U.S. Housing Market on Much Better Footing

U.S. Housing Market on Much Better FootingThe housing market is clearly on the upside, with stronger housing starts and building permits.

In July, there were 746,000 housing starts, which was below the 763,000 estimate and the revised 754,000 in June. The reading was a bit soft but much better than what we saw earlier in the year, indicating that housing starts continue to be relatively strong. The building permits reading of 812,000 in July was impressive, well above the 770,000 estimate and the revised 760,000 in June. This strong reading indicates builders are expecting a good flow of buying ahead in the housing market.

Moreover, home prices representing another key piece of the housing market, are edging higher. The S&P/Case-Shiller index, comprised of the 20 largest U.S. metropolitan cites, increased a better-than-expected 0.9% in June, representing the fifth straight month of increases.

If you live in Connecticut, the playground for the rich, home prices have been on the decline due to the lower payouts on Wall Street.

The marked improvement in the housing market is also showing up in the results of numerous homebuilder stocks.

Homebuilders are continuing to deliver better results. Toll Brothers, Inc. (NYSE/TOL) blew away the consensus earnings estimates in its fiscal third quarter after reporting $0.36 per diluted share, double the estimate of $0.18 per diluted share. Revenues surged 40.6% year-over-year. The backlog of homes surged to 2,559 units, up 44.0% year-over-year. In the case of Toll, much of the easy money has been made for now. The hefty valuation given to Toll at 30.3X fiscal year 2013 earnings per share and a price/earnings to growth ratio of 2.9 supports this. The stock has already moved down from its high of $33.68 on August 22, as the trading volume has also been declining.

The chart of the SPDR S&P Homebuilders (NYSE/XHB) shows the upward trend of the S&P Homebuilders Select Industry Index from the October 2011 bottom to the current high. The upward break at the $22.00 level was bullish due to the topping action that was evident.

SPDR S&P Homebuilders Chart

Chart courtesy of www.StockCharts.com

The National Association of Home Builders (NAHB) Housing Market Index reported an encouraging 37.0 reading in August, but it’s still indicating that more builders have poor views than positive ones towards the housing market. The 50.0 level is the midpoint—not reached since April 2006, over six years ago.

Yes, there are still some concerns towards the housing market, but I expect housing to continue to improve, especially if the jobs market can get going. (Read “It’s Simple: We Need Jobs!”)

Consumer confidence was a disappointment, with a reading of 60.6 in August, the lowest reading in nine months and below the estimate of 65.7 and the downwardly revised 65.4 in July. To tell you how bad the readings are, consider that 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.

At this juncture, if you hold some homebuilder stocks, I would be taking some money off the table after the run-up in housing market stocks.