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Forget the Data…Home Builders are Confident

Homebuilders aren’t letting housing data rain on their parade.

Home prices fell for the fifth consecutive month in January…to the lowest level since 2003. And as home prices continue to search for a bottom, in some suburban areas we might “never in our lifetime see a rebound” in prices, according to Robert Shiller (of the Case-Shiller home price index).

Not only have home prices hit a new post-crisis low…they are 34% below the peak of 2006. But even as prices are skimming for a bottom, we are seeing a pickup in home building, and with it home builder confidence.

Builder confidence is holding steady at its best level since 2007…and expectations reached the highest level in four years. Builders are betting on a solid season – filing for the most permits in three years.

And housing starts have seen their strongest six-month stretch since 2003. Builders are putting inventory in place ahead of what they hope will be a good selling season.

Still, home construction is only a fraction of what it once was. As much as housing starts are up, they are still about half the annual pace that might be considered healthy.

Even with increased construction, the supply of new homes is skimming a record low…with inventory of 150,000 units, amounting to a 5.8 month supply. That’s an improvement over the peak of January 2009, when we had a 12.1 month supply of new homes crowding the market.

While there are signs of life, there is still a lack of strong momentum. New home sales slowed in February. And increased interest in buying doesn’t automatically translate to higher sales. According to the National Association of Home Builders, “while many builders are seeing more traffic through their model homes as the spring buying season gets underway, tight lending conditions and appraisal issues continue to pose significant obstacles to prospective purchases”.

But caution is thrown to the wind in the markets. SPDR S&P Homebuilders Index ETF (XHB), a proxy for the home builder space, is up 24% so far this year. While the fund is a technical buy, I would approach it with caution…reality in the housing market means being careful not to get ahead of ourselves.

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