Is There Too Much Hope for These Stocks in the Housing Rebound?

Home prices continue to show signs of stabilizing, as several factors have provided the industry with support during the worst housing slump since the Great Depression. However, will the support hold or crumble?

According to a new report by the National Association of Realtors, prices for single-family homes increased in the majority of American areas in the second quarter. The median sales price gained in 110 out of 147 metropolitan areas across the nation. In comparison, only 74 areas showed increases in the first quarter. The median existing single-family home price was $181,500 for the second quarter, representing a 7.3 percent jump from a year earlier. It was the strongest annual increase since the beginning of 2006, according to the Realtors group.

The report echoes results from other housing reports released this week. CoreLogic (NYSE:CLGX), a California-based data company, said home prices rose by 2.5 percent in June from a year earlier, and by 6 percent from the previous quarter. Freddie Mac, which uses a different method to calculate results, announced that home prices during the second quarter jumped by 4.8 percent from the previous quarter, marking the biggest jump since 2004.

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“The turnaround in home prices feels pretty broad,” explained Celia Chen, a housing economist at Moody’s Analytics in West Chester, Pennsylvania, according to Bloomberg. “But I think there are still risks that home prices will dip a little more before they start appreciating with any consistency.”

As the chart above from the Big Picture shows, home prices measured by S&P/Case-Shiller indices have been boosted by the first time homebuyer’s tax incentive, foreclosure abatement and record low mortgage rates. Robert Shiller, co-founder of the indices and one of the earliest professionals to identify the housing bubble, is still cautious on declaring a bottom in housing at current levels. As the WSJ notes, he points out that the housing sector is lacking momentum, and the unemployment rate is still well over 8 percent. In fact, the headline unemployment rate has been stuck above 8 percent for 42 consecutive months. Shiller is also gun-shy due to the large supply of distressed homes that could enter the market and depress prices.

The concerns in housing appear to warranted. The Mortgage Bankers Association announced on Thursday that the U.S. mortgage delinquency rate increased for the first time in a year in the second quarter, up 7.58 percent from the first quarter. The delinquency rate on loans more than 90 days behind increased 3.19 percent. Furthermore, long-term mortgage rates ticked higher for the second consecutive week, decreasing the affordability of purchasing a home for borrowers.

Wall Street mostly ignored any housing worries today as homebuilder stocks increased across the board. KB Home (NYSE:KBH) and PulteGroup (NYSE:PHM) jumped 6.5 percent and 4.2 percent, respectively. Meanwhile, Lennar (NYSE:LEN) and DR Horton (NYSE:DHI) both gained more than 2 percent.

On Thursday, JPMorgan (NYSE:JPM) upgraded KB Home and PulteGroup to Overweight from Neutral. The bank cited improving fundamentals in housing, especially for the apartment sector. JPMorgan downgraded Toll Brothers (NYSE:TOL) to Underweight based on valuation, but shares still managed to climb 1 percent higher. The SPDR Homebuilders Trust (NYSEARCA:XHB) edged slightly higher to reach its highest level since September 2008, giving investors who prefer to book profits on the way up a good excuse to do so.

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