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Fear and Greed Return to the Housing Market

The significant rise in mortgage rates on the failure of QE3 and QE4 could be the catalyst to pop the current mini-bubble in today's housing market.

My focus in the housing market has been single family homes and the home builder stocks, which are part of the PHLX Housing Sector Index (^HGX) (183.92) which is between the 200-day simple moving average at 180.50 and its 50-day SMA at 190.81. The housing index is up only 7.4% year to date after dipping into the red on June 24. The index is down 12.4% from its May 20 high.

Chart Courtesy of Thomson/Reuters

Homebuilder stocks have been downgraded on strength and upgraded on weakness, which has helped in setting buy-and-trade strategies in 2013. This dynamic has lined up well with the technicals and my proprietary analytics given risky levels at which to sell on strength and value levels at which to buy on weakness.

In my last post covering all 11 home builders I have been tracking on June 21, Homebuilders Hurt by Fed Policy I noted the weakness caused by rising mortgage rates, but in that post six had buy ratings and only one had a sell rating. Today, none have buy ratings and four have sell ratings.

On Tuesday morning we learned that the National Association of Home Builders Housing Market Index rose by six points to 57 in July, the strongest reading since January 2006. This reading is solidly above the neutral 50 mark indicating that home builders are seeing improving demand for newly-built single family homes.

The NAHB HMI peaked at 72 in June 2005, which is when I predicted a peak the share prices for the home builders. The index had been below 50 since May 2006, and home prices peaked in June/July of 2006. The low for the index was 8 in January 2009. Notice that the chart below shows that single family housing starts lag the HMI significantly.

Housing Starts for June will be released on Wednesday morning at 8:30 AM. Expectations call for a rise to 950,000 units annualized. The key component for the graph above is single family housing starts, which has stalled at the 600,000 unit rate annualized. Builder confidence is leading housing starts.
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