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Two Bad Housing Reports in a Row Might Signal Trouble

By now, you should know that real estate and housing stocks are resurgent.

The SPDR S&P Homebuilders ETF (NYSE:XHB) is up 44% in the last year. Toll Brothers (NYSE:TOL) is up 54%. D.R. Horton (NYSE:DHI) is up 62%. PulteGroup (NYSE:PHM) is up 124%.

But that’s old news. What investors need to figure out is whether the boom will continue.

I continue to have fears that new money is buying a top in housing, but it’s hard to argue with the tape. So far in 2013, the builders have continued their outperformance, as have secondary housing plays like Home Depot (NYSE:HD) and Lumber Liquidators (NYSE:LL).

However, we’re starting to see some chinks in the armor of this heroic housing rally.

  • Builder Optimism Wanes: On Tuesday, the National Association of Home Builders announced that confidence slipped into negative territory in January. “Following solid gains over the past year, builder confidence has essentially leveled out,” said NAHB Chairman Rick Judson in a USA TODAY article. This might just signal a natural rollback in high growth rates for builders, but it’s noteworthy.
  • Housing Starts Are Down: The Census Bureau reported that January housing starts hit a seasonally adjusted annual rate of 890,000. That’s an 8.5% drop from December — though admittedly up 23.6% from January 2012. Unfortunately, the forecast was for a much smaller drop of about 5%.

Those are two bad indicators for future growth — and now that we have some signs of trouble, tomorrow’s existing home sales report will be closely watched.

Of course, the trajectory remains “less good” at worst. Consider that prices for single-family homes climbed in 88% of U.S. cities in the fourth quarter, and that the Census Bureau reported separately that permits hit a four-year high.

But you have to wonder how sustainable this rally in housing stocks is. Whether real estate prices are firm is only one factor. Considering the massive run-up in homebuilder stocks and other equities, we might be at an inflection point where sentiment has peaked and the sector is becoming short on upside.

Remember: Housing stocks can decline even if housing overall is recovering.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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