There's probably little that's more difficult than absorbing the random shotgun blasts of housing data that hit us monthly or weekly -- depending upon the issuer -- and then trying to decipher what it all means about the health of housing in general.

For instance, just by looking at the latest renditions of existing (pre-owned) sales and new home sales, both of which were recently up slightly, one easily could come away with the notion that the housing market has finally bottomed, and that the world is about to turn rosy again. However, you'd be dead wrong -- and your portfolio would suffer for it -- if you acted on that information without also taking a gander at other important factors such as the foreclosure rate, changes in home values, and -- a metric coming from the folks who are on the firing lines day after day -- builders' sentiments.

But obtaining that sort of meaningful overview of housing direction is tough, especially when the sector starts to turn. The information comes at you at different times throughout the month, is distributed from a variety of sources, and is intermingled with other sometimes confusing housing chatter about, for instance, the goings on at Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE).

Tabling the housing issue
In my opinion, the table below, which I'll revise and publish regularly, provides the opportunity for a quick scan of some of the key metrics that indicate -- and quantify -- whether housing is still sliding, has reached a direction-changing inflection point, or appears to definitely be recovering. That's information that should give Foolish investors a leg up on the eventual housing turn.

 

Latest Trend

Direction

Home Prices

S&P/Case-Shiller 20-city index down 16.6% YOY

- -

Foreclosures

Up 5.1% for the month and 24.5% YOY

- -

Builders' Sentiment

Down 3 points to 14, with 50 being neutral

- -

Consumer Confidence

Down to 38.0 in October from 61.4 in September

- -

Existing Home Sales

Rose 5.5% in September

+

New Home Sales

Increased 2.7% in September

+

Pending Home Sales

Down 4.6% in September

-

Housing Starts

Down 6.3% to 817,000 annually

-

Housing Permits

Down 8.3% to 786,000 annually

-

Jobless Claims

Increased by 32,000 last week to 516,000

-

Positive Indicators: 2

Negative Indicators: 12

But lest you be confused by what I hope is an understandable format, let's look at some of the most important aspects of the table, so that deciphering its message will only take a few seconds for Fools in a hurry:

  • You'll notice, through the addition of a plus or minus sign, the final column deals with the direction indicated by each trend being discussed. You may have also noted that the first four metrics have two directional indicators each. That's because it seems to me -- today, at least – that these measures currently have a little more importance in signaling housing's direction than do the others. You'll notice that those top four (most important) indicators each merits two directional signs -- indicating that housing isn't close to being healthy, something you already knew.
  • However, as the housing picture begins to improve, an increasing number of positive indicators will help to confirm that improvement. At this point, it's impossible to quantify how many plus signs would indicate a definite strengthening within housing, but I'd like to see about an equal number of pluses and minuses in the right-hand column before committing real funds to the sector.

Balance sheet balance
Changing gears, somewhat, since balance sheets today are more important than income statements to each homebuilder's staying power in the face of a continuing downturn, let's take a quick look at what I believe is an underappreciated measure of balance sheet strength and see how that metric stands at a sampling of major builders:

Homebuilder

Total Debt/Equity

Centex (NYSE:CTX)

1.73

Lennar (NYSE:LEN)

0.74

Pulte (NYSE:PHM)

1.10

Ryland (NYSE:RYL)

1.00

Toll Brothers (NYSE:TOL)

0.69

Source: Yahoo! Finance

Clearly, when housing begins to improve -- and certainly until that time -- Toll Brothers gives you the most bang for your buck by this measure of balance sheet strength, with Lennar reasonably close behind. In future issues, we'll continue to focus on the builders' balance sheets, since the longer the downturn continues, the more important balance sheet differentiators will become.

Where to go from here …
At this juncture, with the top chart definitely tilting (if not cascading) toward the negative, I'd advise my Foolish friends to heed that loudly proclaimed message and wait until a few more pluses begin to appear on the big chart at the top before venturing into the homebuilder waters.

For related Foolishness:

Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned. He does welcome your questions or comments. The Fool has a well-constructed disclosure policy