Don't be Fooled by Jump in Pending Sales of Existing Homes

The news about pending sales of existing homes looks good on its face.  Pending home sales jumped by six percent, according to the National Association of Realtors.  That pushed the pending home sales index to the highest level since last October.  The index rose to 110.9, up from an upwardly revised 104.6 in March.  It is 22.4 percent higher than the year ago period.

The climb in the index beat the consensus estimate, which was for a gain of five percent.  Estimates ranged from a decline of three percent to a gain of ten percent.  Thus, the increase was towards the high end of estimates.

But before you get too excited about the jump in housing -- which is the sector that drove the economy into recession and which needs to recover for a strong recovery to take place -- remember that according to the National Association of Realtors, "the home buyer tax credit brought close to 1 million additional buyers into the market."  Without those additional buyers, even the National Association of Realtors only expects the housing market to "return to sustainable levels."  And they're cheerleaders, who say that it's a good time to buy a home no matter what.

Analysts that don't cheerlead for the housing industry say that the pop we saw in housing is not something that will be sustained.  A housing economist at IHS Global Insight said that housing sales are "going to take a big dive."  Towards the end of the year, he added, the housing market will see "sustained growth, but at really low levels."

Given this viewpoint, one group of companies that investors may want to avoid is the home builders.  This group was up in intraday trading, with the group heading up by 1.1 percent.  But with the group trading at astounding valuations, and the housing market not likely to take off any time soon, it's difficult to see why anyone would want to buy those stocks.  It's even more difficult to see why people want to buy those stocks when the recent downturn in the market has made many companies inexpensive.

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• Pending Home Sales Jump (online.wsj.com)

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