Chart Courtesy of NAHB/Wells Fargo Housing Market Index It seems to me that record low inventories of new homes is discouraging prospective new home buyers from becoming actual new home buyers. The NAHB indicated that in some markets there is a lack of building lots and the cost of building materials is on the rise. The bottom line is that the market for new homes is less depressed that it had been for the prior five months. The graph above shows that builder sentiment is leading new single-family starts. Housing Starts Rose 2.3% in August: Strength in single-family starts boosted the overall number. Single-family starts rose to a seasonally adjusted annual rate of 750,000 units. The important single-family sector saw new construction up 5.5% with a gain of 535,000 units. The NAHB reacted to this improving trend with the note that "there is still plenty of room for improvement." New Home Sales for August: These came in at an annual rate of 373,000 units, which was below analysts' estimates. The inventory of new homes remains near a record low at 141,000 units. The S&P/Case-Shiller Home Price Indices: I focus on the 20-City Composite and this index was up 1.6% in July versus June 2012, up 1.2% year over year and up 7.8% since the recent low. Home prices are still down 30% from the June / July 2006 housing market bubble peak. Chart Courtesy of S&P Dow Jones Indices and Fiserv Here I profile nine of the stocks in the PHLX Housing Market Index. Despite this positive data for the homebuilders I continue to be cautious about the sustainability of the powerful rally in this industry. Chart Courtesy of Thomson/Reuters The weekly chart for PHLX Housing Sector Index (157.44) shown above shows extremely overbought momentum with the index well above its five-week modified moving average at 151.97. The multi-year high was set on Sept. 21 at 168.79. This high was well above 145.52, which is the 38.2% Fibonacci Retracement of the entire down trend from the July 2005 high to the March 2009 low. This level now becomes support on the downside. The 50% retracement at 173.81 is resistance to the upside. My quarterly and annual value levels are 135.17 and 122.53 with a monthly pivot at 158.52, which was tested on Wednesday's downside.