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Homebuilders Will See Some Cracks

By Michael Jaffe

On Dec. 5, we at Standard & Poor's downgraded shares of homebuilders to marketweight from overweight. With a better economy likely to bring slightly higher mortgage rates over the course of 2003, our enthusiasm for building shares is diminishing.

Homebuilding stocks have been beating the overall market for some time. Year to date through Nov. 29, the S&P Homebuilding Index fell 1.1%, vs. an 18.4% decline in the S&P 500 index. In 2001, homebuilding stocks jumped 36.6%, vs. a 13% fall in the broad market index.

HARD TO TOP. The market's muted reaction on Wednesday, Dec. 4, to good November orders for several big builders shows it's getting tough to find a catalyst for the industry's shares. Though the valuations are very modest and we expect decent 2003 results, the cycle's peak is likely nearing. We established that forecast given that new single-family home sales have been in an upcycle for most of the past decade. In fact, a record was reached in 2001, when 908,000 units were sold. That record level

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