd think we're right back in 2006, the last time this industry was booming. The PHLX housing index has risen a hefty 150% in just 18 months.
But it's far too soon to sound the "all clear" for housing stocks as stiff headwinds remain.In recent quarters home sales have been perking up, aided in large part by very low interest rates. Yet as the U.S. economy starts to strengthen from here, so will mortgage rates. And as rates rise, fewer mortgage applicants will qualify for loans. Supply is another factor you should be concerned about. Investors, from major hedge funds to local retirees, have been snatching up distressed properties in hopes of eventually flipping them for a quick buck, leading to a relative shortage of homes for sale. Yet with home prices already rising at a double-digit annual pace in many markets, these speculative investors may soon look to start unloading the homes they bought, adding a broad supply of homes to the market. And supply of those homes could easily blunt the hopes of homebuilders that had hoped to entice buyers into new homes. >>5 Defensive Stocks to Protect Your Portfolio Gains Analysts at UBS cite two other concerns: "The cost of better located land has risen faster than home prices, reflecting limited availability and the concentrated nature of the recovery. Further, cost pressures associated with labor and materials will likely intensify as the supply chain slowly rebuilds." With these potential headwinds in place, the environment has simply become too risky to chase homebuilder stocks at this point in hopes of yet more gains. In fact, many of these stocks look ripe for pullbacks if the housing market fails to grow at a pace that the major share price gains already imply. Here are three homebuilder stocks that look ripe for profit-taking or even shorting. >>4 Huge Stocks Ripe for a Sharp Pullback