Home Builder Stocks Punished Too Far?

There used to be a saying that your home is always your best investment. But by the time the current housing bust in the U.S. is over, American consumers might not look at their homes as a source of wealth accumulation for years to come.

Early this morning, several groups came out with new numbers for the housing market. And they continue to be startling (the following data is provided by either RealtyTrac or the National Association of Realtors):

— Bank seizures of U.S. homes this past April doubled from April, 2007.

— More than 240,000 U.S. homes are in some stage of the foreclosure process.


— At the end of March, over four million homes were for sale in the U.S.

— Depending on which report you believe, housing prices are now down anywhere from 7% to 15% from last year.

Of all the stats coming out about the U.S. housing market, I find this one the most troubling: By the end of this year, RealtyTrac estimates that more than one million American homes may be bank-owned.

Personally, I don’t feel sorry for the banks, home builders and mortgage companies that are facing difficult economic times right now — they made billions during the housing boom and, in my opinion, are simply giving some of it back right now. Who I feel sorry for is the average American consumer who was lured into buying a home they shouldn’t have been able to buy.

Yes, today’s news will be filled with negative remarks and coverage about the U.S. housing market. As my loyal readers know, I turned very bearish on the housing market in 2005, at the market’s peak, because my stock charts were telling me that the industry was topping out.

Today, the stock market doesn’t seem too concerned about the housing market. In fact, I believe it has discounted the worst for the housing market. The key chart I follow, the Dow Jones U.S. Home Construction Index, is actually up 38% since its January 2008 low.

This key index of the largest builders in the U.S. isn’t saying that the housing market is turning around. Not a chance. What the chart of this index, which is still down 67% from its 2005 high, is saying is that the worse is behind us for housing. Remember, economic figures that are released daily are based on what has already happened. The stock market tells us what is going to happen.

I still expect one or two of the weaker American homes builders to declare bankruptcy. I don’t expect housing prices to rise; if anything, they will continue to be weak. But the stock market says that investors have punished the stocks of the home builders, banks and mortgage companies enough.