This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Time to Book Profits on Home Builders

NEW YORK ( TheStreet) -- On April 25, I wrote about the strength in home builder stocks despite what the Federal Reserve described as a housing depression.

Today, we review the housing starts data for April and the National Association of Home Builders Housing Market Index for May. In addition, I will show a graph of the housing sector index that I use to evaluate the risk/reward of the stocks that represent the housing sector within the symbol HGX.

Housing starts rose by 2.6% in April to a seasonally adjusted annual rate of 717,000 homes, which was stronger than expected by Wall Street analysts. The single-family component came in at 492,000 units. The NAHB described this data as "very solid" but at half the pace of a fully healthy housing market. In my opinion, this pace is still within the framework of a depressed market for new homes.

Yesterday, Federal Reserve Governor Elizabeth Duke said that the housing market is slowly mending, but needs a lot of help. Any sustainable housing recovery needs more help from Congress and the banking regulators to stabilize the mortgage market. Governor Duke suggests that banks ease up lending standards for mortgages, which would be a positive step toward attracting buyers back to the market.

The National Association of Home Builders (NAHB) Housing Market Index (HMI) measures builder confidence for newly built, single-family homes on a scale of zero to 100 with a reading of 50 being neutral. This index rose by 5 points in May to 29, after a downward revision to April's reading. The good news is that this is the best reading since May 2007, but the bad news is that it's well below 50.

After a lull in April, potential buyers are window shopping for a new home given record low mortgage rates and the desirability of buying new rather than buying a distressed "bargain" home that faces expensive repairs to return to being livable. The pace of demand for new homes would pick up if potential buyers had access to credit at a reasonable mortgage rate, and if builders had access to new construction and development loans. The NAHB continues to have concerns about inaccurate appraisals on depressed properties, and rising materials prices.

The Housing Market Index peaked at 72 in June 2005, which is when I predicted a peak in the share prices for home builder stocks. On June 21, 2005, I wrote this for, "Homebuilders' Charts Testing Hearts." The index has been below 50 since May 2006, a month or so before home prices peaked in June/July 2006. The low for this index was 8 in January 2009.

I track the housing market technically by following this weekly chart PHLX Housing Sector Index (HGX) and here's a look at the weekly chart.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $93.74 0.00%
FB $117.58 0.00%
GOOG $693.01 0.00%
TSLA $240.76 0.00%
YHOO $36.60 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs