Home Sweet New Home

Gordon Scott  |

Lumber prices have been inching higher lately, but it is a mild move compared to what those prices do when you add some paint and hook up utilities. Homebuilder stock prices have risen 50% since the beginning of October and after this week will likely rise further.

Last week I alerted you to the possibility of rising gas prices following a breakout of the price pattern evident on United States Gasoline (UGA), the ETF that tracks the price of gasoline futures. UGA did breakout to start the year along with a host of other stocks. But among the sector tracking ETFs, none was likely as dramatic as SPDR S&P Homebuilders (XHB), the ETF that tracks an index of homebuilder companies.

Rising From the Ashes.

Stocks within this sector have quietly made surprising gains. The more well-known names in this space such as Toll Brothers (TOL), and Hovnanian (HOV) have done well, but companies whose prices have been burned low have risen in rather Phoenix-like fashion.  Ryland Homes (RYL), Pulte Homes (PHM), and Meritage Homes (MTH) have managed gains of 80 to 100% in the fourth quarter of 2011.

Now many would contend that these rapidly rebounding companies are not on solid ground.  PHM, to pick out one example, reported a loss of (1.03) per share for 2011. That’s not exactly the kind of number to inspire confidence. In fact options for PHM had priced in the possibility of bankruptcy beginning in August. The implied volatility (a forecast annual rate of change derived from the option pricing) on PHM’s first three strikes permanently dropped below 100% only two weeks ago. This was the option market’s way of officially taking bankruptcy off the table.

So it’s pretty clear that the rebound in prices for these companies has more to do with a diminished fear of insolvency than a rosy outlook for their business climate.  But what of that climate? Is there any evidence that home buying may be coming back? Have we truly hit bottom in the housing market?

Happy days are here again?

While home buying still remains sluggish, there can be now doubt that evidence suggests the free-fall in prices has at least slowed. Serious investors are out shopping and banks are more aggressively pursuing foreclosures as opposed to letting deadbeats stay in the house. Interest rates may have bottomed.

If all that is not enough, consider this little tidbit.  Some people are actually BUYING houses now! Consider the graphic below (source: Zillow.com) which tracks the prices for which homes have actually SOLD in two metropolitan areas on opposite sides of the country—Richmond, Virginia and Yakima Washington.

It is true that these are not the biggest metropolitan areas to graph, but they are similar in size and price. More importantly, they represent the upper edge of what is apparent in the overall U.S. trend (shown by the orange line). You can see it for yourself: house prices across the U.S. are actually sneaking upward.  It won’t take much more of that trend to convince investors that the oversold homebuilding industry is a bargain buy.  XHB’s target coming out of that rising wedge is $24 and we could see it midway through 2012.

Stock price data is provided by IEX Cloud on a 15-minute delayed basis. Chart price data is provided by TradingView on a 15-minute delayed basis.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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