Investment Contrarians

Why Housing’s “For Sale” Sign Is Gone

By for Investment Contrarians |

Why Housing’s “For Sale” Sign Is GoneThere were extremely difficult times for homeowners following the subprime mortgage implosion that helped to drag down the global economy in 2008. I recall at that time how easy it was to get a mortgage without even having to provide an income or work history to the lenders. When an entry level worker at McDonalds Corporation (NYSE/MCD) could get a mortgage with no questions asked, you had to wonder how long it would be before a housing bubble would surface.

Luckily, after several years of the housing market being dragged through the mud, the current situation has vastly improved to the point where housing stocks are hot.

The declining mortgage rates have helped. The $40.0 billion in mortgage-buying each month by the Federal Reserve has driven down the cost of interest rates to record lows.

There are more people working, and with the jobs picture improving, albeit at a slow pace, I expect the housing market will continue to strengthen.

Wherever you live, it’s clear that the housing market is displaying much-improved industry metrics. We just saw another strong reading for housing starts and building permits.

In October, there were an impressive 894,000 starts, according to the U.S. Census Bureau, which is above the Briefing.com estimate of 815,000 in October and the 863,000 starts in September.

Also lending support to the housing market recovery was a strong building permits reading of 866,000 in October, albeit short of the Briefing.com estimate of 900,000 and the 890,000 reading in September. The strong reading indicates that builders are expecting a good flow of buying in the housing market, and this could only bode well for homebuilder stocks.

Moreover, representing another key piece of the housing market, home prices are edging higher, with the S&P/Case-Shiller index, comprised of the 20 largest U.S. metropolitan cities, increasing a better-than-expected two percent in August, representing the seventh straight up month. When prices rise, I expect more spending by homeowners due to the increase in wealth.

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

The technical analysis chart of the S&P Homebuilders Select Industry Index (NYSE/XHB) shows the upward trend 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.

XHB SPDR SandP Homebuilders Index NYSE Chart

 Chart courtesy of www.StockCharts.com

The NAHB Housing Market Index reported a strong reading of 46 in November, well above the Briefing.com estimate of 42, and the 41 reading in October. What is interesting is that the reading is approaching the 50 level not reached since April 2006, over six years ago.

I expect housing to continue to improve, especially if the jobs market improves.

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

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