Betting on a housing recovery

Hopes are rising that the housing market has finally hit bottom. In addition to better-than-expected home sales reports, many homebuilder stocks are surging.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Paul R. La Monica, CNNMoney.com editor at large

paul_lamonica_morning_buzz2.jpg
homebuilders0325.mkw.gif
Stocks have been rallying for the past few weeks. But homebuilders have done even better than the broader market.
What do you think of Geithner's plan to enlist private firms in the bank bailout?
  • It's good - we need their money
  • It's bad - it won't work

NEW YORK (CNNMoney.com) -- Has the housing market finally hit bottom? It's probably too soon to say -- but Wall Street sure seems to think so.

The Commerce Department reported Wednesday that new-home sales rose almost 5% last month after hitting their lowest point ever in January. Economists were expecting a decline of about 3%

This comes on the heels of two reports showing a better-than-expected gain in existing-home sales and the first increase in construction of new homes since June.

Investors have taken notice. The SPDR S&P Homebuilders (XHB) exchange-traded fund spiked about 8% higher Wednesday morning. The ETF includes several leading homebuilders, as well as companies with strong ties to the housing market like Home Depot (HD, Fortune 500) and Lowe's (LOW, Fortune 500) and paint maker Sherwin Williams (SHW, Fortune 500).

Over the past two and a half weeks, a period when the entire market has surged, the homebuilders ETF has been one of the big leaders -- it is up more than 40% compared to about 20% for the S&P 500.

In fact, even though the broader stock market is still down sharply this year, several homebuilding stocks are actually in the black, including D.R. Horton (DHI, Fortune 500), Lennar (LEN, Fortune 500) and Pulte Homes (PHM, Fortune 500).

Now what does all this mean? Are savvy investors declaring that the worst is over for housing and that it's time to start plowing back into homebuilders? Perhaps. Still, it's hard to get overly excited about the recent housing data.

Investors have to be cautious.

Even though some of the February numbers suggest that the that the credit markets may be finally thawing after the Lehman Brothers collapse-induced freeze, many experts warn that isn't the same thing as a healthy housing market -- especially since home prices continue to fall.

In addition, the unemployment rate has risen sharply in the past few months and many economists expect that trend to continue.

So even though mortgage rates have been falling and banks may be more willing to lend now that the Treasury Department has a plan to help them unload some of their most troubled assets, that may not be enough to counter the growing ranks of unemployed who can't buy under any circumstances.

Nonetheless, one fund manager who owns several homebuilder stocks said that even though it's premature to predict a housing recovery, the group has been beaten down so far that it won't take a significant real estate upturn for more share-price gains.

"One month does not a trend make. We're hopefully bouncing along the bottom but happy days are not here again," said John Buckingham, manager of the Al Frank fund. "Still, many of the stocks have been priced for the Great Depression 2. Lots of homebuilders have been generating cash during the downturn and their balance sheets, believe it or not, are in good shape."

Buckingham said he's a little concerned by the sharp recent run-up in the stocks. But he said he still likes shares of several of the larger builders, including MDC Holdings (MDC), Ryland (RYL), D.R. Horton and KB Home (KBH, Fortune 500), for the long-term.

At the end of the day, stabilization in the market is what is needed before a recovery. It's the classic case of learning to crawl before you can walk, let alone run.

Buckingham said that as long as the housing numbers are "getting less worse" that should be treated as encouraging news by investors. He added that even though some may dismiss February's surprising sales strength as a byproduct of more demand for foreclosed homes, any boost to sales is a good sign.

"Clearly there is interest in homes. Whether it's in foreclosure or not, there's still a buyer. That helps put in a floor on prices and could boost confidence," he said.

Another investor in several housing-related stocks agreed that the housing picture looks less bleak. But he added that investors will need to be patient. Just as the housing market didn't collapse overnight, a rebound won't take place quickly either.

"It's exciting that the numbers are perking up and the government's efforts to bring mortgage rates down are helping," said Doug Ober, chairman and CEO of Adams Express (ADX), a closed-end fund that invests mainly in U.S. stocks and owns Ryland, Lowe's and cabinet and plumbing fixtures maker Masco (MAS, Fortune 500). "But I think that probably the market is a little early on this. This is going to be a recovery that will take several years."

Shameless plug alert: Before I started writing The Buzz, I covered the media business for several years at CNNMoney.com. Some of this reporting is the basis of a book I've written about News Corp. CEO Rupert Murdoch called Inside Rupert's Brain, which was published on March 19 by Portfolio, an imprint of Penguin Group (USA).  To top of page

Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.