Latest Housing Market Index Report Not A Reason To Rejoice

 |  Includes: BZH, DHI, HOV, KBH, LEN, TOL
by: Markos Kaminis

The National Association of Home Builders (NAHB) Tuesday reported its Housing Market Index. The metric is a measure of the mood of homebuilders, and has been mired in the mud where home foundations might otherwise be for years now. The popular press jumped on the news of improvement in the index, but failed to note, except in the details few Americans likely read, that the absolute value of the Housing Market Index is still dreadful.

The NAHB/Wells Fargo Housing Market Index (HMI) improved by four points to a mark of 18 in October. That information alone set the real estate wire on fire Tuesday with news of “good news in housing.” While I’ve been forecasting growth in real estate for the second half of 2011, until noting this year that economic complications would stall the real estate recovery, I must point out that the homebuilder mood is not sanguine; suicidal would be a better description for homebuilders, though perhaps slightly less so this month. You see, the divider between a positive and negative mood is set at an index reading of 50. While my math is not as sharp as it once was, I can say pretty confidently that October’s reading of 18 is still deeply discounted to that break-point.

Now that I’ve made that important point, I have to note why the positive change still matters. It’s because “change,” or delta as mathematicians might refer to it, matters to the stock market. I favor delta myself in decision making, as it is a catalyst for profit in my view. That said, can we really say there’s a spark in housing based on this latest measure of the homebuilder mood? I think not, and even if it were, it would soon be smothered out by an economic situation that is at least less enthusing and possibly even defusing.

Looking more closely at the data, the report shows improvement across most of the spectrum of sub-measures. The HMI’s component measure for current sales activity shows a four point improvement to a mark of 18. The gauge counting prospective buyer traffic rose three points to a reading of 14. Where we really see the most robust change in the data, though, is in expectations. When surveyed regarding where homebuilders saw things going over the next six months, well, that resultant component index gained seven points to a mark of 24. So what’s got homebuilders hopeful now?

I think they’re basically buying into the numbers. We’re seeing year-over-year results beating many of last year’s low bar marks. It’s amazing to me that it takes this actuality for people, including homebuilders and many of my readers, to realize it. We’ve been forecasting it since the start of the year here, and I’ve found mostly resistance to my “growth” statements. But what you have to understand is that, one, the base for growth is at a dramatic low point, and that, two, the growth we’re forecasting is nothing to write home about. Yet, it’s growth nonetheless. I suppose the clearing away of the negative trend, or the delta, helps sentiment, however surely it should have been expected.

My view regarding this measure is that its great dependence on the views of smaller builders, which are greater in number and which have suffered more than the larger, publicly traded players, who have easier access to capital, has weighed on it. Thus, it’s been mired in this mud of low-teen readings for months. Whenever it has changed, it’s been mostly due to expectations, not significant changes in real sales activity or traffic.

As we look regionally, we see the largest market of the Northeast stuck at a reading of 15. I suppose that is because of the well developed nature of the region. In the West, the component reading improved by nine points to a mark of 21. The Midwest and South saw increases of four points, to readings of 15 and 19, respectively.

The report and the reporters of the report have noted all the usual suspects behind the absolute low level of confidence, including the weight of foreclosures on appraisal values and competitive properties, and the obstacle of tighter lending criteria. When seeking a reason for the gains made this month on a relative basis, those same scribblers attributed the move to record low mortgage rates. Certainly, the lower rates fall, the more folks qualify for homeownership. Still, the real barriers to this housing recovery are the result of our economic illness, including high unemployment and the hangover we must bear due to our previous housing overindulgences. Therefore, I say temper your enthusiasm until the latest economic stumbling blocks are cleared away.

Stocks of homebuilders reacted to the news just the same, with the shares of Toll Brothers (NYSE: TOL) up 9.9%; Hovnanian (NYSE: HOV) +6.7%; D.R. Horton (NYSE: DHI) +8.5%; Lennar (NYSE: LEN) +7.9%; Beazer (NYSE: BZH) +11.3%; and K.B. Homes (NYSE: KBH) up 8.1% at about two hours ahead of the close.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.