UBS: A Housing Recovery Is Underway, But Homebuilder Stocks Are Getting A Little Pricey

housing suburbs houses

Photo: Iduke, Wikimedia Commons

LOS ANGELES (AP) — A UBS analyst downgraded several homebuilders, saying their stock prices have climbed to a level that isn’t justified by their earnings potential in a still lackluster housing market.Recent housing data have raised hopes that the housing market might be ripe for recovery.

The Commerce Department said Thursday that single-family home construction increased for the third month in a row in December. Single-family homes make up about 70 per cent of the residential real estate market.

And a survey of builders this week showed the sector has grown slightly less pessimistic because more people are saying they might be open to buying a home this year.

Some economists say they expect this year will be better than 2011, which was the worst year for single-family construction on records dating back a half century, and also likely the worst year for sales of new homes.

The improved housing news has helped lift homebuilder stocks sharply in recent months, but UBS says those prices aren’t justified. The S&P 500 is up 7 per cent since Aug. 31. Shares of the five builders downgraded by UBS have risen between 34 per cent (D.R. Horton Inc.) and 57 per cent (Lennar Corp.) since then.

In a research note, UBS said it believes the housing market recovery is underway, but stressed it will be slow. That’s in part because mortgage lending standards remain too restrictive for many people who want to buy a home, which weighs on demand.

As a result, UBS doesn’t anticipate that homebuilders will be able to generate the kind of earnings growth that would drive their stock prices far beyond current levels.

UBS cut its stock rating on D.R. Horton to “Neutral” from “Buy”; KB Home to “Sell” from “Neutral”; Lennar to “Neutral” from “Buy”; Meritage Homes Corp. to “Sell” from “Neutral”; and Toll Brothers Inc. to “Neutral” from “Buy.”

D.R. Horton slipped 7 cents to close at $14.05, while Lennar fell 35 cents to $22.65. KB Home shares slipped 8 cents to $9.61; Toll Brothers dipped 59 cents, or 2.5 per cent, to $22.90; and Meritage fell 76 cents, or 2.9 per cent, to $25.88.

Elsewhere in the sector, PulteGroup Inc. rose 14 cents to $8.08; Hovnanian Enterprises Inc. was flat at $2.39; Beazer Homes USA Inc. slipped 9 cents, or 2.9 per cent, to $3.05; NVR Inc. rose $2.38 to $755.08; Standard Pacific Corp. was unchanged at $4.18; MDC Holdings Inc. fell 23 cents to $21.27; Ryland Group Inc. rose 15 cents to $18.64; and M/I Homes Inc. fell 2 cents to $11.45.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at