Investors may have overbuilt U.S. housing stocks as data has yet to match up with the homebuilder sector’s biggest rally in five years.
The S&P 1500 Homebuilding index of homebuilder companies has surged 32% this year and hit a decade-high. By contrast, the wider S&P Composite 1500 Index has gained less than 9%.
Housing optimists are pinning their bets on strong U.S. job creation, low interest rates, tight housing supply, robust earnings estimates and a lack of recessionary red flags.
Some investors still see opportunities, but others warn the stocks may have run too far.
“The sentiment has been quite positive for housing but where they are today, I’m not a buyer of housing stocks. The stocks have run up faster than the data supports and there are better pockets of value in the market,” said Erin Browne, global macro portfolio manager at UBS O’Connor in New York.
Ms. Browne cited weakening growth in building permits and new projects, known as housing starts, since the first quarter as well as land and labour constraints.
“While new home sales still look solid, they are still low versus historical levels, given the ongoing shortage of skilled labour and buildable lots which is constraining faster growth,” she said.
Data shows first quarter single-family housing starts grew 6% year-over-year and 8.5% in May. Overall housing starts have risen 1.27% so far this year. June data is expected to show an 8.3% increase from May.
“Demand overall has been positive for the builders,” according to Will Randow, analyst at Citi, although he questioned whether it was positive enough to support such an outsized gain. Mr. Randow believes the stocks have risen partly on hopes that policy changes by the administration of U.S. President Donald Trump could help boost home sales.
Earnings growth
Analysts expect most home builders to report solid double-digit earnings growth, according to Reuters data. D.R. Horton Inc., whose quarterly profit is seen rising 14%, and PulteGroup, pegged for 15.5% growth, will report last week of July.
But Mr. Randow says the 2017 median earnings estimate for 12 housing stocks he covers has barely changed in the last three months. “Maybe the stocks have gotten ahead of themselves. It doesn’t necessarily mean we’re going to see any sort of correction in housing starts.”