Housing Bouncing Along Bottom

We are seeing more signs that the housing industry is bouncing along a bottom.

Housing starts declined 1% to an annualized pace of 581,000 last month. Building permits fell 1.8% to an annualized pace of 560,000. Conversely, Home Depot (HD) raised its full-year earnings guidance.

The numbers follow a survey showing increased optimism on the part of builders. The National Association of Home Builders/Wells Fargo Housing Market Index reached 18 last month, its highest level since June 2008.

Behind the numbers are some cross-currents that often occur as a sector tries to find its legs.

Though housing starts fell, the drop reflected fewer multi-home units being built. Single-family starts were actually up slightly last month.

On the other hand, both builders and realtors are concerned about the first-time home buyer tax credit, which is due to expire on November 30. Re/Max International Chairman Dave Liniger predicted yesterday, “If the stimulus ends, or isn’t even extended, you will see the market drop again.”

In other words, despite the gradual improvement, a cloud of uncertainty continues to shade the entire real estate sector. This means investors should continue to use a high level of caution when looking at stocks such as D.R. Horton (DHI) and AvalonBay Communities (AVB). Investors should also be cautious with banks that have a high level of exposure to depressed markets, such as Zions Bancorporation (ZION).

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