Have you noticed that sentiment about the housing market looks a lot like Phil Mickelson's golf ball did on that horrible hole at last weekend's U.S. Open? It moved up a hill toward the green for a while, but before reaching the crest, it retreated back to lower ground. Think there could be a housing double bogey in the works here?

Here's what I mean: During the first part of the year, homebuilders' share prices headed strongly upward, and it finally looked as though they might have turned the corner and put the downturn behind them. But since May, the group's shares have begun to fall again, as much-anticipated good news has mostly failed to materialize.

Indeed, recent data reinforces the myriad negatives that have smothered the housing industry for nearly two years:

  • Perhaps most importantly, the foreclosure rate for May jumped by 48% year over year. Across the nation, 261,255 homeowners received at least one foreclosure-related filing during the month.

    Yet as bad as that is, the foreclosure boom may just be getting started. Credit Suisse recently predicted that 6.5 million home loans will drop into foreclosure during the next five years. That works out to about 8% of U.S. homes that will be affected. In addition to serving as a damper on the general economy, foreclosures bloat the inventories of homes for sale and effectively block a housing recovery. Watch for more cries for governmental bailout assistance.
  • All of the bad news is dampening builders' sentiment. According to the National Association of Home Builders, the housing-market index slipped one point to 18 this month. That tied the all-time low set back in December. Anything lower than 50 indicates that builders are less than optimistic. And the current pessimism among homebuilders is understandable, given the bulging inventories, ongoing land writedowns, falling new-home prices, and general lack of anything positive to report in quarterly results.
  • Housing starts in May hit their lowest level in 17 years at an annual pace of 975,000 units, or 3.3% below April's numbers. At the same time, building permits dropped to a lower rate of 969,000 units.
  • On Tuesday, a group of 10 economists from major banks opined that U.S. home prices probably have completed only about half of their overall slide and that most of the additional slippage will take place this year. The economists belong to the American Bankers Association's economic advisory committee and come from such banks as JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC).

Looking for good news
As I see it, when the builders next report, the keys will be the size and pervasiveness of writedowns, cancellation rates among prospective buyers, changes in average selling prices, and overall changes in unit sales -- along with progressively more meaningful balance-sheet data. I'm not overly optimistic about improvements in the operating metrics, and they'll definitely have to firm up before housing stocks can truly recover.

Let's look at how the share prices among some of the builders are holding up:


Price, 12/31/07

Price, 6/18/08


Beazer (NYSE:BZH)








Pulte (NYSE:PHM)




Ryland (NYSE:RYL)




Toll Brothers (NYSE:TOL)








Sources: Yahoo! Finance. Historical prices adjusted for dividends.

It's evident that the group is still sliding. Beazer, which is attempting to fight its way through all manner of difficulties, was the real damper in the sector.

But even with Pulte and Toll managing to climb slightly higher for the year, it's tough to be inspired about any of the sector's companies. In fact, my feeling has long been that Toll Brothers would be the first to register real a real rebound, since its luxury-builder status means that its buyers are somewhat less beholden to the vagaries of mortgage lending. But as you can see, Toll isn't yet making anyone rich this year.

It doesn't take the dire prognostications of the American Bankers Association to make me swear off the builders for at least the rest of this year. Similarly, I urge my Foolish friends to avoid the temptation to reap big rewards from this down-and-out group, and wait until there's tangible and sustained evidence of a lasting recovery before plunking down your hard-earned money on a potential double bogey.

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