Housing Market’s On Fire; Why It’s Not Time to Buy

May 23rd, 2013 by Emma Davis
XHB: SPDR Series Trust SPDR Homebuilders ETF logo
XHB
SPDR Series Trust SPDR Homebuilders ETF

Submitted by Emma Davis of Investment Contrarians as part of our contributors program.

By George Leong

The housing market continues to vault ahead. We are seeing strong housing starts and the flow of building permits in the pipeline. Home prices are also steadily moving higher.

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The S&P/Case-Shiller Home Price Index, comprising the 20 largest U.S. metropolitan cities, increased a better-than-expected 9.3% in February, representing the 13th straight up month for prices.

Looking at the chart below, notice the S&P/Case-Shiller index is currently at its highest point since late 2008, when the subprime credit crisis was in full bloom. Home prices remain well below the levels we saw in 2006, prior to the housing market meltdown.

You can thank the Federal Reserve for creating the ideal environment for the hot housing market via its strategy of record-low, near-zero interest rates and the continued buying of $85.0 billion monthly in bonds to drive down the financing rates.

Chart courtesy of www.StockCharts.com

You can feel the housing market is ready for a bubble, but the trend continues to point higher, albeit at a slower rate and with interest rates inevitably going higher. You need to be careful; but for the time being, the housing market is where it’s at.

I would be hesitant to touch the homebuilder stocks, due to their already massive gains. The chart of the S&P Homebuilders Index below shows the steady upward trend since December 2012, as indicated by the parallel blue lines. Yet also notice that prices have been rising higher without any major adjustment back to the bottom support line since late April. Look at the area marked by the red oval: this is the downside risk to which you are exposed. As such, I advise you to wait for a market dip toward the bottom support line to buy, based on my technical analysis.

Chart courtesy of www.StockCharts.com

An area that I continue to like is the suppliers of home building products and services. Homeowners are deciding more often to stay with their current homes and renovate, which has helped to drive the home supplies stocks higher, including bellwether The Home Depot, Inc. (NYSE/HD).

The company recorded a strong first quarter in which it easily beat on earnings and reported revenue growth of nine percent year-over-year.

A strong recovery in the housing market drove sales, according to Home Depot, which also led to an upward revision in its sales and earnings guidance for this year.

The chart for Home Depot shows the impressive breakout in 2011 to the new record highs. Now, while the advance has been steady and impressive, the majority of the easy money has probably already been made, so you should look to buy on weakness.

Chart courtesy of www.StockCharts.com

Make no mistake about it, the housing market is sizzling, but if you want a piece of the action, your best opportunity would be to wait and buy on weakness.

This Article Housing Market’s On Fire; Why It’s Not Time to Buy was originally published at Investment Contrarians