Wednesday, February 9, 2011

Homebuilders Defying Conventional Wisdom

There are still plenty of analysts and pundits that worry that housing markets remain weak, and some believe that housing prices may be poised to drop another 10% over the next year or so. I guess I’m in the camp that says we’ve seen the worst of the housing crisis overall. Even if we are forming a bottom that takes some years to base out, I just don’t see the surprise factor that was embedded in housing a few years ago. A few years back, surprise that housing could go down at all was compounded by the real surprise that a housing boom and lax lending standards had formed systemic rot on the balance sheets of global financial institutions.

Despite all the negative fundamentals, it’s not lost on us that homebuilder stocks have been rallying lately. Since the last dip in late November, homebuilders have outperformed the S&P 500 by about 10%. It could be that this is just another outperformance spurt that will ultimately fizzle, like we’ve seen several times from the homebuilders over the last few years. But perhaps a better economy and more jobs will solidify home prices, and share prices of the builders are beginning to pick up on this theme. We’ll have to watch closely as this industry is volatile, but it’s been interesting to watch the builders rallying at the same time that many are predicting another big leg down in housing.