Are housing stocks ready to fly?

After spending most of the year bouncing along the bottom, homebuilders are on the move again.

By Anthony Mirhaydari Dec 10, 2010 3:53PM

The housing market just can't catch a break. The expiration of the government's homebuyer tax credit resulted in a double-dip of sales activity over the summer. And now, prices are sliding again.

 

To make matters worse, the recent selloff to hit bonds -- which was the subject of my last post -- is pushing mortgage rates higher. The 30-year fixed mortgage rate has climbed from a record-low of 4.17% just a few weeks ago to more than 4.6% now. That's hitting housing affordability at just about the worst possible time as the "shadow" inventory of foreclosed homes starts to hit the market as the foreclosure moratorium related to shoddy bank paperwork comes to an end.

 

And by extension, the same goes for housing stocks. While the overall stock market is pushing to new multi-year highs, the Homebuilders Index ETF (XHB) has been stuck in purgatory since falling from its April highs and is down nearly 14% over the period. The same goes for its constituents, including Toll Brothers (TOL), PulteGroup (PHM), KB Home (KBH). But now, there is evidence that buyers are returning to the sector.


What, you ask, could be the motivation? Although the rise in mortgage rates is a negative, they are being driven in part by expectations of higher economic growth. And that, in turn, will help drive job growth and income growth. A relaxing of loan standards, as evidenced by recent loan officer surveys by the Federal Reserve, is also a big positive.


UBS economist Maury Harris recently published a note on the subject and evaluated the "sequential causal chain extending from easing credit conditions to more jobs and then to higher household formation and homeownership demand -- two key to reducing vacancies and thereby stabilizing home prices."

 

Because of these factors, Harris is looking for home prices to stabilize by the fourth quarter of 2011.

 

 

Investors seem to be pricing in this optimistic scenario by moving back into homebuilder stocks over the last two weeks.

 

The XHB has enjoyed a surge of buying interest and has moved up and over its 20-, 50-, and 200-day moving averages. A solid new uptrend has been established as the sector demonstrates relative strength against the S&P 500 -- an indication that the gains will continue.

 

Be sure to check out Anthony's new investment advisory service, The Edge. The author can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.  

 

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