Will Housing Stocks Crash?

Housing Stocks CrashOne of the most often talked about parts of the economy is the real estate market sector. Because real estate is such a large and important part of the economy, naturally, many eyes are focused on whether or not this market sector can and will rebound from its deep decline.

While we have certainly seen a strong bounce off the bottom, there are still many concerns for the future of both the real estate market sector and housing stocks, specifically. Investors in housing stocks are definitely ahead of the curve, as many housing stocks have increased substantially. With gains in excess of 100%, the question on many people’s minds is: will the real estate market sector continue its upward trajectory or are housing stocks teetering on the edge of a massive decline?

I think recent comments by the CEO of D.R. Horton, Inc. (NYSE/DHI), Donald Tomnitz, can illuminate a lot. Tomnitz stated in a conference call that he was quite concerned that the lack of jobs might lead to lower home sales next year. D.R. Horton is, by volume, the largest homebuilder in America. One of the most sobering moments was when Tomnitz stated, “I also see the fact that there are potential layoffs in a number of industries, especially the defense industry.” (Source: “D.R. Horton Falls as CEO Cautions on Job Growth Next Year,” Bloomberg, November 12, 2012.)

The question isn’t the current level of the real estate market sector. For the fourth quarter, which ended September 30, 2012, D.R. Horton reported net income of $100 million, a massive increase of 180% from the prior year’s quarter. Revenue for the fourth quarter was $1.3 billion, up 21% from last year. Net sales orders for homes were 5,276, an increase of 24% from the prior year’s quarter. The backlog was also quite interesting, as the company reported a total of 7,240 homes at the end of the quarter, a massive increase of 49% from last year’s quarter. (Source: “D.R. Horton, Inc., America’s Builder, Reports Fourth Quarter and Fiscal 2012 Results and Declares Quarterly Dividend,” D.R. Horton, Inc., November 12, 2012.)

Obviously, the real estate market sector has picked up significantly from the bottom. In the press release for D.R. Horton’s latest fourth quarter, the firm stated that its pretax income was the highest in 22 quarters. For the full year 2012, the company’s pretax income was the highest since 2006.

While housing stocks have done well on the backs of such massive increases in their balance sheets and fundamental metrics, the overall real estate market sector is still susceptible to a downturn. Even if we don’t get a decline in home prices, for the current housing stocks to remain at their elevated levels, they would need to see the real estate market sector continue its extremely strong trajectory. I think too many of these housing stocks are priced to perfection.

Horton Inc Chart

Chart courtesy of www.StockCharts.com

This is a great look at one of the housing stocks that has done incredibly well. With the share price essentially doubling from a year ago, it appears that sellers are taking the CEO’s warning to heart. With the fiscal cliff potentially resulting in massive layoffs, many are becoming worried that this might trickle down to the real estate market sector. If I were an investor in these housing stocks, seeing that many are breaking trendlines, I would certainly take my profits and await the resolution (if there is one) of the fiscal cliff. While I don’t think housing stocks will crash, I also see limited upside potential from here.