9/26/2012
By David Urani

More Articles by David Urani

Homebuilder Confidence Back Up

Market Valuation Entering "Fair" Territory

Can Brunswick Float Your Boat?

New home sales according to Census came in at 373k for August, and that was below the 374k from July. But as I'm sure you know by now the Street is conditioned to expect continued growth from this sector. Actually, the Southern region was the only area to drop during the month, with the Northeast rising, and with the Midwest and West mostly flat. But even so, homebuilding stocks are taking a shellacking today, with the Dow Jones US Home Construction Index down approximately 4%. It's not that the housing market has made a major misstep, but that these stocks trade with a premium now after having rallied strongly for a year. The consensus estimate was calling for a 380k result, but to be honest even that may not have impressed the Street which has gotten used to these results outperforming expectations.

There are a number of analysts who say that a lack of inventory is actually holding back sales, myself included. However, considering the spooky economic backdrop these days I'm not convinced it's the primary risk. Nevertheless, with overall sales essentially flat from the previous month I wouldn't call the housing recovery dead by any means.

The bottom line is the reawakening homebuyer combined with a finally realigned supply footprint have set the tone for a long term fundamental recovery. But at the same time, Wall Street knows this already and that's why they've been keen to bid up housing equities to healthy premiums. Thus, any bumps in the road, even minor ones like we saw today, are enough to trigger large scale selling.

If you're looking to invest in housing I think it depends on your timeframe. Over the course of a couple of years this sector continues to have big upside potential, because even though sales have picked up significantly from the depths of last year, they're still way down from a historical standpoint; there were more than 3 times as many homes sold in 2005. Perhaps new home sales may never triple to the bubble levels of 2005, but one could certainly see them doubling over the next few years.

But if you're looking at housing on a more narrow timeframe (which is how the market tends to see it), these stocks' valuation is perilous as I noted above. With a harsh recession in Europe and a slowing China bringing our own economy to a standstill I wouldn't necessarily expect Americans to literally want to bet the house on a new home. Therefore I see further risk of a pullback in housing stocks. I could see another 10% to 20% pullback in the months ahead as they readjust to reality. As you can see in the chart below, when the stocks have strayed too far from actual sales in the past they have tended to revert back more closely to the actual sales trend.

The way I see it, I'm a long term buyer of housing stocks, but am not itching to jump in right now. I will be looking for that aforementioned pullback as a good entry point for a long term holding.

David Urani
Wall Street Strategies