The Housing Market May Be Crashing But Homebuilder Stocks Like These 5 Are Stable

The National Association of Home Builders (NAHB) Housing Market Index (HMI) plunged by a record 42 points to 30 in April, down from 72 in March. Single-family housing starts declined by 17.5% in March to a seasonally adjusted rate of 856,000. Further declines are likely in April.

Home prices had been in a reinflated bubble, but readings will likely show a decline in the months ahead. One thing we know is that people are moving from urban areas into rural homes.

The Graph of the NAHB HMI versus Single-Family Starts

The scale on the left is the Housing Market Index, which is the blue line across the graph. The scale on the right is Single-Family Starts in red on the chart. Look at the right side of the graph and you will see the 42-point drop. The graph does not reflect the decline in starts as the March reading will show next month.

One of the observations I have warned above is the fact that HMI was too high versus single-family starts. This will be neutralized over the next few months.

Mortgage rates are at record lows, but potential buyers are living in lockdown. New homes can only be viewed virtually. The current reading for single-family starts at 856,000 is well below the mid-2006 high of 1.8 million units. This occurred when HMI was just above 70.

The S&P CoreLogic Case-Shiller Indices

The chart shows that home prices peaked in July 2006 and declined by 35.1% to a cycle low in March 2012. Since then the home-price bubble reinflated by 63.1%. This reading is 5.9% above the July 2006 high. This questions home affordability!

Here is a Scorecard for the Five Major Homebuilders

Here is what I said on February 24: A major problem for homebuilders as an investment is their elevated P/E ratios. History says you can own homebuilder stocks when their P/E ratios are under 8.00. Today, they range between 12.00 and 14.00, which is a reason to book profits now.

Today these stocks are cheap with P/E ratios between 5.82 and 8.54. This is the case even though these stocks are well into bull market territory with gains between 49.1% and 115.8% since lows set between March 18 and March 23.

DR Horton (DHI): Holding its quarterly pivot at $39.67 targets is semiannual risky level at $49.91 where profits should be taken.

KB Home KBH : Is just below its quarterly pivot at $21.47. Sell strength to its annual risky level at $37.36.

Lennar LEN : Holding its quarterly pivot at $35.27 targets is semiannual risky level at $53.00 where profits should be taken.

PulteGroup PHM : Is just below its quarterly pivot at $28.08. Sell strength to its semiannual risky level at $39.87.

Toll Brothers TOL : Is just below its quarterly pivot at $22.27. Sell strength to its semiannual risky level at $39.87.

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This post first appeared on Forbes.com. To see the original, click here.