A Mixed Bag of Housing Market Indicators

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Shares of homebuilders fell Friday after the government said sales of U.S. new homes fell in February for the second straight month. The decline came after months of gains even if the improvement has been halting. Homebuilder KB Home (NYSE: KBH) reported net orders fell 8 percent, and its cancellation rate rose to 36% during what is normally peak season. Meanwhile, on wednesday another homebuilder, Lennar Corp. (NYSE: LEN), helped bring housing stocks back up with earnings that beat Wall Street expectations.

So which is it? Are home sales up or down? And how concerned should investors be?

It is no secret that shares of homebuilding companies are important indicators as to the strength of the housing market. Homebuilding companies have taken a hit in sales in recent years, as more and more foreclosed homes went for sale, reducing the demand for new homes.

The news from the Commerce Department on Friday reported that new-home sales dropped 1.6 percent in February. The report signaled that despite improvements in the housing market, there is still a long road to go before anyone can declare it “good” again. The current sales rate is less than half what economists consider to be good (700,000). The silver lining on this black cloud is that overall sales of existing homes increased, just not the sales of new homes.

The bad news doesn't stop there. Home prices have continued to fall, and foreclosures have started to creep up again. And yet, there is reason to focus on the positive.

Given those and other dismal statistics, it might seem surprising that experts are increasingly optimistic. Permits for new housing construction are at their highest levels in years, and falling home prices attract more competitive buyers. The job market continues to improve, which means more families can afford to buy a home (and avoid foreclosure). Mortgage rates and mortgage lenders are more home-buyer friendly now than over the past few years.

The positive indicators are reflected in homebuilding shares. In spite of last week's tumble, KB Home's shares have doubled over the last six months. For the quarter ended Feb. 29, KB posted a net loss of $45.8 million, which was an improvement over the loss of $114.5 million, in the same quarter the year before. Lennar gained 4.7 percent, best among stocks in the Standard & Poor's 500. In fact, just two weeks ago, Credit Suisse raised Lennar, along with D.R. Horton Inc. (NYSE: DHI) and Toll Brothers Inc. (NYSE: TOL) to 'outperform.'

In February, Toll Brothers also showed a mixed bag of housing market recovery indicators. The company recorded a loss of $2.8 million (2 cents per share) in the first quarter of fiscal 2012, compared with a profit of $3.4 million (2 cents per share) in the same quarter of fiscal 2011. Revenues went down by 4%, but net signed contracts rose 45%. In dollar figures alone, this would be a negative sign, but the increase in signed contracts is very promising.

The road to recovery will not be quick or easy. The sales of one company over just one month do not represent the industry as a whole, but should also not be summarily dismissed. All factors at all levels must be considered before casting judgment on the industry and the market as a whole.

Read also: Companies to Watch for Housing Market Indicators

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