Homebuilding Sector: Time to Buy or Sell?

News alert: The American public’s love affair with housing market has been rekindled. Although it may be difficult to accept, the very same properties they hated from 2008-09 are now increasing in value.

The latest S&P/Case-Shiller Home Price Indices – a popular yardstick of nationwide U.S. home prices – showed increases of 2.5% and 2.4% for the 10- and 20-City Composites in May 2013 compared to April 2012.

To further understand the velocity of the run-up in property values, not one of the 20 cities posted a loss over the past year. Furthermore, cities like Dallas and Denver have now surpassed their pre-financial crisis peaks established in June 2007 and August 2006!

David M. Blitzer, chairman of the Index Committee at S&P Dow Jones Indices, noted: “The Southwest and the West saw the strongest year-over-year gains as San Francisco home prices rose 24.5% followed by Las Vegas (+23.3%) and Phoenix (+20.6%). New York (+3.3%), Cleveland (+3.4%) and Washington DC (+6.5%) were the weakest. Monthly numbers before seasonal adjustment showed all 20 cities experienced rising prices. San Francisco (+4.3%), Chicago (+3.7%) and Atlanta (+3.4%) were the leaders.”

Most housing analysts expect home prices to keep gaining and so far they’ve been right.

A March survey of home and mortgage analysts by Zillow showed the consensus median appreciation in 2013 was 4.8%, with only two respondents out of 117 indicating a decline. 

Does this make the homebuilding sector and related REITs a buy?

First, it’s important to have some historical perspective.

Although home prices have staged an impressive rebound, the S&P/Case-Shiller 20-City Index is still 22% lower compared to its 2006-07 peaks. And by definition, market losses greater than 20% are still considered a bear market.

The still elevated number of homeowners with a larger mortgage than the value of their homes is problematic.