Some Home Builders Remain 'Buys' Despite Housing Depression

The following commentary comes from an independent investor or market observer as part of TheStreet's expert contributor program, which is separate from the company's news coverage.

I follow the housing market via the PHLX Housing Sector Index, which is up a solid 19.1% year to date, and is up 79.7% since the Oct.4 lows. You would think that the market for new homes would be in a lot better shape considering this performance, but that's not the case given recent data on the housing market, particularly the market for new homes. Even the Federal Reserve still describes the housing market as depressed.

Here's an overview of the current housing data followed by my recommendations for how to play home builder stocks in this environment.

Home Builder Confidence Fell 3 Points in April

The National Association of Home Builders recently reported that their Builder Confidence Index for newly built, single-family homes fell to 25 from 28 in April. This slide in confidence was the first in seven months.

Builders have noticed increased interest among potential new home buyers, but consumers are reluctant to proceed with a purchase. Potential buyers are being held back by tight credit conditions.

Builders continue to have difficulty in rebuilding inventory off record low levels also due to tight credit conditions for construction and development loans. Builders also remained concerned about competition from foreclosures and appraised values for existing homes.

Housing Starts Fell 5.8% in March

Housing Starts fell to an annual rate of 654,000 units in March on flat single-family starts and a drop of 6.9% in the volatile multi-family segment.

Builders continue to be very cautious about beginning new homes until there are more real sales on Main Street USA.

The deterrents to building new homes and sales are; Access to credit for both builders and prospective home buyers, and appraisals influenced by the sales of depressed existing homes.

March New Home Sales Decline From Upwardly Revised Earlier Pace

Sales of new, single-family homes declined 7.1% in March to a seasonally adjusted annual rate of 328,000 compared with an upwardly revised 353,000 units in February.

The National Association of Home Builders characterized this as good weather pulling forward some projects to February from March. It appears that builders want to rebuild inventories, which fell to a new record low of just 144,000 homes nationwide, but the deterrent remains tight credit from community banks with regard to Construction and Development loans.

S&P / Case-Shiller Shows Home Prices Still Declining

The 20-City Composite declined 0.8% in February sequentially and was down 3.5% year over year to 134.20. The Index is thus 34.2% above its inception level of 100 in January 2000.

To decline to 100 home prices would have to fall another 25.5%. From the June / July bubble peak home prices hit a new low, down 35%.

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