Homebuilder Stocks Show Improvement, But Stay Selective

US DollarWhile home prices continue to slide across the nation, we have been seeing improvements in the homebuilder sector. An improving economy and some job creation are helping to attract buyers to the housing market and the hope is that prices will advance higher.

Housing starts came in at 717,000 in April, above the 680,000 estimate and the revised 699,000 in March. This reading means that builders are seeing higher demand down the road in the housing market, which is positive. Moreover, the key Building Permits reading, which shows how well the building pipeline is doing, is also improving, with 715,000 permits in April, above the 730,000 estimate and the revised 769,000 in March.

The chart of the S&P Homebuilders Select Industry Index (NYSE/XHB) below shows the upward trend from the October 2011 bottom to the May peak. Yet we are currently witnessing some stalling on the chart, with the XHB showing some topping and a recent breach below the 50-day moving average of $20.91. The $18.50 to $19.00 levels are showing some buying support above the 200-day moving average of $17.97.

Chart courtesy of www.StockCharts.com

But, while the index has been trending higher, we need to monitor the break at the 50-day moving average. Should the employment problem and the eurozone crisis escalate, there could be additional moves down to the 200-day moving average.

Distressed prices in the housing market remain problematic. The Case-Shiller 20-city Index showed an average 2.6% price decline in the housing market across the top 20 U.S. cities in March, following a 3.5% decline in February. The problem continues to be high foreclosures and short sales driving home sales and placing downward pressure on home prices.

The NAHB/Wells Fargo Housing Market Index, an indication of homebuilder sentiment, is at its highest level since May 2010, coming in at 29 in May, but still well below 50. This means that confidence is rising, but there are still more builders who see the housing market as poor. The last time the index was above 50 was way back in April 2006, before the subprime fiasco.

Jobs growth has been disappointing over the last few months, after a great start to the year with 243,000 jobs created in January. In May, a mere 69,000 jobs were created, which followed a downward revised 77,000 new jobs in April. Weak jobs impact the housing market and retail spending, as I discussed in Retail Sector Forecast Remains Cloudy.

One thing’s for sure; the homebuilder market has bottomed out. We are seeing an influx of foreign buyers to the U.S. housing market from Brazil and Canada buying real estate in Florida and other depressed regions.

Homebuilder stocks such as Toll Brothers, Inc. (NYSE/TOL) and Lennar Corporation (NYSE/LEN) have been reporting strong results. Even troubled Hovnanian Enterprises, Inc. (NYSE/HOV) managed a blow-away quarter by earning $0.02 per diluted share, well above the consensus estimate calling for a loss of $0.32 per diluted share. Revenues surged 33.9% year-over-year to well abo