Homebuilder Update: Taking Stock of the Market

Two charts on tech bubbles show why the homebuilder rally looks frothy

September 28, 2012, 2:11 PM

Buying home-builder stocks at the start of the year has been a very profitable bet. PulteGroup Inc.  PHM -0.19%  shares have skyrocketed 146% year-to-date, while KB Home KBH +0.13%  is up 116% and Ryland Group Inc.  RYL +0.93% has risen 94%. That performance crushes the nearly 15% gain for the S&P 500 SPX -0.45% year-to-date. Read more on housing stocks big run.

However, a chart put together by economists at RBC Capital Markets, LLC shows why investors should consider pocketing some of those outsized gains. The chart tracks the post-bubble behavior of tech and housing stocks.

At current share prices, RBC economists argue home-builder stocks are divorced from fundamentals.

“Recently there seems to be an endless supply of optimism toward housing. As homeowners we are sympathetic to this view. As economists we are appalled . . . consider that the last time home builders were sitting at this level, sales were 3x greater than where we are today,” RBC Capital economists wrote in a report Thursday afternoon.

In the first chart, RBC Capital Markets Chief U.S. Economist Tom Porcelli overlays the S&P 500′s tech index XX:GSPTI +1.57% during the boom-bust period of 1994 to 2003 with the S&P 500 homebuilder index during its later rise — and spectacular crash — between the early part of the 2000′s and late 2007. Indeed, they look scarily similar.

In the second, Porcelli overlays tech’s last pre-crash runup, the period between 2004 and late 2007 as rich bids from private equity firms hiked tech-share prices, with the 2011-2012 rally in builders. They also look like sister peaks in the same mountain range. But the other side of the mountain — the big drop in tech during the recession — looks more like an abyss. From the peak in November 2007, the S&P 500 tech index fell as much as 55% by 2009.

“Putting aside the fundamentals, home-building stocks are exhibiting similar post-bubble behavior to that of the technology bubble that popped back in 2000. Both followed very similar patterns during the bubble cycle and home builders now seem to be tracking the post-bubble reflexive rebound that was also witnessed in tech stocks. The thing about reflexive rebounds is that they are, well, reflexive. Food for thought.”

– Matt Andrejczak

Author: kimhuntkw

We specialize in Real Estate in the Pleasanton, Dublin and Livermore areas of the East Bay in California

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