Another Look at Homebuilder Stocks

NEW YORK (TheStreet) -- Since my last post covering the housing market we have received additional data that show continued gradual improvement in homebuilding: New Home Sales last Thursday and the S&P /Case-Shiller Home Price indices on Tuesday.

Today I profile the 19 stocks in the PHLX Housing Market Index, or HGX.

Despite these data I continue to be cautious about the sustainability of the powerful rally in the homebuilder stocks.

In my Aug. 17 article on homebuilder stocks I talked about the rise in the NAHB Housing Market Index, or HMI, to 37, but also warned the index remained below its "normal" reading of 50. A reading above 50 is "good" and a reading below 50 is "poor."

I also wrote that the construction of single-family homes declined 6.5% in July and that this segment of the housing market represents 70% of the home construction market.

Last Thursday the latest data on new home sales were released. Sales of newly built single-family homes rose 3.6% in July to a seasonally adjusted annual rate of 372,000. The National Association of Home Builders viewed this release as positive indicating that prospective home buyers are looking to take advantage favorable prices and low mortgage rates. The NAHB expects this gradual upward trend to continue for the remainder of 2012.

I worry about this enthusiasm as the inventory of new homes declined to another record low at 142,000 units, as builders continue to see tight credit conditions for construction and development loans. This makes it tough for builders to begin construction of a home without a buyer's signed contract in hand.

Homebuilders would like to take better advantage of rising home prices. On Tuesday we learned that the S&P Case-Shiller 20-City Composite of home prices rose 0.5% year over year in June, was up 2.3% versus May, and up 6.0% in the second quarter versus the second quarter of 2011.

On Tuesday we also learned the Conference Board's reading on Consumer Confidence fell to 60.6 in August versus 65.9 in July. This measure correlates with the housing market and thus provides a warning for the sustainability of the rally for the home builder stocks.

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