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Stock Market Watch: Is Now The Time To Get In On Homebuilder Stocks?

|Includes: SPDR Homebuilders ETF (XHB)

Homebuilder stocks were rallying on Monday on optimistic news about homebuilder confidence while housing data released today was more mixed and other recently released data has been anything but positive. So what in the world is going on with the housing market and is now the time to get serious about homebuilding stocks? Consider the following:

  • May Housing Starts Fall But Permits Rise Sharply. On Tuesday, the Commerce Department reported that new housing starts for May fell 4.8% to a seasonally adjusted annual rate of 708,000 units (Note: This figure is prone to significant revisions) but new housing permits rose 7.9% to the 780,000 level - a near four-year high. Nevertheless, April's housing starts were revised upward to the 744,000-unit level from a previously reported 717,000 unit rate for the highest reading since October 2008.
  • Homebuilder Confidence Rises. On Monday, it was announced that the National Association of Home Builders/Wells Fargo confidence index rose to 29 from a revised 28 in May to reach its highest level since May 2007. Cheaper properties along with record-low mortgage rates are fueling demand as well as encouraging homebuilders to take on new projects. On the other hand, any continued momentum could take time as access to credit remains limited while more foreclosures keep adding to the supply of homes.
  • Foreclosure Filings Spike Higher. Last week, RealtyTrac reported that foreclosure filings in May spiked 9% compared with the previous month as 205,990 properties in the US received filings that ranged from default notices, scheduled auctions and bank repossessions. May was also the first monthly rise since January. To make matters worst, there was also a 12% jump in foreclosure starts while bank repossessions rose steeply by 7% to 54,844 after hitting a four-year low in April.

Of course, it's rising foreclosures and hence a rising supply of homes that investors in homebuilder stocks must be worried about. On the flip side, not every home buyer is looking for a really good deal on a foreclosed home that may have dated appliances and in need of a renovation. Moreover, the US housing market is really a patchwork of housing markets with some, particularly those in the South and West, being hit much harder than others by foreclosures but many homebuilder stocks are also national players with exposure to both good (if there is such a thing) and bad housing markets.

Nevertheless, the SPDR S&P Homebuilders ETF (NYSEARCA:XHB), which attempts to match the returns of the S&P Homebuilders Select Industry Index, is up over 21% since the start of the year, up 19% over the past year and up 30% over the past two years but still down over 37% over the past five years. Those recent returns are hard to ignore but so is the sheer number of foreclosures that continue to hit the market.

Hence, investors without a strong stomach for risk may just want to sit on the sideline with homebuilder stocks while those looking to get in should keep the SPDR S&P Homebuilders ETF (XHB) along with a few homebuilder stocks on their My Portfolio screen in order to keep an eye on them.