Housing clearly has been booming in the last year or so. But it’s time to move out of your housing plays, because most of the gains have already been realized and the outperformance is likely to end soon.
Don’t get me wrong — the housing market isn’t going to crash or anything. Data on Tuesday showed continued strength in real estate, with homebuilders increasingly confident and sales outlooks bright.
But as an investor, you have to be realistic about the profits that are left.
Look at the big winners in every flavor of housing:
- Among homebuilders, PulteGroup (PHM) is up 77% in the past 12 months vs. 23% for the S&P 500. KB Home (KBH) is up 88% in the same period
- Among building supply stocks, Lumber Liquidators (LL) is up 150% in the past 12 months, and home improvement retail stock Home Depot (HD) is up 55%.
- Among home furnishing stocks, appliance maker Whirlpool (WHR) is up 99% in the past 12 months, and furniture giant La-Z-Boy (LZB) is up 75%.
- Mortgage servicer Nationstar (NSM) is up 77% in the past year and mortgage insurance provider Genworth (GNW) is up 115%.
If you have shared in these profits, good for you. But it’s time to take that cash off the table.
For starters, the major indices are at multiyear highs, and there is some serious concern about consolidation before there’s another leg to this rally. Valuations across all of these stocks are starting to look at best fair and at worst overblown — and they could be the first victim of more conservative investors looking to rotate into defensive sectors, or at least the next big thing.
Also, interest rates are creeping higher and that could add a few hundred bucks to the average mortgage payment — a deterrent to real estate sales.
Then there’s the ugly macro data that persists. Last week, Barclays cut its second-quarter GDP estimate to 1.0% from 1.6% and JPMorgan Chase cut its Q2 forecast to 1% from 2% previously — and anemic retail sales seem to reinforce the fact that any “wealth effect” from rising stock prices and home values hasn’t translated to more spending or economic growth.
This could all be a head fake, of course, and housing could continue to soar. But it seems prudent to consider alternative investments after front-loaded returns in 2013 and a 12-month run for the housing sector.
Rotation is bound to happen eventually, and housing stocks can’t keep up this run forever.
- It’s official: Housing has recovered. (MarketWatch)
- But good housing data doesn’t always help stocks. (TradeTheNewsroom)
- Remember, homebuilder stocks pulled back 10% just a few weeks ago on Fed worries. (Money Morning)
- Amazingly, subprime borrowers with good credit have been denied help on their loans. (Bloomberg)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.