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Should We Be Excited About the Housing Market?

|Includes: DHI, ESS, Hovnanian Enterprises, Inc. (HOV), KBH, PHM, SRS, TOL, UDR, URE
****This is a guest posting written by Phil's Stock World contributing writer David Ristau. David publishes The Oxen Report every morning with various daily trades that are highly profitable. You can follow him on Seeking Alphaor check him out at Phil's Stock World.****

The housing market had another stellar beat of market estimates this morning with existing home sales hitting 5.77 million for the annual rate after April numbers were released. The 7.6% increase from March to April was much better than the 6.8% increase expected. Further, last week, the housing market got more good news that housing starts were still positive in April at 670,000, beating estimates by 10,000. Housing starts continuing to rise…existing home sales rising as well… Its all looking quite good in the housing market. Right?

The problem for the housing market lies in the expiring tax credit for homebuilders and an increasing inventory problem. In April, inventories rose 11.5%, which means lots of people are moving out of their homes and trying to sell them. Unfortunately, it is not because everyone is buying new homes. It is because most Americans are having to downsize, find new jobs in new locations, or trying to make some money off their home to keep their heads above water. 

The tax breaks that have been available to first-time home buyers over the past fifteen months are now expired. With the tax credits up, it may spell doom for the home industry’s demand. One signal of that fact is that building permits are dwindling, meaning builders are not actually seeing that demand will be available. Permits fell in April from March to only 610,000. Without the tax credit, does the housing market shore up?

Prices are still relatively low on existing houses, with the median price in the $170,000 range. Further, many foreclosed homes are still very cheap. With cheap houses and foreclosed homes, the existing home market makes much more sense to stay afloat than the new home market - thus the drop in building permits. It is hard to justify with unemployment still high and struggling to drop and no tax credit to ease buyers into the market, much out of the new home sales. This puts residential builders at a tough spot to be able to sustain consistent business.

If there is no new tax credit passed, it may still be quite some time before the likes of PulteGroup Inc. (NYSE:PHM), Lennar (NYSE:LEN), KB Homes (NYSE:KBH), and Hovnanian Enterprises (NYSE:HOV) can really turn the corner and be investments that I can recommend. I would stay away from these. Additionally, high end homes like Toll Brothers (NYSE:TOL) and Ryland (NYSE:RYL) are definitely ones to avoid. If you do want to look at residential construction, we want to look low-end. In the residential market, the low-end continues to thrive for DR Horton Inc. (NYSE:DHI). This would be one of the only residential companies that could still turn profits and is a decent pick up at its current prices.

With the existing market continuing to probably be sustainable until unemployment starts to drop, I would look to some of the REIT - Residential companies to be able to continue to do well in the market that own, manage, and sell existing homes and apartments. Some of my favorites in this industry include Equity Residential (NYSE:EQR), UDR Inc. (NYSE:UDR), and Essex Proprety Trust (NYSE:ESS).

While the housing market has had some sustainability over the past year, it may start to dwindle away again and retest some of the earlier woes that it had two to three years ago over the next year. Congress may decide to continue the tax credit, but there has been little talk of it so far.

The last hurrah for the housing spike may have hit for some time.

Disclosure: none