Avoid Homebuilder Stocks

The latest U.S. housing market data were just released and it clearly points to a downward trend in the housing market, something that readers here have been hearing for some time. The continued softness in the housing market may cast a dark cloud over many housing and building related sectors.

 In June, housing starts came in at below economist estimates for the third time over the past four months. In all, there were 1.85 million units, short of the estimate of 1.90 million units. It was also the lowest reading since 1.836 million units in March 2005. The cooling in the housing market is for real and this does not bode well for housing and housing-related stocks.

 Likewise, Building Permits for June also saw a shortfall, coming in at 1.862 million units, well short of the estimate of 1.920 million units. It was below estimates for the fourth straight month and has declined for the last five straight months. It was the first decline below 1.90 million since way back in September 2003. The downward trend is supporting the widespread belief that the housing sector is cooling.

 The downturn in the housing market was also confirmed by an industry report that suggested the weakest outlook for the single- family real estate market since the mid-1990s. According to the National Association of Home Builders (NAHB), the July Housing Market Index (HMI) fell sequentially for eighth time since October 2005, coming in at 39, its lowest point since a 35 reading way back in December 1991. A reading below 50 indicates more builders view sales conditions as poor than good.

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 Clearly, the aforementioned trends point to continued cooling in the real estate sector. We will see less price competition and multiple bidding in the higher demand areas of the nation. If you are a buyer, it is good news. I continue to suggest you avoid homebuilder stocks.

 And even home renovation stocks like bellwether Home Depot Inc. (NYSE/HD) reported some softness in its first quarter sales growth that was shy of Wall Street estimates.