Real Estate: Don’t Call it a Comeback… Yet!

by Louis Basenese
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Submitted by Wall St. Daily as part of our contributors program

It’s Friday in the Wall Street Daily Nation. For the neophytes in our ranks, that means it’s time to break free from our regular routine.

Instead of just flapping my gums ad nauseum, I’m employing a handful of graphics to help convey some important insights.

Specifically, I’m serving up more evidence to support my bold claim that the residential real estate market just hit rock bottom (also backed up by my colleague, Karim Rahemtulla).

Then, it’s on to a cautionary tale from the tape about homebuilding stocks.

So without further ado…

Can You Feel it, Baby?

I’m pretty sure the National Association of Homebuilders (NAHB) isn’t going to hire Marky Mark to start conducting its builder confidence survey. But they should. Because homebuilders are definitely feeling “good vibrations.”

Earlier in the week, the NAHB reported that the NAHB Index rose for the fifth straight month to hit 29. That’s the highest level in more than four years.

Of course, we’re still well below the key threshold of 50, which indicates that the majority of builders are optimistic. But as NAHB Chairman, Barry Rutenberg, said, “Builder confidence has doubled since September as measured by the HMI.”

In my book, that certainly qualifies as a trend worth tracking. Especially since the Index tends to be a leading indicator for housing starts.

And wouldn’t you know it? Yesterday morning the Commerce Department reported that housing starts did indeed pick up, too. Ahead of expectations.

Starts checked-in at an annual pace of 699,000. And starts for the previous month were revised upward to 689,000 from 657,000.

In the famous words of LL Cool J, “Don’t call it a come back.”

Not yet, anyway! But we’re getting close.

The Roof, the Roof, the Roof is on Fire

Before you respond to the positive data by piling into homebuilding stocks, take a look at the next chart. It pretty much cements our belief that the stock market is a forward-looking animal.

Ever since October 2011, homebuilding stocks have been on fire! PulteGroup (NYSE: PHM) and KB Home (NYSE: KBH) have both more than doubled.

I’m afraid that’s a little bit too far, too fast. You see, if we compare the valuation metrics for each homebuilder to their 10-year averages, they’re trading at significant premiums.

Bottom line: As I predicted last week, the real estate market is indeed bottoming out. But you should stick to finding deals in your local real estate market, instead of buying homebuilding stocks. They’ve gotten too far ahead of the rebound and are overdue for a pullback.

That’s it for today. Before you sign off, though, do us a favor. Let us know what you think about this weekly column – or any of our recent work at Wall Street Daily – by sending an email to feedback@wallstreetdaily.com, leaving a comment on our website, or catching us on Facebook or Google+.

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