NEW YORK -(Dow Jones)- Stocks climb a wall of worry, and never has that old Wall Street adage been more true for than shares of home builders.
So far this year, despite the worst housing market since the Great Depression, the stocks have risen 31%, compared with the broader market's 8% decline, according to UBS Investment Bank.
Heavy short covering - when short-sellers close out their positions - and optimism the government is finally getting involved in addressing the mortgage crisis have fueled the stock gains. But most industry watchers, convinced the housing market hasn't reached bottom, say the rally is unlikely to be sustained.
New and existing inventory remain historically high, a count unlikely to abate with foreclosures occurring at the highest rate in decades. Foreclosures pull down prices and creating even more competition for builders already struggling to sell homes. Luxury builder Toll Brothers Inc. (NYSE:TOL) (TOL) last month said it isn't seeing "much light at the end of the tunnel."
Neither are buyers, many paralyzed on the sidelines as economists predict plunging prices to continue for several years. Tuesday, the closely-watched S&P/ Case-Shiller home-price index showed a record 10.7% year-over-year decline in house prices for 20 reporting markets in January.
"Conditions are still extremely challenging," said Michael Rehaut, a JPMorgan home building analyst. "I think, by and large, demand was poor for another spring selling season, [and] this was on top of a very weak 2007."
Even so, the builder stock gains continue. According to data from Standard & Poor's Capital IQ division, U.S. home builders hit a three-year low Jan. 8 and began outperforming the S&P 500 Jan. 22. Of 29 public U.S.-based home builders, 23 have gains so far this year.
The Dow Jones US Home Construction Index has climbed more than 20% this year. After the National Association of Realtors said Monday that February's existing- home sales climbed for the first time since July, the index closed up 5.28% for the day.
Since January, M/I Homes Inc. (NYSE:MHO) (MHO) has soared nearly 75%, while Hovnanian Enterprises Inc. (NYSE:HOV) (HOV), which recently reported a first-quarter loss, is up more than 70%. Both Standard Pacific Corp. (NYSE:SPF) (SPF), currently negotiating with lenders to amend bank credit facilities, and Pulte Homes Inc. (NYSE:PHM) (PHM) have risen more than 40% this year.
Because builders typically rally several months before the market bottoms, it would be easy to assume recovery is near.
Industry watchers offer other explanations for the surge.
It began earlier this year as investors snapped up the cheap stocks, and was further fed by significant buying from short sellers. Both Beazer Homes USA Inc.
