Two Bad Housing Reports in a Row Might Signal Trouble

by Jeff Reeves | February 20, 2013 9:26 am

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

The SPDR S&P Homebuilders ETF (NYSE:XHB[1]) is up 44% in the last year. Toll Brothers (NYSE:TOL[2]) is up 54%. D.R. Horton (NYSE:DHI[3]) is up 62%. PulteGroup (NYSE:PHM[4]) 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[5], 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[6]) and Lumber Liquidators (NYSE:LL[7]).

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

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[10] 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[15] is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[16] Write him at[17] or follow him on Twitter via @JeffReevesIP[18]. As of this writing, he did not own a position in any of the stocks named here.

  1. XHB:
  2. TOL:
  3. DHI:
  4. PHM:
  5. new money is buying a top in housing:
  6. HD:
  7. LL:
  8. confidence slipped into negative territory in January:
  9. January housing starts hit a seasonally adjusted annual rate of 890,000.:
  10. 88% of U.S. cities:
  11. if you should buy these 3 related housing plays:
  12. housing returning to fashion as an investment:
  13. mortgage applications decrease and rates rise:
  14. here’s a good take on your options:
  15. Jeff Reeves:
  16. “The Frugal Investor’s Guide to Finding Great Stocks.”:
  18. @JeffReevesIP:

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