Market Overview

Home Builders Mixed as Housing Signals Remain Unclear

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Shares of Homebuilders have been mixed in recent sessions, as investors ponder mixed signals coming from the housing and mortgage industry. Many of the home builders, including Lennar (NYSE: LEN), Hovanian Enterprises (NYSE: HOV) and D R Horton Inc. (NYSE: DHI) are bumping into resistance around the recent highs.

The jobs data released Friday puts a positive spin on the employment picture but there are still a lot of concerns over the number of people who have dropped out of the labor force. Hourly earnings increased modestly and the length of the workweek edged higher. Mortgage rates are at record lows and the home builders themselves report that the logjam of distressed or foreclosed properties is beginning to ease.

Almost all of the listed home builders have had a strong rally this year but many were sold off last week on concerns that share prices had gotten ahead of reality. The question is: are the home building shares just taking a breather—the so–called “pause that refreshes”—or is the rally in home builders over?

There are certainly some positive signs for housing. First, the widely followed S&P/Case-Shiller Home Price Index clearly shows that home prices are rising. Julian Brigden, managing partner of Macro Intelligence 2 Partners, has created a model that predicts home prices will continue to improve over the next several months.

hb1.jpeg

Source: Macro Intelligence 2 Partners

Brigden also points out that sales traffic—the number of potential homebuyers touring model homes at the home builders' developments—has increased substantially. Bulls say that the clear uptrend in housing prices is driving the increase in sales traffic as potential home buyers don't want to miss out on current low prices.

But, Brigden writes, ”I fear the story remains more hype than reality, because we just aren't seeing actual new home sales rise anywhere nearly as quickly as the traffic numbers would suggest.”

And why would that be?

Brigden continues, “Until we see Americans actually start to apply for mortgages, which as you can see below they clearly aren't, then short of finding pots of gold at the bottom of their gardens they can't buy homes! “

hb2.jpeg

Source: Macro Intelligence 2 Partners

If home prices continue to rise, as S&P/Case-Shiller would suggest, then perhaps banks will become more confident in home values in the future and more willing to lend to qualified buyers. Right now, even well-qualified borrowers are finding it difficult to get mortgages, which probably has less to do with their ability to pay and more to do with their bank's recent experience with the sharp decline in the value of property used as mortgage collateral.

It would appear that home builders do need to take a breather to see if home prices continue to trend higher before resuming this year's spectacular rally.

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