Housing Remains in the Dumps

Builder Confidence Remains extremely low, which does not jive with the 52-week high for HGX. Defaults are increasing in the Loan Modification Programs. Foreclosures Surged in the first quarter as banks increase OREO. ValuEngine Valuations – Justify shifting to 75% cash once again. At 1225 to 1232 it's time to short the S&P 500.

The National Association of Home Builder Housing Market Index (HMI) may have improved to 19 from 15 in April, but considering that 50 is a “neutral” reading, the overall builder confidence remains in the dumps. There may have been some last minute orders for new homes, but the tax credits expire for contracts at the end of April. The NAHB described the four point gain as a surge, but I view that comment as pure cheerleading.

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Homebuilders remain in a bind from tighter lending standards as C&D loans are next to impossible to get, and as lower home appraisals from foreclosures and short sales cut into the demand for new homes.

With initial jobless claims up the past two weeks to 484,000 the labor market remains a concern for the housing sector. Continuing claims are rising again as is the four-week moving average.

The Housing Sector Index (HGX) reached a new 52-week high with weekly MOJO in overbought reading. In my judgment HGX is anticipating that the HMI should be above 80. My weekly pivot for HGX is $115.99 with monthly resistance at $122.16.

Chart Courtesy of Thomson / Reuters

Defaults are rising in the Loan Modification Program - Not helping the housing market or the banking system is the fact that defaults on modified mortgages doubled in March to 2,879 from 1,499 in February.

There are approximately seven million homeowners behind on their mortgage payments. The modification programs were intended to help four million stay in their home, but the results have been dismal. Only 227,922 permanent modifications have occurred, and in my opinion re-defaults will occur.

According to the latest Mortgage Metrics Report complied by the Office of Thrift Supervision and the comptroller of the currency, 60% of mortgage modifications negotiated by homeowners with their servicing bank entered default a year later.

In addition, many homeowners are saddled with HOA fees, home equity loans, credit card debt, which must be covered by generally lower incomes.

Foreclosures Surged in the first quarter as banks increase OREO - Home foreclosures spiked 16% in the first quarter, the largest jump in five years. In my discussions on foreclosures I have been worried about the growth of OREO, Other Real Estate Owned, which will deteriorate further when the FDIC Quarterly Banking Profile for the first quarter is released in the later half of May. Realty Trac reported that the number of homes taken over by banks spiked 35% in the first quarter. This could result in more than a million bank repossessions in 2010. This is indeed the first real sign that banks are catching up with failed mortgage mitigations, and as I have been saying there remains a glut of depressed properties.

By the numbers: 367,000 foreclosures in March is up 19% sequentially and 7.6% year over year. The first quarter OREO was a record 258,000.

ValuEngine Valuations – Justify shifting to 75% cash once again

MOJO may be strong, but only 39% of all stocks are undervalued with 61% overvalued. Only 18.8% of stocks are undervalued by 20% or more and 31% of stocks are overvalued by 20% or more. All eleven sectors are overvalued by 3.2% (Health Care) to 20.5% (Consumer Durables). Sector P/E ratios range from 16.6 times (Public Utilities) to 29 times (Technology)! There are only 20 stocks that are at least 10% undervalued and projected to gain 10% over the next twelve months that trade above $10 per share, and none are “brand” names. This is an historic time to raise cash to 75%.

At 1225 to 1232 it's time to short the S&P 500 – The weekly chart is overbought with the 200-week simple moving average at 1225 and the 61.8% retracement level at 61.8%. This retracement is back to the high of October 2007. It was Fibonacci Retracement levels that helped me time the low of 666 back on March 5, 2009.

Chart Courtesy of Thomson / Reuters

Disclosure: No positions