Housing stocks may not be on terra firma

Investors may have overbuilt US 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 decadehigh earlier last week. By contrast, the wider S&P Composite 1500 Index has gained less than 9%.

Housing optimists are pinning their bets on strong US 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.

Brown cited weakening growth in building permits and new projects, known as housing starts, since the first quarter as well as land and labor constraints.

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. This week’s 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 by the group.

Randow believes the stocks have risen partly on hopes that policy changes by the administration of US President Donald Trump could help boost home sales.

Wall Street 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% earnings growth, will both report in the last week of July.

But 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.”

Earlier last week, Barclays downgraded four US homebuilders, citing a buyer traffic pullback in its June survey that was inconsistent with rising valuations.

Short interest in seven homebuilders – the four biggest and the three biggest year-to-date gainers – has risen by 20% for 2017, with much of that increase coming in June and July, according to financial analytics firm, S3 Partners.

Of the seven, the biggest recent short-selling increase was in LGI Homes, whose shares are up 46.6% for 2017, followed by NVR Inc., up 51.4%.

And recent trading in SPDR S&P Homebuilders ETF has leaned toward defensive bets with options positioning implying investors are on guard against a near-term decline.