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TheStreet Open House

Homebuilders Upgraded On Weakness

Stocks in this article: BZH DHI HOV KBH LEN MDC MHO PHM RYL SPF TOL

NEW YORK ( TheStreet) -- Most equity market strategists say the housing market should be the driver for an improving U.S. economy for the remainder of 2013 and beyond. Their theme is that rising home prices are a good thing, and that supply is low for both existing and new homes. In addition, mortgage rates remain low making homes affordable.

My theme is less optimistic with the housing market performing at half the pace of what the National Association of Home Builders (NAHB) defines as normal. The NAHB Housing Market Index at 44 remains below the neutral 50 reading.

The NAHB considers single-family housing starts the most important measure and the April data showed that this key statistic fell by 2.1% to an annual rate of 610,000, just above the key 600,000 level.

The NAHB has numerous concerns about the sustainability of the market for new home construction and sales including; the cost of building new homes is on the rise due to tightened supplies of materials, lots and labor. In addition, community banks remain reluctant to increase exposures to construction and development loans given a still elevated $201.6 billion exposure established during the housing bubble years.

The NAHB agrees with my assessment concluding that the market for new single family homes is "about half-way back to what could be considered a full recovery."

The supply of existing homes slowed as major banks delayed the foreclosure process as home prices rise. Banks have also slowed down sales of homes in the category "Other Real Estate Owned". At the end of the first quarter banks had an inventory of $35.9 billion in OREO properties, up 195.5% from the end of 2007. At some point this hidden supply will return to the market.


In addition, as home prices rise fewer homes are underwater territory vs. mortgage debt, which will increase the supply of existing homes on the market. More "For Sale" signs are up in my community in Tampa Bay.

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