More Gains In Store For Homebuilders

The housing market reached a milestone in January that al-most no one noticed. The S&P CoreLogic Case-Shiller Composite, an index that tracks average home prices in 20 U.S. cities, finally rose above the record set in April 2006. Is it cause for celebration or trepidation?

- James K. Glassman

A bit of both. The good news is that more Americans are getting a home of their own, and those who already have one are seeing the value of a valuable asset rise. The bad news is that, by historical standards, homes may be getting too expensive. “Of the nation’s 50 largest housing markets, 52% were considered overvalued in April,” reported CNBC, drawing on a housing consulting firm’s analysis.

After the housing bubble popped in 2006, prices continued to drift lower for years, not reaching bottom until 2012. Since then, they have risen more than 50%. And the boom shows no signs of abating. It costs, on average, 6.9% more to buy a house than it did a year ago.

Companies that buy land and build homes on it have been huge beneficiaries. PULTEGROUP (SYMBOL PHM, $30) more than doubled its revenues from 2011 to 2017, and the Value Line Investment Survey expects growth of 12% this year. Home builder stocks have extreme ups and downs. Although I like to buy shares of good companies and hold on through thick and thin, perseverance is nearly impossible with most home builders. This sector is among the few in your portfolio that can be bought and sold and bought and sold again. (Stocks I like are in bold; prices are as of June 15.)

A good call. There are times when the world gives up on home builders, as though no one will ever construct or sell a new house again. One of those times was in August 2011, when I began my column this way: “Suggest that now might be a good time to buy the stocks of home builders, and you will almost certainly be considered out of your mind.” In the wake of the recession, prices had plunged and prospects were dim.