The boom in homebuilder stocks has far outpaced the housing market. Over the past 6 years, Standard & Poor’s Homebuilding Index has increased 675%, but has fallen 18% since last summer. At the same time OFHEO’s House Price Index only shows a 57% increase over the same period (not that I am crazy about OFHEO’s stat validity).
Kiplinger Magazine agrees “with Frank Nothaft, chief economist for Freddie Mac, who expects a “soft landing,” meaning that home prices won’t fall, but they’ll grow at a much slower pace. He predicts 5% a year on average, rather than the torrid 15% annual growth that some regions have experienced during the past five years.”
They contend that if prices continue to rise, even modestly, that profits will continue to be realized. Stocks are only trading at about 6x 2006 earnings, well below 15x for the overall market.
There are two strategies presented in the article, depending how you think the housing market is going to move.