Still not a believer in home builders!

Posted on December 27th, 2012

I saw this chart this morning on the Wall Street Journal. It is the Homebuilder sentiment index which tracks how the executives within the industry feel about their own prospects. As you can see, the sentiment is shooting straight up for an industry that has suffered a few bleak years ever since the housing bubble burst.
If ever there was a group of executives that I would like to be short, it is this group. The homebuilders have never gotten great reviews for their ability to predict future demand. None of them ever planned for the bubble - in fact, they didn't even think they were in a bubble until it burst on them.

But the housing bubble brought this industry back down to Earth. The recovery in housing has shown some promising signals in 2012. As a result, investors have flocked in to these stocks. The industry is UP 60% IN THE LAST 12 MONTHS. That is an impressive move.

But I am still not a believer. I think the stocks have come too far in too short a time period. 

Price improvement in home prices alone will not bail out this industry. Demand needs to keep improving. But without an improving employment situation, I am hard pressed to believe that the demand can improve materially. After all, the total number of people receiving some amount of unemployment assistance is the highest level since the recession in the 1990s. Without solid incomes to pay for new homes, the demand cannot increase enough to justify more premium in these prices.

This industry and its likely performance in 2013 is certainly an interesting investment dialogue. I think it is a place to stay away in 2013 - unless the overall economy shows much beter improvement that could spur some unforeseen demand.

The Home Builder industry is not large enough to qualify as its own sector - but it is close. Certainly in its prime, it was one of the largest individual industries in this country - maybe the largest. This look at the housing industry has made me wonder about the sub-sector industries that have their own ETFs - and therefore can be invested in as long as adequate hedges exist.

We'll start looking at some of them using the same sector analysis we used earlier this month. Maybe a particular industry with some real gems will stick out! We'll start with Home Builders next week to see if my hypothesis about their valuation proves correct!



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