Homebuilder Stocks Break Out Again

NEW YORK (TheStreet) -- Homebuilders rallied on Thursday after we learned that building permits in July rose 6.8% to a seasonally adjusted annual rate of 812,000, the highest reading since August 2008.

This followed Wednesday's press release from the National Association of Home Builders, which reported its Housing Market Index rose by two more points to a reading of 37.

While these trends are considered positive, the market for new homes is far from a normal recovery.

Below the positive permits data, housing starts slipped 1.1% in July to a seasonally adjusted annual rate of 746,000 units. This weakness resulted from a 6.5% decline in the construction of single-family homes, which fell to an annual rate of 502,000, down from a two-year high set in June. The important single-family home segment represents 70% of the market.

The rise in the NAHB Housing Market Index, or HMI, to 37 followed a strong six-point rise in July, but the index remains below its "normal" reading of 50. A reading above 50 is "good" and a reading below 50 is "poor".

In its press release, the NAHB cited the positive trends in this data including improved readings for "current sales conditions" up three points to 39, "traffic of prospective buyers" up three points to 31, and "sales expectations for the next six months" up one point to 44. All measures for the HMI were at their highest levels in more than five years.

From the builder's perspective, these trends are positive, but keep in mind that the housing market is far from normal. I view the rise to a "less poor" reading of 37 as indicating that the homebuilders are somewhat less pessimistic.

Digging into the current report for housing starts we find they rose only in the Midwest and fell elsewhere around the country. At 746,000 units and 812,000 permits, the rate of construction is roughly half the normal pace of the 1.5 million units considered healthy.

At the January 2006 peak of the housing bubble the pace was an astonishing 2.3 million. At the low point in April 2009 Housing Starts were just 478,000 so we up 56.1%, which is a start, but is it sustainable?

Anecdotally, homebuilders still talk about overly tight lending conditions for both the builders and potential buyers of new homes. With defaults and foreclosures on existing homes still elevated, the home appraisals are dragged lower by short-sales and sales of bank-owned homes.