Looking way, way over the valley with housing stocks

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It’s getting tougher to keep home builders’ stocks down on bad news from the housing market -- and investors look increasingly eager to latch on to any good news. The shares are helping to lead Wall Street’s surge today. A Standard & Poor’s index of 15 major builder stocks is up about 6% with an hour of trading left to go, while the S&P 500 index is up about 3.2%.

Here’s the bigger surprise: Builders were some of the best-performing stocks in the dismal first quarter ended Monday. L.A.-based KB Home was up 14.5% in the quarter, to $24.73 on Monday. Pulte Homes jumped 38% to $14.55. Ryland Group, based in Calabasas, was up 19.4% to $32.89.

The industry’s fundamentals have been horrendous, of course, but there was a glimmer of hope today: A government report on construction spending in February said outlays for private residential construction spending dropped 0.9% in the month from January, a smaller-than-expected decline. The drop in January was 1.9%.

Not so fast, says Peter Kretzmer, an economist at Bank of America. The overall decline in residential construction spending in February was muted by a 5.1% surge in remodeling expenditures, he says. By contrast, “new single-family building fell a large 5.7% in the month, suggesting that the glut of homes on the market continues to suppress construction.”

KB Home CEO Jeffrey Mezger couldn’t have been much more downbeat on Friday when the company reported a fiscal first-quarter loss of $268 million, or $3.47 a share. “We see no reason to believe [home sales] in the next few months will improve dramatically enough to clear excess inventories,” Mezger said. That means prices will have to continue to fall, he said — further squeezing builders.

Some of the first-quarter strength in builders’ stocks probably reflects “short covering” by bearish traders who had expected the stocks to slide and have been buying to close out their positions. But the short position in KB Home, for example, was the same in mid-March as it was at the end of November. Not much covering going on there -- yet.

Fundamentally, we know that Wall Street always tries to front-run an industry’s recovery. That’s got to explain some of the action in the builders’ shares. In this case, the recovery in earnings is expected to be a 2009 event: Most of the companies are expected to lose money through 2008.

Talk about looking over the valley.