Keep a Close Eye on Housing Stocks

All indications suggest the housing market remains healthy when you look at the monthly housing start and building permits data. Housing starts have come in at over two billion in 10 of the last 12 months. The recent September reading of 2.108 billion was the highest since February 2005. Equally strong has been the monthly building permits data, coming in at over two billion for the last 12 consecutive months, and the September reading of 2.189 billion was the highest in over two years. So, there’s no problem, right? If you look beyond the numbers, there is some concern.

 Fed Chairman Alan Greenspan has commented on the risk of the lofty real estate market. Hot real estate markets across the country have rewarded property owners with remarkable gains.

 However, interest rates have been rising since June 2004, and there are more increases to come. While financing rates are still relatively attractive, you can’t help but wonder how higher rates will impact the hot real estate market. Leverage will become more of an issue as interest rates rise. Watch the key markets in California and New York for any evidence of cooling. We are beginning to see properties at the high end last longer on the resale market as the buying frenzy subsides.

 On Tuesday, there was some evidence that the forward growth in real estate may be coming to a halt. Major homebuilder Toll Brothers Inc. (NYSE/TOL) reported a strong Q4, but also lowered its home deliveries forecast for fiscal 2006. The company attributed the slowdown to fewer-than-expected selling communities and lower demand in several markets. The company also said it expects to enter “a period of more moderate home price increases, more typical of the past decade than the past two years.” TOL is off 42% from its 52-week high of $58.67 achieved on July 20.

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 The question now is, is TOL representative of the housing stocks or is it more of an isolated situation? So far, there is little evidence the tide is reversing based on the monthly numbers. The trend remains positive, but perhaps TOL is indicative of what we can expect in 2006. If you own any housing stocks, keep a close eye on them — this could include a stop to protect the downside. In this type of jittery market, you don’t want to be left exposed to market shocks.