Book Profits On These Homebuilder Stocks Despite The Strong Housing Market

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Homebuilder stocks DR Horton (DHI), Lennar (LEN), PulteGroup (PHM) and Toll Brothers (TOL) traded to new cycle highs Monday morning, March 29. KB Home (KBH) set its cycle high on March 17. PulteGroup and Toll Brothers stalled below their monthly risky levels. The others traded above their monthly pivots. Gains since a year ago are between 200% and 378%.   

Homebuilder stocks are cheap when their price-to-earnings ratios are around 8%. Today the P/E ratios are between 11.15% and 15.42%.  Share price gains and elevated P/E ratios are reasons enough to reduce holdings and take profits.

The National Association of Home Builders (NAHB) Housing Market Index (HMI) peaked at an all-time high of 90 (on a scale of 00 to 100) in late 2020. The S&P CoreLogic Case-Shiller 20-City Composite for home prices was up 11.1% year-over-year in January 2021.

Home prices are rising faster than the Consumer Price Index as lumber and concrete prices are rising on increasing demand from homebuilders.

The Graph of the NAHB HMI versus Single-Family Starts

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The NAHB Housing Market Index scales from zero to 100. A reading of 50 is neutral. A reading above 50 indicates a positive reading for home sales. A reading below 50 is a negative reading.

The Covid-19 pandemic caused the NAHB Housing Market Index to plunge by a record 42 points to 30 in April 2020. Homeowners living in urban areas sold their homes to move to the suburbs or more rural areas. The theme is to live in homes with an extra room as an office. Many continued to work from home as the economy recovered from the lockdown. The HMI rose to a record high of 90 in late 2020.

The S&P CoreLogic Case-Shiller 20-City Composite in green.

Home prices continue to be in a reinflating bubble. The latest reading from the S&P CoreLogic Case-Shiller 20-City Composite is for the end of January 2021.

The 20-City Composite first peaked in July 2006. The trough occurred in March 2012. The decline totaled 35.1%. The current reading in January is 79.4% above the March 2012 low.  

Here is a Scorecard for the Five Major Homebuilders

DR Horton: ($87.98 on March 30) has a positive but overbought weekly chart. The stock traded as high as $91.05 on March 29 testing its monthly risky level at $89.87. Quarterly, semiannual and annual value levels are $74.87, $67.27 and $65.40, respectively.

KB Home (KBH): ($45.51 on March 30) has a positive but overbought weekly chart. The stock traded as high as $47.37 on March 17, well above its monthly pivot at $42.91. Quarterly, semiannual and annual pivots are $41.43, $39.30 and $32.05, respectively.

Lennar (LEN): ($100.31 on March 30) has a positive weekly chart. The stock traded as high as $104.53 on March 29, well above its monthly pivot at $93.99. Quarterly, semiannual and annual value levels are $81.55, $72.68 and $69.51, respectively.

PulteGroup (PHM): ($51.75 on March 30) has a positive weekly chart. The stock traded as high as $53.66 on March 29 versus its monthly risky level at $53.91. Quarterly, semiannual and annual value levels are $45.97, $43.19 and $40.13, respectively.

Toll Brothers (TOL): ($56.84 on March 30) has a positive but overbought weekly chart. The stock traded as high as $59.52 on March 29 versus its monthly risky level at $60.77. Semiannual, annual and quarterly value levels are $47.40, $43.89 and $42.81, respectively.