Investors are bullish on homebuilders

How long will the stock rally last?

The various stock indices started of the first trading day of the week with a bang as homebuilders rallied off investor appetite and interest in the stock market.

The Dow Jones Industrial Average had its best day since July, closing near session highs and soaring above the 15,000-level.

Additionally, the S&P 500 Index and Nasdaq shot up more than 1%.

Investors piled into homebuilders and related stocks Monday, signaling a flurry of upside activity in the sector.

When taking a look at the HW 30 index  — HousingWire’s exclusive index of stocks impacting the housing economy — homebuilders ended the day up significantly.

D.R. Horton (DHI), Lennar Corp. (LEN) and Toll Brothers (TOL) all performed well, closing up 6.52%, 5.40% and 4.70%, respectively.

The recent rally is in large part due to rates falling to 2.9% Monday and following weak August payroll data. This data suggested the Federal Reserve's tapering of its bond-buying program may occur later than market expectations, explained Morningstar Credit Ratings homebuilder analyst James Krapel.

However, many investors are wondering how long the rally will last?

"We think the homebuilders are fair to overvalued at this point," Krapel said. "From a long-term perspective, there’s not a lot of upside for homebuilders and for the next six months, stocks will be driven by interest rates."

On a similar note, Robert Grimm of Odeon Capital stated the recent stock performance is due to the overall strength in the market, but such momentum will be short lived.

"I think mortgage rates being up 100-plus basis points will have an impact on sales, at least for a while and I expect that housing sales in the next two quarters or so will be below expectations," Grimm explained.

When taking a closer look at the HW 30 Index, homebuilders outperformed the majority of the stocks Monday, with D.R. Horton reaching nearly $20 per share for the day.

Going forward, the bigger picture is that there’s still a lot of pent up housing demand and, consequently, affordability is favorable from a long-term perspective, Krapel concluded.

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