Should You Be Jumping Into the Homebuilders?

Is housing hitting a bottom?

There's been a lot of talk in recent days that the housing bust may finally be about over. While no one is projecting a robust recovery in the housing market, there is hope that the worst of the slide may be behind us.

June new home sales rose 11% in May to 384,000 from 346,000, the largest monthly jump in 8 years. However, it was still well below last year's 488,000 sales.

New housing sales appear to be turning a corner. This is the good news. The bad news is that June's number was the lowest monthly sales total since 1982.

Of course, this upturn is taking place during the time of the year, the summer, when most home buyers are looking to buy (although the numbers are adjusted for seasonality.) The $8,000 first-time buyer tax credit also seems to be boosting sales.

It's not just new home sales which are perking up. The S&P 500/Case-Shiller home price index reported an increase in May of 0.5%, the first increase in over 2 years. 15 out of 20 of the largest metro areas also saw month over month price increases.

Homebuilder Stocks Rise In Anticipation of Sunnier Days

The homebuilding stocks have been moving higher in July as the data has been better than expected and appears to indicate a turning point in the market.

The thinking is what better place is there to be invested than the homebuilders when housing starts to come out of the dark days?

Taking a look at the 6-month charts of some of the major homebuilders you can see the sharp move higher in the past 3 weeks.

Ryland Group Inc. (RYL - Snapshot Report), a homebuilder which specializes in a more entry-level price point:

Pulte Homes Inc. (PHM - Snapshot Report), the largest homebuilder in the United States:

D.R. Horton Inc. (DHI - Analyst Report), the second largest homebuilder in the United States:

Ryland Rains on the Parade

On July 29, Ryland reported second quarter results that implied that some aspects of the housing recovery may still be far off.

The company reported a much worse than expected loss of $1.70 per share compared to Zacks Consensus Estimate of a loss of 97 cents.

While this was an improvement over the loss from a year ago, which was $5.70 per share, it was still the fourth straight miss in a row. Each of those earnings misses was massive, averaging a miss of 61.06% during that period.

Revenue fell 44.2% from a year ago while new orders declined 16.1%. Total closings were down 40.3% year over year.

If analysts are as optimistic as investors about the sector, they aren't showing it in their earnings estimates.

Even before Ryland's disappointing quarterly report, analysts were already lowering estimates over the past 90 days for 2009.

The full-year Zacks Consensus Estimate had fallen by $1.30 to a loss of $4.24 per share with 1 analyst lowering in the last 30 days.

You can bet with the larger than expected second-quarter loss, analysts will be revising estimates down even further.

Making Bets on the Sector

Competitors Lennar (LEN - Snapshot Report) and KB Homes (KBH - Snapshot Report) both reported earnings previously and both beat on estimates even while reporting losses, so maybe Ryland is just an anomaly.

But analysts still appear bearish on KBH Homes whose full-year Zacks Consensus Estimate continued to move lower in the past 30 days even after it beat on June 26.

Pulte and DR Horton are scheduled to report on Aug 3 and Aug 4, respectively. Because both companies are among the largest in the sector, investors will get a better gauge on the health of the housing market.

But once again, the analysts are bearish. Zacks Consensus Estimates have fallen in the past 30 days for the upcoming quarter on both companies.

Ignore Estimate Revisions at Your Peril

With the sharp swing higher in all of these stocks over the past 3 weeks, investors should be cautious.

Currently, not a single homebuilder mentioned in this article has a Zacks Rank higher than a #3 (hold).

Eventually, the earnings estimates will be turning to the upside for the homebuilders even as the companies continue to see losses. Right now, however, the estimates are, for the most part, continuing to fall.

Given the recent hopeful data, the homebuilders seem tempting. But it's too early to say the coast is clear.

Additional Investing Resources Available to Research Homebuilding Stocks

Research Wizard - This sophisticated tool will allow you to search for a detailed list of the homebuilders based on Zacks Rank, earnings history and other criteria.

Zacks Custom Screener - This is the place to start to create your own screens.