Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Jason Stipp | 01-18-2012 12:00 PM

Are Housing Stocks Getting Ahead of the Housing Market?

An eye-popping runup in homebuilders stocks could foretell a better housing market than many expect, but risks still loom, says Morningstar's Bob Johnson.

Jason Stipp: I am Jason Stipp for Morningstar. Homebuilder stocks have been on a tear recently, but what does this mean for the housing market? Here with me to offer some insights is Morningstar's Bob Johnson, director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: Homebuilder stocks have been doing quite well recently. What does the performance looks like, and what is behind that performance?

Johnson: Yes. There is a homebuilder exchange-traded fund, an ETF, that's out there. If you're ever curious and go check, the ticker for it is ITB, and that index which includes many leading homebuilders is up more than 60% since Oct. 1. Now, we're not talking all the way back to the beginning of recovery; we're talking just since September. That index is up more than 60%.

Stipp: What's behind that performance? We also got some recent data from Lennar, one of the homebuilders that seems pretty positive as far as demand. Why are these stocks running up so much?

Johnson: Sure. Well, I think you hit the nail on the head there. I think Lennar certainly got the last 10% or 20% of the move going last week. It had a very optimistic quarterly earnings report and outlook for the future. The firm talked about new orders for homes being up 20%, and the backlog being up even a more impressive 35%, which means there's more firepower behind that. And Lennar went on to say that it got all those new orders without substantial discounts, so it was not an issue of the firm giving away the homes at some type of bargain-based price. On top of that, Lennar said that December, which is usually the very weakest month of the quarter with all of the holiday shoppers not wanting to go looking for homes, that actually December was probably one the stronger months, and so that would set us up for a good trend going forward.

Stipp: So, improving metrics are occurring for these homebuilders. But from an economist point of view, when you look at the housing market, does that jibe with what you are seeing from a broader point of view? I'm wondering specifically, were these homebuilder stocks beaten down so much that even a little glimmer of hope from a lackluster housing market could cause them to pop up like we've seen?

Johnson: Well, I think that certainly some of it. I mean I think nobody believed at all, and now they've started to believe a little bit. They've got some firm evidence to do so, and we talked about some of that evidence. But certainly they have started to come back and react to that. Now, in terms of economists, I doubt that you could find an economist that says, "We're going to run wild in housing in 2012 or even 2013 maybe."

Now, there are a few brave souls out there who have said that maybe the housing market has "bottomed," and whether they mean in units, prices, or whatever, it's a little bit hard to tell. But in any case, I think some are thinking, "Yeah, it's not going to hurt anymore." But I don't think anybody is in a very bullish camp on housing. Yet, you've got the homebuilder stocks; people actually putting their money behind real stocks that are doing real things in the world. These homebuilder stocks are starting to move ahead, and I think maybe the economist might be just a little bit behind the eight ball on this one.

Stipp: So, you would say, you would fall maybe a little bit more on the bullish side then for the housing market looking ahead?

Johnson: Yes.

Stipp: So, what factors are you looking at? What things specifically do you need to see from an economic point of view that would show that some of these trends that these homebuilders are seeing are actually playing out?

Johnson: Well we get a number of reports every month on the housing market, and certainly we get pending home sales, existing-home sales, and new-home sales. These kind of measure something a little different. One measures how many have signed new contracts; one looks at the existing stock of homes such as what homeowners are mobile and feel like they can move. And then you have new-home sales, which is actually the number that goes into the gross domestic product report.

Stipp: So, when you're looking at all those, what's the trend been? And do you expect to see those trends continue then into 2012?

Read Full Transcript

{1}
{1}
{2}
{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
{1}
{5}
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article
    Username: