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Can Housing Stocks Keep Outperforming the Housing Market?

13 December 2012 in Trading Ideas

It seems that a whiff of a bounceback in housing was all it took for housing stocks to go on a tear in 2012.

The Housing Recovery motif, a portfolio of 20 housing stocks is up 15.6% this year. The S&P Homebuilding Index has surged more than 80% this year, whie the S&P 500, representative of the broader marketplace, has increased 13.1% in 2012.

This sort of performance, of course, if a far cry from the tumble that housing stocks took following the housing bust/financial crisis/recession when, for example, the SPDR S&P Homebuilders exchange-traded fund fell by more than 80% from its peak in 2006 to early 2009.

The data does seem pretty unequivocal that housing has turned the corner. As economist Dean Baker recently explained, existing home sales are up more than 10% from year-ago levels, while housing starts have increased 40%.

Meanwhile, home prices continue to show strength. The Case-Shiller 20-City Index, which reports on a two-month lag, rose 0.4% in September, its eighth consecutive gain. It’s now up by 3% over 2011 and has climbed by a 4.6% annual rate.

However, as Baker points out, it’s a legitimate concern as to whether prices can continue the current growth rate. A sharp runup in prices in the bottom tier of the housing market is driving much of the price increases, Baker said, while many of these same markets continue to show a relatively high vacancy rate, as well as rents that aren’t rising especially fast.

That consideration figures into the equation that investors must use to determine whether housing stocks have gotten ahead of the housing recovery itself.

As Paul LaMonica put it rather succinctly on CNNMoney, “The housing market has hit bottom. Problem is, investors already know that.”

LaMonica pointed to the recent decent-but-disappointing earnings reports of homebuilders D.R. Horton (DHI) and Beazer Homes (BZH), as well as a recent tepid forecast from online real estate site Zillow (Z), as a sign that the rally in housing stocks may be in for a pause after an incredible run.

The recent pullback in homebuilding stocks has contributed to a 5.2% decline in the Housing Recovery motif in the past month.

LaMonica suggests that improved housing data may no longer be enough. “Housing stocks need to do more than just confirm that the market is improving,” he wrote. “They have to keep beating expectations to justify the huge run-ups they’ve all had this year.”

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