Home Builder Stocks: A Look at How They’ve Helped Investors Feel Good Vibrations

Despite the headwinds facing the American economy, home builders continue to feel more confident about their future.

This week, U.S. home sales data improved and the National Association of Home Builders reported that its survey of builder confidence in the market for newly built, single-family homes increased for a fifth consecutive month in September. The index rose three points and now stands at 40, which is the highest level it has reached since June 2006. The index is still below 50, the cut off line between positive and negative, but it is an improvement from last year’s reading of only 14. Considering the three-month average, the Midwest and West region registered the biggest gains.

All three components of the index posted increases for September. The component measuring current sales conditions gained four points, while sales prospects for the next six months jumped eight points. However, the component measuring traffic of prospective buyers only edged up one point and remains the lowest part of the index.

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“Builders across the country are expressing a more positive outlook on current sales conditions, future sales prospects and the amount of consumer traffic they are seeing through model homes than they have in more than five years,” said NAHB Chief Economist David Crowe in a press release. “However, against the improving demand for new homes, concerns are now rising about the lack of building lots in certain markets and the rising cost of building materials. Given the fragile nature of the housing and economic recovery, these are significant red flags.”

Before the confidence figures were released, Goldman Sachs (NYSE:GS) issued a bullish note on the housing sector. The firm cites that policy measures like QE3 and the REO to Rental program have been positive for the housing market. Furthermore, it claims, “Home prices continue to improve, inventory remains low and the risk of a major foreclosure wave is shrinking further.” Goldman recommends MDC Holdings (NYSE:MDC), KB Home (NYSE:KBH), PulteGroup (NYSE:PHM) and Toll Brothers (NYSE:TOL) as its “favorite stocks to take advantage of the improving housing markets.” All four names traded lower after the confidence index reading was released.

Although home builders pulled back today, they have been on a tear in 2012. Shares of MDC Holdings have more than doubled this year. Let’s take a look at the charts:

Shares of KB Home have surged 90 percent this year. The company will unveil its latest earnings this Friday. The average estimate of analysts is for net loss of 18 cents per share , a wider loss from the year-earlier quarter net loss of 13 cents. During the past three months, the average estimate has moved down from a loss of 9 cents.

PulteGroup shares have gained almost 150 percent year-to-date. Last week, the home builder received an upgrade to Buy from Hold at Williams Financial Group. Analyst David Williams made the upgrade and raised his price target to $17 from $13.

Shares of Toll Brothers, the largest luxury home builder in the United States, have increased 72 percent this year. On Monday, shares hit a fresh 52-week high of $36.69.

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