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Terra Firma May Not Be The Base For U.S. Housing Stocks

Terra Firma May Not Be The Base For U.S. Housing Stocks
As data has yet to match up with the homebuilder sector's biggest rally in five years, investors may have overbuilt U.S. housing stocks.
Hitting a record of a decade prices this week, the S&P 1500 Homebuilding index of homebuilder companies has surged 32 percent this year. In comparison, there has been a gain of less than 9 per cent for the wider S&P Composite 1500 Index.
a lack of recessionary red flags, robust earnings estimates, tight housing supply, low interest rates, and strong U.S. job creation are the issues that the housing optimists are pinning their bets on.
While others warn the stocks may have run too far, some investors still see opportunities.
"The sentiment has been quite positive for housing but where they are today, I'm not a buyer of housing stocks. The stocks have run up faster than the data supports and there are better pockets of value in the market," said Erin Browne, global macro portfolio manager at UBS O'Connor in New York.
In addition to land and labor constraints, weakening growth in building permits and new projects, known as housing starts, were cited with Brown.
"While new home sales still look solid, they are still low versus historical levels, given the ongoing shortage of skilled labor and buildable lots which is constraining faster growth," she said.
There was a growth of 8.5 percent in May and 6 percent year-over-year for the single-family housing starts for first quarter, data shows. So far, this year, overall housing starts have risen 1.27 percent. An 8.3 percent increase from May is expected to be shown in next week's June data.
"Demand overall has been positive for the builders," according to Will Randow, analyst at Citi, although he questioned whether it was positive enough to support such an outsized gain by the group.
hopes that policy changes by the administration of U.S. President Donald Trump could help boost home sales, has been partly responsible for the sire in stocks, Randow believes.
According to Reuters data, most home builders are expected to report solid double-digit earnings growth by Wall Street analysts.
Presenting reports in the last week of July will be PulteGroup, pegged for 15.5 percent earnings growth, and D.R. Horton Inc, whose quarterly profit is seen rising 14 percent.
But there has barely been any change in the last three months for the 2017 median earnings estimate for 12 housing stocks he covers, Randow says.
"Maybe the stocks have gotten ahead of themselves. It doesn't necessarily mean we're going to see any sort of correction in housing starts."
citing a buyer traffic pullback in its June survey that was inconsistent with rising valuations, Barclays downgraded four U.S. homebuilders earlier this week.
However, some investors still see value.
A home shortage is expected to boost prices by Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas who also likes D.R. Horton and LGI Homes.
"Maybe there's another 20 percent in these stocks over the next 12 months, assuming that interest rates stay relatively low," said Bradshaw. "I still think there's plenty of home buyers and not that many homes."

Christopher J. Mitchell

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