Depressed Housing Market Leads Recovery

NEW YORK ( TheStreet) -- Based upon the performance of the homebuilder stocks since the Oct. 4, 2011 lows and year to date, you would think that the market for new homes was booming. There are subtle signs of stability in data from the National Association of Home Builders, rising new home sales, and stability and a possible bottom for home prices, but the housing market is far from normal.

Back on June 21, I wrote Homebuilders Vulnerable in Current Market and focused on the PHLX Housing Sector Index (HGX), discussing the downtrend that went all the way back to the July 2005 highs for the homebuilder stocks.

The weekly chart for PHLX Housing Sector Index shows rising momentum (12x3x3 weekly slow stochastic). HGX is above its five-week modified moving average at 128.49. The weekly chart profile is thus positive particularly with the breakout above the downtrend that goes back to July 2005. This downtrend connects the highs of July 2005, January and April 2006, and February 2007.

I did not expected this trend to be broken to the upside at this time, but that does not mean that you avoid "buy and trade" strategies for the homebuilders rated Buy or better by www.ValuEngine.com.

My annual value level for HGX is 122.53 with my quarterly pivot at 135.17 and monthly risky level at 148.28. HGX is up a staggering 33.8% year to date and up 87.1% since its October 4, 2011 low. The September 2008 high is 146.34 with the 120-month simple moving average at 155.73.


Chart Courtesy of Thomson/Reuters

In my judgment the latest data on housing does not justify the extent of the rally in homebuilder stocks.

The Fed statement following the June 19 and 20 FOMC meeting continued to include, "Despite some signs of improvement, the housing sector remains depressed."

The National Association of Home Builders Housing Market Index rose just a point in June to 29, which was the highest reading since May of 2007, but was still well below 50. This means that the homebuilders view the activities in the market for new single family homes as being well below normal.

New home sales rose by 7.6% to an annual rate of 369,000 units in May. The 4.7-month's supply is the lowest since October 2005. The inventory of new homes rose by just 1,000 to 145,000 units. While the pace of new home sales is promising, the National Association of Home Builders cautioned that the current sales figures remain low by historical standards, constrained by challenges related to credit availability for builders and faulty appraisals.

Did you ever notice that housing starts are always a higher figure than new home sales? Housing Starts are a broad measure of all homes beginning construction. New home sales come from sales from the inventory of homes built in anticipation of finding a buyer. Not included are custom homes, where the owner of a vacant property decides to have a home build on that land. It is estimated that 80% of all housing starts are new homes built for sale.

The latest release of the S&P Case-Shiller Home Price Index shows price stability in April after setting cycle lows for the 20-City Composite in March. The index showed that home prices rose by 1.3% in April vs. March, but were down 1.9% year over year. Overall home prices declined 34.1% from the June-July 2006 bubble highs to the lows set in March 2012. Since the year 2000, the 20-City Composite is still up 35.8%, and would have to decline by another 26.4% to return to those levels.

The Mortgage Bankers Association reported that its seasonally adjusted index of mortgage applications for both refinancing and home purchase fell 7.1% last week. Refinancing applications decreased by 8.3%, while the loan requests for home purchases, a leading indicator of home sales, fell 1.4%. The MBA survey covers over 75% of US retail residential mortgage applications. This forward-looking statistic shows that despite record low mortgage rates, the housing market is well below participating the normal 17% of an economic recovery.

Here are my profiles for five home builders that are rated buy or better according to ValuEngine. Use the value levels, pivots and risky levels for your "buy and trade" Strategies.

D R Horton ( DHI) ($18.51) set a multi-year high at $18.56 on Monday. My quarterly value level is $16.79 with a monthly risky level at $19.46. My annual value level is $14.45 with annual risky level at $29.28.

Lennar Corp ( LEN) ($31.10) set a multi-year high at $31.20 on Monday. My quarterly value level is $28.89 with a monthly risky level at $33.90. My semiannual value level is $23.97 with annual risky level at $44.87.

Meritage Homes ( MTH) ($34.61) set a multiyear high at $34.61 on Monday. My annual value level is $29.44 with a quarterly pivot at $33.00 and monthly risky level at $37.46.

Ryland Group ( RYL) ($25.98) set a multiyear high at 26.23 last Friday. My quarterly value level is $20.68 with a monthly risky level at $27.04. Ryland has been downgraded to Buy from Strong Buy this morning.

Toll Brothers ( TOL) ($29.96) set a multiyear high at $29.98 on Monday. My quarterly value level is $27.38 with an annual pivot at $29.30 and monthly risky level at $31.92.

I advocate the use of GTC Limit Orders to add to long positions or become less short on share price weakness to the Value Levels. Traders should enter GTC Limit Orders to reduce the long positions or to add to a short position on strength to Risky Levels.

To review my "Buy and Trade" methodology please read "Suttmeier's 'Buy and Trade' Investment Strategy" at http://www.thestreet.com/story/11513797/1/suttmeiers-buy-and-trade-investment-strategy.html.

At the time of publication, the author held no positions in any of the stocks mentioned.

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