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Homebuilder Upgrades Fortify Potential Sinkholes

Stocks in this article: DHI HOV KBH LEN PHM RYL SPF TOL HGX

NEW YORK ( TheStreet) -- The housing market has been a bright spot for a slowly growing economy but in my judgment this spotlight has dimmed. My benchmark for the homebuilding industry is the PHLX Housing Sector Index (HGX) (179.51) set a multi-year high at 198.06 on March 20 the day after I wrote, Sell Downgrades Weaken Homebuilder Foundations. HGX is down 9.4% since setting the multi-year high.

In the March 19 post I showed that seven of the eight homebuilder stocks I follow had been downgraded to sell with the eighth rated hold. Given the proliferation of sell ratings in this industry my suggestion was to book profits in these names as a "source of funds."

Today the seven homebuilders that were rated sell, have been upgraded; two to buy and five to hold. These upgrades fortify the sinkholes that weakened the homebuilder foundations at the March highs.

On Tuesday we learned that housing starts surged 7.0% in March to an annual rate above a million units for the first time since 2008, but this was on the strength of soaring production of multifamily properties. For the homebuilders the more important measure is single-family housing starts, which came in at an annual rate of 618,000 units, just above the 600,000 threshold deemed necessary to sustain the upward momentum for the market for new homes. As a warning, building permits fell 3.9% to an annual rate of 902,000 units.

A more important indicator was released on Monday, as the National Association of Home Builders (NAHB) reported that their Housing Market Index slipped to 42 from 44 in April as the spotlight dims below the neutral reading of 50.

Note that on the chart above shows that single family starts continue to lag the HMI. Homebuilders are getting frustrated by the rising cost of building materials and the difficultly in finding ideal land for development. These new concerns piggy-back on prior concerns of the lack of credit for construction and development loans, the difficulties in the mortgage market for qualified home buyers and lower than market appraisals for depressed properties.

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