Homebuilders Are Risky Bets Despite Positive Data

NEW YORK (TheStreet) -- Home prices have been rising, builder confidence has been improving, but the rise in single family housing starts slowed in October. At 10 a.m. we get the New Home Sales data for October, which is projected to have slipped somewhat.

In my last story covering the home builder stocks on Oct. 25 I wrote Homebuilders Are Overvalued and Overbought, and the overvalued condition still holds today. At www.ValuEngine.com we show that the construction sector is 13.7% overvalued with the building -- resident/commercial industry -- 29.1% overvalued. Even so, six of the eight stocks I am profiling today are rated buy, one is rated strong buy and one is rated hold. On Oct. 25 I projected that these stocks may have rallied too far too fast, and I stand by that call.

The home builder stocks have been moving sideways since the middle of September as shown in the weekly chart for the PHLX Housing Sector Index ( HGX). Four of the eight stocks I profiled on Oct. 25 have declined since, two moved sideways and two moved higher.

The weekly chart for HGX (165.04) shows declining momentum with the index above its five-week modified moving average at 161.44, which is a neutral weekly chart profile. My monthly pivot is 163.92 with a weekly risky level at 167.62. My quarterly value level lags at 145.84.

Chart Courtesy of Thomson/Reuters

In a speech on Nov. 20 Fed Chief Bernanke described the housing market as showing some clear signs of improvement on rising sales, higher prices and increased construction. He described these developments as encouraging saying that this segment of our economy will be a source of economic growth and new jobs over the next couple of years.

Bernanke hedged this optimism acknowledging that despite record low mortgage rates, lenders continue to enforce tight credit standards even for potential borrowers with good credit scores. Lenders complain about uncertain economic conditions and the stiffening regulatory environment.

Bernanke also explained that the housing recovery was slower than normal because potential buyers of new homes cannot sell their current homes because they are underwater on their mortgages. Despite the low inventory of existing homes for sale, Bernanke says that there's a "a substantial overhang of vacant homes, either for sale or in the foreclosure pipeline that continue to hold down house prices and reduce the need for new construction."

The National Association of Home Builders recently reported that their Housing Market Index rose a solid five points in November to 46. This was the seventh consecutive monthly gain to the highest level since May 2006, which is a month before the bubble in home prices popped.

Builders reported increased demand for new single family homes as inventories of foreclosed and distressed properties decline. Buyers were said to be looking to take advantage of record low mortgage rates.

Keep in mind that a reading of 46 for NAHB HMI is still below the neutral reading of 50, and difficult appraisals and tight credit standards for both builders and new home buyers remains quite tight.

The chart below shows single family housing starts lag the HMI significantly.

Housing Starts rose 3.6% in October to an annual rate of 894,000 units, but the important Single Family Starts fell 0.2% to 594,000 units, which does not correlate with the five-point rise of the NAHB Housing Market Index to 46 in November. Building permits, the leading indicator for future starts, is also not confirming the NAHB HMI with a decline of 2.7% to 866,000 units annually.

The S&P Case/Shiller 20-City Home Price Index rose 0.3% month over month in September, the sixth consecutive monthly rise, and rose 3.0% year over year. The index is up 9.0% from its March 2012 low, but is still down 29.0% since the housing bubble popped in June/July 2006.

Reading the Table

OV/UN Valued: The stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-engine" rating is a strong sell, a "2-engine" rating is a sell, a "3-engine" rating is a hold, a "4-engine" rating is a buy and a "5-engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last twelve months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next twelve months. Stocks with a black number in the table are projected to move higher by that percentage over the next twelve months.

Value Level: The price at which to enter a GTC limit order to buy on weakness. The letters mean; W-weekly, M-monthly, Q-quarterly, S-semiannual and A-annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: is the price at which to enter a GTC limit order to sell on strength.

D R Horton ( DHI) ($19.58 vs. $21.41 on Oct. 25): Since Oct. 25 buy-and-trade investors could have sold versus my monthly pivot at $21.35 then buy on weakness to my quarterly value level, now a pivot at $18.11.

Hovnanian ( HOV) ($5.49 vs. $4.44 on Oct. 25): -- After a gain of 325.6% over the last 12 months it is time to book profits against my weekly risky level at $5.71.

KB Home ( KBH) ($14.61 vs. $16.72 on Oct. 25): Has been upgraded to buy from hold since that Oct. 25 post. After a gain of 120.7% over the last 12 months consider booking profits on strength to my weekly pivot at $16.41.

Lennar ( LEN) ($38.72 vs. $38.20 on Oct. 25): Lennar is 56.8% overvalued and up 136.8% over the last 12 months with a price-to-earnings ratio of 39.6, which are reasons enough to book profits.

Pulte Group ( PHM) ($17.11 vs. $17.45 on Oct. 25): Pulte gained 227.8% over the last 12 months with a P/E of 32.6, so it's time to book profits.

Ryland Group ( RYL) ($33.72 vs. $32.79 on Oct. 25): Since Oct. 25 buy-and-trade investors could have sold versus my weekly risky level at $35.30 then buy on weakness to my monthly value level at $30.37. Ryland's P/E is the most elevated at 74.7.

Standard & Pacific ( SPF) ($6.90 vs. $7.79 on Oct. 25): Has been upgraded to buy from hold since Oct. 25 and is above its 200-day simple moving average at $5.78. Since Oct 25 buy-and-trade investors could have sold versus my weekly risky level at $7.83 then buy on weakness versus the 200-day SMA at $5.69 on Nov 15.

Toll Brothers ( TOL) ($32.22 vs. $35.25 on Oct. 25): Since Oct. 25 buy-and-trade investors could have sold versus my monthly pivot at $35.57 then buy on weakness to my annual value level at $29.30.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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