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
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

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 Realmoney.com, "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

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

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
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, 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
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,493.37 -69.93 -0.42%
S&P 500 1,925.15 -5.52 -0.29%
NASDAQ 4,352.6390 -17.1340 -0.39%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs