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This could spell trouble for housing

Talking Numbers

This could spell trouble for housing

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This could spell trouble for housing

This could spell trouble for housing
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These three charts spell trouble for the bulls

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These three charts spell trouble for the bulls

It was bad news/good news for housing.

First, the bad news: Cold weather once again took its toll on housing starts, which fell 0.2% from January and 6.4% below February of last year according to the US Commerce Department. Sure, January's numbers were not as bad as previously announced, but they were still not good. January's housing starts were revised to a drop of 11.2% rather than 16% down as first reported.  

The good news: Building permits – one of the first steps before a housing start can begin – were up 7.7% from January and 6.9% above where they were in February 2013. And, while cold weather may have prevented homebuilders from starting homes, it sure didn't stop them from finishing up homes; housing completions in February were up 4.4% from January and 21.9% from the year before.
What does it all mean for housing going forward?

(Watch: Housing starts slide for 3rd straight month; price pressure dormant)

"This is challenging," says Gina Sanchez, founder of Chantico Global. "One of the things that drove optimism and all of those permits was that the housing market came back into balance in terms of supply and demand last year. A lot of overhang was worked through. And, there was quite a bit of price momentum that built by the end of the year. So, permits rose."

But with more homes being planned as well as completed, additional supply will lead to more softness, according to Sanchez.

"Right now, homebuilder confidence – the HMI index – is actually very soft," says Sanchez. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) is at 47 this month when it was expected to be at about 50.

However, Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, sees a potential opportunity in the charts of the iShares US Home Construction ETF (the ITB).

After a drop from May 2013 due in part to rising interest rates, the ITB built a base of support, according to Ross. In December, the ITB broke above a resistance at $24 and that level became support for the ETF as it consolidated throughout January. The ITB rallied in February only to fall back down toward $24 in March in a pattern Ross identifies as a "throwback"

(Read: US stocks end higher for second day on housing data, Putin words)

"If form holds, that prior resistance should now be support on that throwback – or 'pullback' as it's also commonly referred to," says Ross. "This was a bullish chart two weeks ago so now, with this 8% decline to textbook support, this is probably where you want to be a buyer if you believe in that homebuilding story – which I guess, on some level, I do."

Ross, in other words, is a buyer of homebuilders and the ITB.

"I think that we're close enough where the risk/reward is in your favor," says Ross. "If you wait around and kind of dither here worrying about pennies, you might miss this significant move to the upside. I think your risk/reward is very favorable – with a well-defined stop at prior resistance ($24) which should now be support."

To see the full discussion on the Homebuilders ETF (the ITB) with Sanchez on the fundamentals and Ross on the technicals, watch the video above.

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