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Housing Stocks Heat Up

The news in housing has been decidedly less bad lately. Construction spending rose 1.2%. Housing starts rose 9.3%, and building permits increased 5.7%. New home sales were up 1.6%. Homebuilder confidence has been up for three consecutive months. The good news is leading to suggestions that we may finally be seeing a bottom forming in the housing market.

And homebuilder stocks have been on a tear for the past few months. Since the October bottom, homebuilders have been market outperformers. The Dow Jones US Home Construction Index has taken off relative to the S&P 500.

The recent healthy housing data is great…but the improvements are lagging behind the run-up in housing stocks. What foothold the housing sector has managed to gain doesn’t quite justify the enthusiasm for homebuilder stocks.

Here’s the thing: much of the healing in housing has been in the multi-family space. And while we have seen some improvement, 2011 is still on pace to be the slowest year for new home sales on record. And home prices are still posting broad declines.

There are still headwinds facing the housing market, and homebuilder stocks have really gotten ahead of themselves lately…and it’s not likely they will be able to keep this up. In other words, don’t chase the homebuilder rally.

The iShares Dow Jones US Home Construction ETF (ITB) is up 34% over the past three months. And while a buy signal has been technically indicated, the recent run-up has this fund looking too hot right now, so I wouldn’t be a buyer.

The same can be said for the SPDR S&P Homebuilders ETF (XHB). The fund has gained around over 40% from the bottom, but shares are too frothy to make this look attractive.


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