Steer Clear of Housing Market

I have written in previous commentary about the downtrend in the housing market as both housing starts and building permits continue to slide.

 As we await the October data, which is expected to remain soft, the picture for housing continues to look relatively bleak at this time. The monthly housing starts have been below estimates in five of the last seven months, but we saw a surprise better than expected reading in September. Housing starts have not been above two billion since February, 2006. Moreover, the trend for building permits looks equally bad. The monthly building permits have been below estimates for the last seven straight months back to March and have declined for eight straight months since January. The September reading was the lowest in over two years.

 What makes me believe the softness will continue are the higher rates for interest and mortgages, which have clearly impacted borrowing and, by proxy, the housing market.

 In my view, I would steer clear of the housing market for the time being, unless we get a strong sense that the slide will end. Many homebuilder stocks such as Toll Brothers Inc. (NYSE/TOL), a builder of luxury homes, may appear to have decent valuation, but be careful as revenues and earnings for the FY06 and FY07 (ended October) are estimated to decline year-over-year.

 We also saw some concerns out of bellwether home renovation company Home Depot Inc. (NYSE/HD), which reported a 3% drop in its Q3 profits while also cutting its financial guidance for this year as weakness in the housing market is impacting business. Year-over-year sales did rise 11.3% to $23.09 billion, just below the Street estimate of $23.4 billion according to Thomson First Call.

 The positive if you own the stock is that, despite all of the recent negative news, Home Depot is holding up and continues to show good fundamentals. I feel home renovation will continue to be strong as people choose to renovate instead of moving. And, as rates stabilize, I feel the company will improve and should continue to be a core holding for investors.