A Word of Warning About the Housing Recovery


"New-home sales surged last month, a sign the housing market is regaining momentum after a rise in mortgage rates last summer," read the first sentence of story in The Wall Street Journal this morning.

And indeed it appears to be. According to the Commerce Department, sales of new single-family houses rose in October by 25.4% above the revised September rate. It was the largest sequential increase in new home sales in over a decade.

Looks like it's time to buy shares of homebuilders like D.R. Horton and PulteGroup , the nation's largest builders by volume.

Or maybe not. It turns out these results were an anomaly.

In the first case, they came on the heels of an otherwise dismal performance during the prime home-selling season. From July through September, new home sales fell into a deep trough. Had they stayed even with June's figure, October's results would have ended up being down on a sequential basis.

On top of this, both existing and pending home sales are in the midst of a multi-month downturn. The latter have decreased on a monthly basis since May, while sales of previously occupied dwellings have dropped for three months in a row.

The takeaway here is that the housing recovery remains extremely fragile.

Should investors welcome October's new home sales figures? Absolutely. But it's critical to keep the reading in perspective before you rush out to load up on shares of D.R. Horton, PulteGroup, or any other homebuilder you believe will imminently benefit from these trends.

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