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Housing stocks may not be on terra firma

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NEW YORK: 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 per cent this year and hit a decade-high earlier this week. By contrast, the wider S&P Composite 1500 Index has gained less than 9 per cent.


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 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 per cent year-over-year and 8.5 per cent in May. Overall housing starts have risen 1.27 per cent so far this year. Next week’s June data is expected to show an 8.3 per cent 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.


DOUBLE-DIGIT GROWTH: Wall Street analysts expect most homebuilders to report solid double-digit earnings growth, according to Reuters data. DR Horton Inc, whose quarterly profit is seen rising 14 per cent, and PulteGroup, pegged for 15.5 per cent 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 this 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 per cent 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 per cent for 2017, followed by NVR Inc, up 51.4 per cent.


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.


Still, some investors still see value.


Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas, likes DR Horton and LGI Homes, and expects a home shortage to boost prices.


“Maybe there’s another 20 per cent in these stocks over the next 12 months, assuming that interest rates stay relatively low,” said Bradshaw. “I still think there’s plenty of home buyers and not that many homes.”


US STOCKS: The Dow and S&P 500 hit record highs on Friday after weak economic data dulled prospects of more interest rate hikes this year.


A decline in financial shares limited the day’s gains, even though JPMorgan Chase & Co and other big banks delivered quarterly results that beat Wall Street expectations.


Data showed consumer prices were unchanged in June and retail sales fell for a second straight month, pointing to tame inflation and subdued expectations of strong economic growth in the second quarter.


Chances of a rate hike in December fell to 48 per cent after the release of data, from 55 per cent late on Thursday.


The S&P financials, which benefit from a rising rate environment, fell 0.5 per cent, and the group was the only one of the S&P 500 sectors down on the day.


The Dow Jones Industrial Average was up 84.65 points, or 0.39 per cent, to 21,637.74, the S&P 500 gained 11.44 points, or 0.47 per cent, to 2,459.27, and the Nasdaq Composite added 38.03 points, or 0.61 per cent, to 6,312.47.


The CBOE Volatility index closed at its lowest since December 1993.


For the week, the Dow was up 1.1 per cent, the S&P 500 was up 1.4 per cent, and the Nasdaq rose 2.6 per cent.


The Nasdaq’s percentage gain for the week was its biggest so far this year.


The small-cap Russell 2000 index, which has underperformed the S&P 500 this year, also ended at a record high. About 5.3 billion shares changed hands on US exchanges. That compares with the 6.7 billion daily average for the past 20 trading days, according to Thomson Reuters data. — Reuters


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