The housing market is receiving growing media attention as a place to invest. We are seeing an upward move in homebuilder stocks, as the optimism picks up.
We are near a housing bottom, but I’m not convinced it will be all up from here for the housing market.
While the housing market has definitely imp roved from last year and the start of the subprime housing crisis in 2008 that led to the worst recession since the Great Depression, I still feel the optimism is somewhat high and feel there will continue to be hurdles ahead.
The chart of the S&P Homebuilders Select Industry Index (NYSE/XHB) 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 at around $22.00. The $18.50 to $19.00 levels are showing some buying support at above the 200-day moving average of $17.97.
Let’s take a look at the housing market numbers.
Housing starts have been trending higher with 760,000 in June, above the 743,000 estimate and the revised 711,000 in May. This reading means builders are seeing higher demand down the road in the housing market, and this is positive. But there was some fragility in the building permits number that came in at 755,000 in June, which while relatively strong, was below the 765,000 estimate and the revised 784,000 in May.
My concern is the shortfall in building permits could suggest an upcoming decline in future construction, indicating some slowing is coming in the housing market.
The NAHB Housing Market Index reported was encouraging at 35 but still indicating more builders have poor views than positive towards housing. The 50 level is the midpoint—not reached since April 2006, over six years ago!
I still see numerous hurdles ahead for the housing market.
The Case-Shiller 20-city Index contracted another 1.9% in April, following a 2.6% decline in March and 3.5% in February. The plus is the decline in home prices is getting smaller, and this will need to continue, as lower home values translate into less home wealth and less desire to want to spend until the situation improves.
A strong housing market is important, as homeowners buy new furnishings, including many big-ticket items. This is not happening, as home prices continue to decline, dragged down by continued high foreclosures and short sales where homes are dumped at below the mortgage value. Homeowners will be hesitant to spend. This was evident in the 0.5% decline in retail sales in June and 0.4% decline excluding autos.
In June, sales of resale homes fell 5.4% to a seasonally adjusted annual rate of 4.4 million homes, according to the National Association of Realtors. According to economists, we need to see this reading at six million for a healthy housing market.
The lack of jobs growth remains an issue. Only 80,000 jobs were created in June, well below the estimate of 100,000. The second quarter averaged less than 80,000 monthly new jobs. And we know that without jobs or the confidence of work, consumers will not buy, which I discussed in “It’s Simple: We Need Jobs!”
Consumer confidence was another disappointment with a reading of 62.0 in June, below the estimate of 64.0 and the downwardly revised 64.4 in May. The reading is at a multiyear low. To tell you how bad the readings are, economists suggest a reading of 90.0 indicates a healthy economy, something that has not happened since December 2007 when the recession began. And it looks like it will be some time until the confidence reading heads back towards the pre-recession readings of 90.0. This cannot be good.
What all this means is while housing is improving, don’t get too excited and start buying up homebuilder stocks. In reality, I would be taking some money off the table.