Is It Time To Buy Into The Homebuilders Yet?

| January 21, 2009

I spent a good part of yesterday watching the festivities in our nation’s capital.  Our newest President, Barack Obama was sworn in.  He’s America’s 44th president.  No matter your political affiliation, yesterday was a proud moment in our country’s history.

The peaceful transition of power sets the United States apart from many countries around in the world.

Every four years we have the potential for one political leader to step aside.  It’s the willing transfer of power to an opposing party that makes the sight truly amazing.  It also makes for one heck of a party.  I’m sure Washington DC was celebrating well into the night.  It was after all a historic event.

I can’t help but think about what happened after the party.

I can imagine President Obama sitting in the presidential limo.  He’s no doubt surrounded by Secret Service and staff members.  I can see the exhaustion from the day’s activities overcome him.  He turns to his closest advisors and asks a simple question…

So, now what?

President Obama is facing one of the toughest economic environments since the Great Depression.  The economy is shrinking, unemployment is growing, and the banking crisis seems to be getting worse not better.

He’s facing a crisis like many households in America.

It happens every day.  A family sitting around the kitchen table.  Bills and bank statements spread out before them.  They owe more on their house than it’s worth.  The threat of layoffs at the factory and office hang like a dark cloud.  Expenses are running ahead of income.

They look at each other and ask, “so, now what?”

I’ll tell you.  President Obama has more in common with these families than many people realize.  The housing market is what ties them together… and will give them a big case of heartburn over the next year.

Just look at the facts.

The Federal Reserve’s cut interest rates to nearly zero.  The US Treasury is buying billions of mortgage backed bonds pushing long term interest rates to new lows.  Home mortgages can be had for just over 5% … the lowest levels seen in decades.

Just last week, mortgage applications spiked 15%.

But that’s not all.  Average home prices are down substantially in the US. In some areas home values are down $50,000 or more.  Here in Arizona it’s likely more.  I know several people living in modest houses that are down $50, $70, even $100,000.

So, what’s it mean?

Combine record lows on interest rates and falling home values.  It means housing affordability is improving.  Homes all over the nation are now more affordable than any other time in decades.

So now’s the time to jump into housing, right?

Not so fast.

The entire industry has continued to move lower.  This move lower comes despite all the government assistance, rate cuts, and other support they’ve put into the market.

To show this trend even better, the 50-day moving average is still trading below this important indicator.  In the last two months, XHB moved above the 50-day moving average, but couldn’t hold onto the gains.  Also, the moving average is still in a down slope (never a good sign).

I like this indicator because it looks at longer term trends.  Despite all the fundamental reasons to look at the housing market, the technicals say watch out.

When to buy?

I’m looking for two things in this index.  First is for the 50-day moving average to start trending upward.  The other is for the XHB to move above the 50-day moving average – and hold onto the move.  Then we’ll see the technical indicators support all the positive fundamental data. Then, and only then, will the homebuilders deserve another hard look.

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Category: Stocks

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