A new bubble for homebuilding stocks?

Major homebuilders have soared since early October, and some analysts say there's no real justification for the rise.

By Kim Peterson Dec 14, 2011 4:23PM
The single-family housing market is a mess. So why are homebuilder stocks so high?

A foreclosure glut is still dragging the sector down. The National Association of Realtors just said the market downturn was worse than it thought. Freddie Mac's chief economist is predicting "another bumpy ride" for 2012.

But shares of D.R. Horton (DHI) were up nearly 50% this week from early October. Toll Brothers (TOL) was up more than 45% in that time. Lennar (LEN) was up more than 50%.

Post continues below.
It's nice to see investors so optimistic about the spring home-selling season, but that kind of share price growth is just too much. And analysts are jumping in with the downgrades, taking homebuilding stocks down a notch or two.

Let's start with D.R. Horton, which makes homes between 1,000 and 4,000 square feet. It only closed 21,000 homes last year, and its stock price was approaching $13 earlier this week.

Stifel Nicolaus hit it with a "sell" rating Wednesday, placing an estimate of $10 on the shares. FBN Securities previously downgraded to "sector perform." But two other analyst firms were a little more optimistic. Barclays went with an "overweight" earlier this month, and Raymond James upgraded to "outperform."

Shares of D.R. Horton fell 3% Wednesday to $11.69 in afternoon trading.

Toll Brothers, which builds luxury homes and other properties, also got a "sell" from Stifel Nicolaus, with analysts saying the stock has recently approached multi-year highs. The analysts added that they didn't see anything on the horizon that will boost shares further.

Toll Brothers had jumped from $13.75 in early October to $21.30 on Dec. 6. The analysts said investors have priced an unrealistically fast housing recovery into the stock, according to the Associated Press.

A KeyBanc analyst downgraded Lennar and Toll Brothers on Monday. Lennar focuses on building homes for first-time and move-up buyers, and analyst Kenneth Zener dropped his rating to "hold."

"We think optimism tied to the seemingly perennial 'spring trade' and positive housing data is unwarranted with credit cycle fundamentals (foreclosure overhang and weak job growth) set to persist longer than most currently think," Zener wrote, according to Investor's Business Daily.

Lennar has risen from below $13 in early October to close to $20 this week.

Tags: DHILENTOL
1Comment
Dec 14, 2011 9:26PM
avatar
The real bubble is in rents. Those walking away from homes are facing reailty of rents going through the roof. Rents are much higher than house payments in most cases. Sticker shock for new renters. 7 billion people on the planet need somewhere to live. Vacant real estate is in demand but those with failed credit do not qualify today. Doing the walk away hits hard there and when real estate goes back up - coulda, shouda, woulda held on. People are doing fantastic buys on real estate at rock bottom prices. Half the price of rents is a reality in mortgages at low interest rates. Rents are ballooning with no slow down insight.
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