US Homebuilder Stocks Surge, But Will It Last?

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By Roland Li | September 13, 2012 7:42 AM EST

One of the best-performing sectors of the U.S. economy this year was also one of the hardest hit by the recession: homebuilders, whose stocks have outpaced the broader market with a modest rebound in home prices and increased demand for properties.

Much of recovery, however, has unevenly benefited the luxury sector.

The SPDR S&P Homebuilders ETF (NYSEARCA: XHB), a benchmark for the sector, has gained 45.44 percent year-to-date, compared to 14.23 percent for the S&P 500. It is up to its highest level since 2008. The iShares Dow Jones US Home Construction ETF was up 62.46 percent year-to-date at Wednesday's close.

"We believe that the housing market is improving at a moderate pace, benefiting from an increase in employment rates, higher consumer confidence and several years of pent-up demand," Zacks Equity Research stated Tuesday.

Bloomfield Hills, Mich.-based PulteGroup Inc. (NYSE: PHM) has been one of the strongest companies on the S&P 500. Its stock has gained 146.43 percent year-to-date, closing on Wednesday's at $15.55.

Miami's Lennar Corp. (NYSE: LEN) shares have risen 75.67 percent year-to-date to $34.52. Fort Worth, Texas-based D.R. Horton Inc. (NYSE: DHI) is up 63.12 percent year-to-date to $20.57. Los Angeles' KB Home (NYSE: KBH) is up 90.03 percent to $12.77 at Tuesday's close.

Toll Brothers Inc. (NYSE: TOL), the largest U.S. luxury home builder, reported a 46 percent profit increase in second-quarter earnings in August. New home orders jumped 57 percent to 1,119. Its stock has gained 71.11 percent year-to-date to close at $34.94 on Wednesday, its highest price since early 2007.

Continued fragility in the housing market and high employment could put a damper on continued gains, Zacks warned. Tight credit standards have also cut into demand by making mortgage financing difficult to obtain.

"There have been signs of a gradual strengthening in the housing market in the first half of 2012. However, homebuilders have cautioned that the process of stabilization is erratic and not adequately broad-based," said Zacks.

Zacks said it was not "generally bearish" on the homebuilder sector, but cited lower earnings at Fastenal Co. (FAST), Masco (NYSE: MAS) and Vulcan (VMC) as potential concerns.

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