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Overvalued Home Builders Face Earnings Hurdle

Tickers in this article: DHI HGX HOV KBH LEN PHM RYL SPF TOL
NEW YORK ( TheStreet) -- On Wednesday the National Association of Home Builders released its Housing Market Index for January with an unchanged reading at 47, ending the winning streak at eight consecutive months and below the neutral 50.

The NAHB indicates that conditions in the housing market are much better than they were a year ago with an increasing number of geographic markets showing signs of recovery. The pending fiscal cliff was blamed for a pause in this improving climate. The possibility that Congress may limit the mortgage interest rate deduction is a growing concern for the home builders. The same difficulties continue to impede the housing recovery; persistently tight mortgage credit conditions, and difficulties in obtaining accurate appraisals.

On Wednesday afternoon the Federal Reserve Beige book indicated that residential construction expanded or held steady in eight of 12 Federal Reserve Districts, which correlates with the pause in the NAHB HMI survey.

This morning we learned that housing starts rose 12.1% in December to an annual rate of 954,000 units with the important single family starts up 8.1% to an annual rate of 616,000. This better-than-expected data still lags the rise in the NAHB HMI. This new family starts data is not in the graph.

When I wrote 4 Downgrades Hit Home Builder Sector on Dec. 19, 50.3% of all stocks were undervalued according to Today this measure is down to 43.5%. On Dec. 19 we showed that 12 of 16 sectors were overvalued and today all 16 are overvalued, eight by double-digit percentages. The consumer staples sector is the most overvalued by 24.6% with construction in second place at 19.2% overvalued.

I have been tracking the PHLX Housing Sector Index (HGX) as my benchmark for the construction sector, and HGX has overbought daily and weekly chart profiles.

The daily chart for HGX (181.42) shows this index well above its 21-day, 50-day and 200-day simple moving averages at 175.66, 168.26 and 146.19 after setting another multi-year high at 183.82 on Jan. 9. My semiannual value level is 152.09 with a monthly pivot at 175.89 and weekly risky level at 186.50. HGX is up 5.9% so far in 2013 setting a multi-year high at 183.82 on Jan. 9. HGX is up 146.3% since its October 2011 low.

Chart Courtesy of Thomson/Reuters

Reading the Table

OV/UN Valued: Stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-engine" rating is a strong sell, a "2-engine" rating is a sell, a "3-engine" rating is a hold, a "4-engine" rating is a buy and a "5-engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.