Housing Recovery Slips: 3 Stocks to Dump Now

Following the winter chill, the housing market had been undergoing a steady recovery. However, recently released data suggests that home buyers seem to be wary of making purchases at the moment. The latest of these negative reports reveals that pending home sales declined in June after three consecutive months of solid growth.

Pending, New Home Sales Drop

Data released by the national association of realtors on Monday revealed pending home sales dropped 1.1% to 102.7 in June from May’s revised figure of 103.8. The drop in pending home sales in June was in contrast to the consensus estimate of a rise of 0.3%.

The decline in pending home sales numbers negatively impacted home builder stocks. The SPDR S&P Homebuilders (XHB) declined almost 1.6%, the largest decliner among the S&P 500 sectors. Key housing stocks from the sector such as Toll Brothers Inc. (TOL – Analyst Report), PulteGroup, Inc. (PHM – Analyst Report), Lennar Corp. (LEN – Analyst Report), KB Home (KBH – Analyst Report), DR Horton Inc. (DHI – Analyst Report) and Beazer Homes USA Inc. (BZH – Snapshot Report) decreased 1.5%, 0.9%, 2.1%, 1.7%, 0.6% and 2.8%, respectively.

The report followed discouraging new home sales numbers. Last Thursday, new single-family houses decreased 8.1% to 406,000 in June. New home sales registered its biggest drop in almost a year.

Existing Home Sales Peak, Home Price Growth Slows

In contrast, data released last week reveal existing home sales increased 2.6% in June. This metric increased to a seasonally adjusted annual rate of 5.04 million in June from May’s upwardly-revised figure of 4.91 million. This was also more than the consensus estimate of 4.98 million. Existing home sales rose for the third consecutive month in June, touching the highest level since Oct 2013.

Additionally, data released yesterday shows home price growth is slowing. S&P/Case-Shiller Home Price Indices data revealed that the 20-City composite index, the leading measure of U.S. home prices, rose 9.3% year on year in May. However, the rate of growth was down from April’s year-on-year rise of 10.8%.

A Choppy Recovery

Taken together, data reveals that a recovery is indeed underway, albeit a choppy one. Home price growth may have declined to single digits in May, but this fall comes after a series of increases. Meanwhile, wage growth remains stagnant even though the job market has turned the corner.

Credit conditions also remain unfavorable since lending standards remain extremely stringent. This has prevented buyers from benefiting from low mortgage rates. The majority of home sales can be attributed to buyers who have good credit scores and are ready to make large cash downpayments. Most of these buyers are also likely to purchase expensive homes.

Our Choices

Here we will list 3 stocks that may witness further downside due to these factors. These stocks have witnessed downward estimate revisions recently. Moreover, share prices for each of these stocks have also declined considerably. These stocks carry either a Zacks Rank #4 (Buy) or Zacks Rank #5 (Strong Buy).

Hovnanian Enterprises Inc. (HOV – Snapshot Report) is a homebuilding company which designs, constructs and sells single family homes, townhouses, condominiums and active adult homes. It also offers financial services to its customers, including mortgage loans and title services. The stock holds a Zacks Rank #5 (Strong Sell) and earnings for the current year are expected to fall 48.9%.

Estimate Revision – Hovnanian has seen 4 negative revisions in the last 60 days for the current quarter and 3 negative revisions for current year estimates. Quarterly earnings consensus has declined from 10 cents a share to 7 cents a share. Yearly earnings consensus has dropped from 19 cents a share to 8 cents.

Share Price – The stock has lost 16.7% over the last four weeks.

DR Horton Inc. is one of the leading national homebuilders. The company is primarily engaged in the construction and sale of single-family houses both in the entry-level and move-up markets. D.R. Horton operates through two segments: Homebuilding and Financial Services. The Homebuilding segment comprises six reporting regions and derives revenues primarily from the sale of completed homes. The stock holds a Zacks Rank #4 (Sell).

Estimate Revision – DR Horton has seen 4 negative revisions in the last 30 days for the current quarter and 7 negative revisions for current year estimates. Quarterly earnings consensus has declined from 53 cents a share to 51 cents a share. Yearly earnings consensus has dropped from $ 1.75 cents a share to $ 1.63.

Share Price – The stock has lost 12.6% over the last four weeks.

Ryland Group Inc. (RYL – Snapshot Report) is a leading national homebuilder and mortgage-related financial services firm. The financial services segment complements the company’s homebuilding activities by providing various mortgage-related products. The stock holds a Zacks Rank #4 (Sell) and earnings for the current year are expected to fall 13.2%.

Estimate Revision – Ryland Group has seen 1 negative revision in the last 30 days for the current quarter and current year estimates. Quarterly earnings consensus has remained flat. However, yearly earnings consensus has dropped from $ 3.03 a share to $ 3.01.

Share Price – The stock has lost 9.5% over the last four weeks.

Despite recent negative reports, many economists are of the view that the housing recovery will continue. However, it may be some time, possibly next year, before the recovery gains momentum. This is why it may be a good idea to drop these stocks from your portfolio now.