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Latest Real Estate Numbers and How They Affect Homebuilder Stocks By Sasha Cekerevac for Investment Contrarians | Oct 24, 2012 One of the most-discussed topics right now is the housing market. The housing market is integral to the economy, so naturally many people have a vested interest in seeing this sector rebound. From its peak in the last decade, which was artificially boosted by cheap money, the housing market tanked severely. The rebound has been extremely slow, as a large number of foreclosures have been making their way into the housing market, keeping prices down.

However, there is a large body of evidence that, in some areas, the housing market is definitely coming back. The qualifier is that we won’t see prices rebound to the same levels as last decade for many years; but homebuilder stocks are certainly seeing the benefits of increased activity.

A recent report by real estate firm Zillow, Inc. stated that U.S. home prices increased by 1.3% in the third quarter, although it was an uneven increase across the country. This represents the largest increase since the first quarter of 2006, when the housing market experienced a 1.5% increase. (Source: “U.S. Home Values Jump the Most Since 2006, Zillow Says,” Bloomberg, October 23, 2012.) Zillow Chief Economist Stan Humphries stated, “The housing market is on the mend, but the housing bottom will be a protracted one.” This is similar to the position I’ve stated in that the price achieved in the middle of the last decade for the housing market was artificially high. People should not be buying real estate based on the belief that those prices will be achieved anytime soon. However, it is clear that for many parts of the housing market, the bottom is certainly in. This brings us back to homebuilder stocks. Taking a look at the index of homebuilder stocks as represented by the SPDR S&P Homebuilders ETF (NYSE/XHB), it’s quite obvious that many investors have certainly been ahead of the curve when it comes to the rebound in the housing market. Since December, the overall index has almost doubled. Homebuilder stocks certainly have been one of the best performing sectors over the past year.

Chart courtesy of As most people know, the stock market leads the economy. Clearly when homebuilder stocks started moving up in the early part of the year, it was a sign that the housing market was on the rebound. When one reads the financial reports from homebuilder stocks, one can see there are shortages in many parts of the housing market.

While I do think the housing market will continue a slow recovery overall, I think homebuilder stocks have certainly gotten ahead of themselves. At this point, they are pricing in extremely strong growth that I don’t think will happen. If anything, I would suggest waiting for a pullback in homebuilder stocks before looking to accumulate more shares.

One of the more interesting overhangs has been the upcoming election and fiscal cliff. It should be interesting to see how next spring’s housing market numbers will come in. I believe both issues will be resolved and, at that point, over the first couple of quarters in 2013, we should see how the economy will respond once the uncertainty surrounding these two issues has been eliminated.

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