U.S. housing stocks are among the market's worst performers over the past year and conventional wisdom would suggest it might be time to buy, but fund managers are warning to hold off.
Government data and forecasts by companies are downbeat, and the sector has had a speculative, bubble-like growth which will take years to unwind, some investors said.
Housing stocks continue to be unattractive, said David Scott, who co-manages the $635 million Chase Growth Fund.
There is probably still absolute price vulnerability in these stocks, he added.
Homebuilders like Hovnanian Enterprises Inc., Beazer Homes USA Inc. and KB Home have seen stock prices tumble more than 40 percent since January and some of their competitors recently slashed forecasts for the rest of the year.
In the face of such a glum outlook, Scott, who has not owned a housing stock for over a year, is also steering away from sectors that are hit by a slowdown in housing.
In July, the fund exited its position in retail giant Wal-Mart Stores Inc.
Since that time, the fundamental outlook has worsened. People will focus on housing more as we move into the later stages of this year and particularly how broadly it affects the rest of the economy, Scott said.
Evidence of a slowdown continues to mount.
On Thursday, the U.S. Commerce Department said sales of new U.S. homes tumbled to a smaller-than-expected seasonally adjusted 1.072 million annualized rate in July.
Sales of new homes fell 4.3 percent last month, the biggest drop since an 11.5 percent plunge in February and the lowest annualized rate since February as well, the report showed.
Earlier this week, the National Association of Realtors said sales of existing homes, which account for 85 percent of the U.S. residential market, fell for the fourth straight month.
And in recent weeks, builders like Toll Brothers Inc., D.R. Horton Inc., Pulte Homes Inc. and Hovnanian have reported higher cancellations and slashed forecasts for the rest of the year.
Christopher Kostiz, senior fund manager at Advance Capital Management, which has recently slashed its holdings of homebuilders, said it would take up to two years before the housing market and the sector's stocks stabilized.
I don't think it's time to come back to housing stocks yet because I don't think everyone's come clean yet. It's going to be another few quarters before all the bad news gets filtered through, he said.
Fund firm Stratton Management Company has also been getting out of housing stocks, saying the soft-landing had turned into a hard-landing for the sector.
The housing bubble and too much speculative inventory will have their impact on home prices over the next 12 months, the firm said in a note.
The PE ratios (see table below) of most homebuilders are in the low single digits, but Scott of the Chase fund said investors in the sector should beware of the PE trap, where stocks stay cheap for a long period of time after a bubble.
As they report earnings, the stocks are going down significantly, despite the fact that they had low PEs. So the PE trap clearly applies here, he said.
Some investors however are more optimistic. Ron Muhlenkamp, head of the $3-billion Muhlenkamp Fund, said the homebuilder stocks will not bounce back very quickly but they are good buys at current prices.
We don't think people are going to quit buying or building houses. So, at some point, whether it's today or in the near future, we think these are very good companies at very good prices, he said.
Tim Biggam, an options strategist at Man Securities in Chicago, said the implied volatility on the housing sector stocks was at the lower end of the range, indicating that the market thinks there's value in the sector.
You are really seeing the fact that even though the business certainly isn't robust as it used to be, the valuations have already reflected that and may have already overdone it a little bit.