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RealMoney Extra: Be Cautious With Builders

This column was published earlier this week on RealMoney . Click here for a free trial and stay up-to-date on the latest analysis and trends.

I am going to make a bold forecast: Existing-home sales are likely to increase each and every month from now through August.

But don't run out and buy Hovnanian (HOV - Get Report), Ryland (RYL) and KB Home (KBH - Get Report), or any other homebuilders just yet. (We do not have any positions at the moment, but we have been pretty actively trading the group.)

The kicker is, these monthly sales gains are absolutely, utterly meaningless. It is not, as some people have mistakenly written, signs of an improving housing sector. Rather, it merely reflects the regular seasonality of home sales.

Hunting Through the Data

I spend a lot of my day digging through data. I try to tease out what I can learn about a given economic sector by dissecting the official data releases, be they governmental or private sector in origin. I believe it's important to understand both what the reality is, as well as what most traders and fund managers believe.

Sometimes, the search is a bust, and the data is exactly what it appears to be. Often, I learn some detail that provides context to the news, allowing me to better understand what is going on economically. On occasion, we learn things about the true state of an aspect of the economy that is quite different than the popular headline. And just sometimes, these "seek and destroy" missions yield a very positive result that is completely at odds with the public perception.

The monthly existing-home sales was just such an economic indicator.

In mid-March, the headlines were quite optimistic: We learned from the National Association of Realtors that "Sales of existing homes increased in February and remain within a fairly stable range." And, we also learned that low prices have attracted buyers back into the market. The Wall Street Journal even had a front-page article, stating, "New data suggested that [foreclosure] pressures are starting to drive prices low enough to attract some buyers back into the market. Sales of previously occupied homes jumped 2.9% in February from the month before, the National Association of Realtors said, the first increase since July."
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