Homebuilder Stocks Break Out Again

Value Level: The price at which to enter a GTC Limit Order to buy on weakness. The letters mean; W-Weekly, M-Monthly, Q-Quarterly, S-Semiannual and A- Annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: The price at which to enter a GTC Limit Order to sell on strength

Analysis of the Homebuilders

Looking at the overvalued/undervalued data six of the home builders are overvalued, with Lennar(LEN) overvalued by 35.4%.

There are two "2-Engine" sell-rated stocks, one "3-Engine" hold-rated stocks and seven "4-Engine" buy-rated stocks.

Look at the tremendous performance of these stocks over the past 12 months led by Pulte Homes(PHM) with a gain of 181.99%.

Three of the stocks are projected to be lower over the next 12 months led by Beazer Homes(BZH) , projected to be down 9.4%. The upside leaders are projected to be Lennar and Ryland Group(RYL) , up by 10.9% and 10.8%, respectively. This projected performance is well behind the gains of the past 12 months.

A major warning comes from the P/E ratios where ValuEngine cannot compute for four stocks and with the others elevated by between 30.4 times and 174.7 times 12-month forward estimates. Longer-term homebuilders statistically had high single-digit P/E ratios.

An issue facing the housing market is how to help potential move up buyers who have an exiting home to sell. If the homeowner has one of the 24% of all mortgages that is underwater, selling that home becomes problematic. There could be a program to offer the forgiveness of principal, but that would not be in the best interest of the lender. This leads to the ongoing debate about principal reductions to help families stay in their homes.

The White House, through the U.S. Treasury, wants the Federal Housing Finance Agency to direct Fannie Mae(FNMA) and Freddie Mac(FMCC) to implement the Home Affordable Program Principal Reduction Alternative, or HAMP PRA. To his credit, the acting director of the FHFA, Edward J. Demarco concluded that the "anticipated benefits do not outweigh the costs and risks" and that the "FHFA concluded that HAMP PRA did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today."