Homebuilders Stocks Outperform but Analysts Say Sector Not Out of Trouble Yet

Homebuilders stocks have gone up again and the SPDR S&P Homebuilders ETF now stands at a year-on-year increase of 30%. The rise came on news that the housing market is stabilizing and sales and prices of new homes are improving.

Investors seem much more optimistic about the housing market now and are confident that both revenues and profits will see a sustained rise over the next few months. The Case Shiller Price Index showed that home prices posted their first gain in more than three years. Moreover, the Department of Commerce has disclosed that sales of new homes increased by 27 percent in March after seasonal adjustments, which is the biggest increase since July last year.

Mortgage rates are at historical lows and could continue at these levels for some time. The Federal Reserve has signaled that rates will remain low in an effort to reduce borrowing costs and encourage spending to further improve the economy so that unemployment can be brought down. The rock-bottom interest rates are making homes affordable. This is likely to reflect in the sales numbers for the spring season, which is generally the period of most activity in the sector.

However, some analysts think that this stock rally does not paint the picture of the housing market accurately, as there is still a huge foreclosure inventory to deal with. The prediction is that homebuilders may not post profits until the third or fourth quarter of 2010. Some of the recent activity in the market could be attributed to the federal tax credits scheme, which has just expired. Second quarter sales forecasts are low and Standard & Poor’s has said that while the housing market is showing signs of improvement, it is not completely out of the woods yet.

Home sales may be hurt if mortgage rates go up following improvements in the economy. Profitability will also depend on whether investments made by homebuilders for land and raw materials can be recouped through higher home prices. But it is not clear yet whether home buyers would be willing to pay higher prices, especially with most people having taken a hit on their savings.

Homebuilders may also have to compete against the home-resale market as a huge number of homes are still being foreclosed, which has a serious impact on sales of new homes as well as the price.

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