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The Builders Are Running. Don't Get Trampled.

By David Smith - Updated Apr 5, 2017 at 8:04PM

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While the builders' shares are roaring, we're not out of the woods yet.

OK, maybe you hit it right when, while technology stocks were imploding, you bought Meritage Homes (NYSE:MTH) below $7.50 a share in early 2001 and unloaded it north of $90 in mid-2005.

And with Toll Brothers' (NYSE:TOL) shares up 38% in just the past couple of weeks, the same timeframe in which Pulte (NYSE:PHM) has risen about 55% and Lennar (NYSE:LEN) has more than doubled, you think we may be off to the races again. If so,

I'm here to urge caution.

Sure Uncle Sam is doing lots to jumpstart housing. For instance, he's agreed to buy up to $600 billion of debt and assets from the likes of Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). That program alone has pushed mortgage rates down and refinancings up.

And you've no doubt heard that Secretary Paulson's Treasury Department is working on a scheme to lower mortgage rates on home sales to about 4.5%. That would be about one point below the current rate for 30-year fixed rate mortgages, a huge boon to homebuyers.

It also would constitute an effort to bail out the builders without acknowledging that the sector is being bailed. Indeed, the homebuilders' CEOs wouldn't even have to point hybrid vehicles or Gulfstream jets toward Washington, D.C., such that they might genuflect before members of Congress.

But keep a few things in mind. First, as the Labor Department told you today, employers across the country are chopping jobs at a breakneck pace, with 533,000 cuts having occurred in November alone. At the same time, housing foreclosures seem unlikely to slow in the months -- or perhaps years -- ahead. In fact, The Wall Street Journal reported that Credit Suisse thinks that about 8.1 million mortgages -- about 16% of the nation's total -- will join the financial eviction parade in the next four years.

Further, while all-important consumer confidence surprisingly improved slightly in November, it's still terribly anemic. And then there's what's being called the "shadow inventory" of homes for sale. Those are the houses (probably lots of them) whose owners would love to plop a sign in the front yard in an effort to lure a buyer, but they realize that, given still sliding prices and a host of houses listed in the neighborhood, the action really wouldn't be worth the effort.

So buy a builder's stock if you must -- my favorite continues to be Toll -- but recognize that we're not yet out of the woods. You might still be conked by a toppling tree.

For related Foolishness:

Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned above. He does, however, encourage you to send him your comments or questions. The Fool has a disclosure policy.

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Stocks Mentioned

Toll Brothers, Inc. Stock Quote
Toll Brothers, Inc.
$48.91 (-1.17%) $0.58
Lennar Corporation Stock Quote
Lennar Corporation
$86.21 (-2.11%) $-1.86
PulteGroup, Inc. Stock Quote
PulteGroup, Inc.
$43.50 (-2.36%) $-1.05
Federal Home Loan Mortgage Corporation Stock Quote
Federal Home Loan Mortgage Corporation
$0.60 (-1.63%) $0.01
Meritage Homes Corporation Stock Quote
Meritage Homes Corporation
$86.11 (-2.11%) $-1.86
Federal National Mortgage Association Stock Quote
Federal National Mortgage Association
$0.62 (-4.00%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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