The homebuilders sector climbed more than 50% off the lows in January – does that mean that housing has put in a bottom? Not according to the National Association of Homebuilders. Attendance at their national conference is down nearly 15% over last year. The general consensus is they are not in a particularly optimistic mood despite the rise in stock prices. Confidence readings among the builders fell to an all time low in December.

Earnings from DR Horton, or should we say loss, was more than $245 million. The Toll Brothers CEO stated there was very little light at the end of the tunnel after posting a quarterly loss. Net sales have fallen as much as 50% for some builders year over year. Cancellation rates are over 40% and the outlook hasn’t cleared much.

Then why did the sector jump in price? The Fed is coming to the rescue? That seems to be the perception among investors we talked to. They believe more money in the system along with lower interest rates will stimulate home sales. Those attending the conference in Orlando will certainly hope they are right.

A look at the chart below shows the move off support near the 259 mark and climbing to resistance at the 407 mark. We caught the 20 day moving average as support short term. The question is can we hold this level and then rally higher? The pullback was nearly 17% from the high and could offer up a trade short term. We are watching what happens here with interest with the rest of the market—not that homebuilders or housing will lead the market higher, but it will go a long way to improving the sentiment of the investor.

To put this in perspective I have always looked at the housing market correcting in four stages. The first is new sales and orders decline. It is safe to say we have established that stage. The second, inventories build. This stage was accomplished in flying colors. The third, prices drop to move the glut of inventory. Speculators are the first to throw in the towel by walking away if possible from pending contracts. Then there are fire sales from those who just want to get rid of them. Next the builders start to drop prices to move the inventory from all the cancellations. Sounds familiar of late; just read the paper on Saturday and Sunday. Pricing gets competitive and as a result it could take 12 - 36 months to bottom. The fourth, defaults and foreclosures begin from those who can’t sell or make the payments on these properties. Interest rate resets on adjustable mortgages play a role in this process as well. The economy plays into the recovery process with a recession exacerbating the situation even further. The rental market starts to rise from those who can’t sell trying to rent these properties. It sounds as if this is where we are now.

With this corrective process still in play it is hard to say the bottom is in. But, we have made it to the final stage of this process. How long until it is over no one knows. The move higher over the last three weeks shows a sign of hope, but as Yogi says, “it ain’t over til its over.” While some may be hearing the fat lady sing, I think she may be just rehearsing. 

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