(Adds pending home sales report and shares of construction-materials makers.)
) -- Homebuilder stocks have jumped as much as 45% over the past three months, and are being buoyed today by a report showing pending home sales greatly exceeding economists' estimates.
The National Association of Realtors' index of pending home sales rose 7.3% to the highest since April 2010, compared with forecasts of a 1.5% gain. But the question remains whether it's a fragile rally based on overly optimistic expectations for the economy or an early sign that a sustained real estate recovery is in the offing.
Investors put out the welcome mat for homebuilders in the first half of the year, pushing up their share prices despite the worst pace of new-home sales since the Great Depression on expectations of a long-awaited rebound after the 2008 and 2009 slump.
But the industry couldn't step up sales, and shares slumped, as the nation faced continued economic headwinds from as far away as Japan.
It's been a volatile ride for homebuilders' shares this year as they rose steadily in the first half of the year, then plunged 29% in the third quarter, only to rally 25% over the past three months. That leaves the
iShares Dow Jones U.S. Home Construction Index Fund
at a loss of 10% for all of 2011. The broader
S&P 500 Index
is down 0.6% this year after having gained 8.3% in three months.
But the new-home market recovery appears tenuous. In October, single-family new-home starts increased from the previous month, but remained close to record lows and were down about 1.5% versus a year earlier, according to the latest data from the S&P/Case-Shiller National Home Price Index.
Among the issues keeping potential new-home buyers on the fence is the threat of continued declines in home prices, concerns over job security and tougher borrowing standards on the part of lenders.
There are some positive economic signs that would support a view that it may be time to start nibbling at these stocks. For example, the unemployment rate fell to 8.6% in November, the lowest level in more than 2 1/2 years, while consumer confidence is rebounding strongly, according to the Conference Board's index of consumer confidence, as it jumped in December to its highest level since April.
And Goldman Sachs said in a Dec. 15 report that "the housing-price bottom is probably in sight," but added that housing prices might decline as much as 3% in 2012 before starting to recover.
Still, many expect that even a slight recovery, coupled with years of pent-up demand, will bring the industry a pop.
And few want to see a turnaround for homebuilders more than mutual fund manager Fidelity, which has a longstanding bet on the sector and is the largest shareholder in several homebuilders -- in some instances holding a stake of as much as 15%, or two to three times that of the No. 2 shareholder.
Nevertheless, the question remains when an industry recovery will gain traction. Industry analysts remain cautious. "We see tepid demand for new-homes sales in 2012 with pricing expected to be flat to slightly lower," S&P Capital IQ said in a Dec. 27 research note. "(Home shopper) traffic to new-home communities remains very slow, and we believe low mortgage rates will not boost demand."
said a Dec. 23 research note that "given the more challenged macro environment and our more muted demand outlook for 2012, we believe valuations will likely remain depressed relative to historical averages over at least the next two to three quarters."
The industry's group of leaders has slimmed down over the past few years to about a half-dozen homebuilders, and the majority of them are expected to regain their strength when an economic recovery does indeed lead to a rebound in demand.
Along with an increase in homebuilders are construction-materials companies.
was at one point today the biggest gainer in the S&P 500, rising more than 6%. It's up 47% this quarter. Cement maker
has surged 71% in three months.
Here, then, is the outlook for the nation's six biggest new-home builders and how they're different from one another:
Lennar, one of the largest in the industry with a market cap of $3.5 billion, builds and sells new homes targeted at value-oriented, first-time purchasers. It operates in 14 states.
up 3.8% this year, including a 41% jump in the past three months.
Given its target market, Lennar should be one of the biggest beneficiaries in an economic rebound. JPMorgan Chase rates Lennar one of its top picks in the sector, with an "overweight" rating, but remains cautious on the industry as a whole.
But S&P downgraded its shares to "hold" from "buy" on Tuesday, citing industry weakness and the company's recent rapid share-price appreciation. Fidelity loves this stock, with a 15% stake, about 3 1/2 times that of the next largest shareholder, but it has been the top shareholder for most of the past year.
KB Home is one the five largest single-family homebuilders in the country. It builds attached and detached single-family houses, townhomes and condominiums aimed at first-time and active-adult buyers.
down 50% this year, but up 10% in the past three months.
has its shares rated "hold," saying the "risk of ongoing cash concerns" were offset by strong order growth in its most recent quarter.
S&P Capital IQ also rates it "hold," but forecasts that "revenues will rebound 15% in 2012 on an expected recovery in the housing market" in the second half of the year. Fidelity owns 14.6%, about three times that of the next largest shareholder.
Goldman Sachs (GS) last week said it is maintaining its "neutral" rating on KB Home following a "lackluster" quarterly report. It adds that "the company may have set itself a high bar for 2012 in terms of expectations for margin improvements and top line." Its price target of $6.50 gives it a 7 cent upside from the current price.
Toll Brothers has a market value of $3.3 billion, making it one of the largest new-home builders. It differentiates itself by focusing its efforts on building high-end homes and so may recover faster than its competitors since the recession has hurt the wealthy less than the middle class.
up 5.7% this year, including a 34% gain in the past three months.
Morningstar's analysts are upbeat on Toll's future, saying "the firm's well-managed indebtedness, lean operations and disciplined adherence to the luxury market make it a likely big winner once volumes normalize."
JPMorgan has it rated "overweight." Fidelity has 15% of its shares, three times that of the next largest shareholder.
D.R. Horton, with a market value of $4 billion, is the nation's second-largest homebuilder. It operates in 71 markets across 26 states, targeting mostly entry-level and first-move-up buyers.
up 4.8% this year, including a 32% gain in the past three months.
S&P has its shares rated "hold," on price, but likes its $1 billion in cash on the balance sheet and its $1 billion order backlog. S&P said: "Net new orders and contract backlog will show seasonal weakness in the first two quarters of fiscal 2012 before improving."
upgraded its rating on the company to "overweight" from "equal weight" three weeks ago. Fidelity owns a 14.3% stake, double that of the next-biggest shareholder.
Also with a $4 billion market value, Pulte is one of the country's largest residential builders, targeting first-time and active-adult buyers through its Centex, Pulte and Del Webb brands. It operates in 70 markets in about 30 states.
down 20% this year, but up 45% in the past there months.
S&P has the shares rated "buy" and gives the company four stars in its five-star rating system, as it sees sales rebounding 9% in 2012 "in an expected housing-market recovery" and the view that it will gain market share.
Fidelity is the second-largest shareholder at 4.5%, having cut its holdings by almost 60% in the third quarter.
A major industry player, with a market value of $3.5 billion, NVR operates in several markets across 14 states. It targets first-time and move-up buyers.
down 2.7% this year, including an 8.3% gain in the past three months.
S&P has it rated "buy" with four stars, citing a promising order backlog of $1.2 billion as of Sept. 30, up 3% year-over-year.
In the third quarter, the company's sales increased 5% over the prior year after two straight quarters of double-digit declines. NVR has an aggressive share-buyback program.
Morningstar says investors "won't find a more profitable homebuilder than (this) in good times or bad. A unique business model allows the company to mostly operate without the burden and risk of carrying large amounts of land, lessening the impact of cyclicality and increasing asset turns."
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.