This piece originally appeared on Real Money Pro.
Here we are at the end of 2011, and still there are few signs of life in the moribund housing sector. Barring some last-minute housing miracle, the year 2011 will go down as the worst ever recorded for new-home sales since the government started keeping track in 1963.
The most recent figures from the Commerce Department indicate that the pace of annual new-home sales has slowed to barely above 300,000. While existing homes account for the bulk of sales in the overall housing market, new homes are important to the economy because they create jobs in construction, flooring, landscaping and in the manufacture of durable goods.
Not only are new homes languishing on the market, the few that are being sold are going to settlement at reduced prices. In October, the median sale price of a new home slipped to $212,300, and the average sale price fell to $242,300 -- both of which are low points for the year.
Based on the above data, most investors would probably avoid companies that sell new homes. Yet all hope is not lost, because while the fundamentals for new home building companies offer little to warrant optimism, the technicals tell a different story. Since a major market low was put in on Black Friday, the SPDR S&P Homebuilders ETF (XHB) has climbed 14.5%, while the SPDR S&P 500 ETF (SPY) is up by only 8.35%.
XHB's chart has shown major improvement recently, clearing its 200-day moving average (red) on Dec. 2 and trading above it ever since. That moving average has been a key area of both support and resistance for XHB, as indicated by the arrows. A series of higher highs and higher lows is now visible.
XHB's third-largest holding, Lennar (LEN), has been on an absolute tear recently, reaching a six-month high last week. Lennar's 50-day and 200-day moving averages are about to form the "golden cross," a bullish technical formation (circle).
Lennar might be a nice play for a momentum trade, but some names in this group that have shown less spectacular moves may also be ready to build on their recent gains.
For example, KB Home (KBH) has been wobbling higher since October. The stock just fought its way through tough resistance at $8.00 and is forming a series of higher lows and higher highs as it grinds slowly and steadily higher.
While there is a ton of overhead resistance remaining from the stock's long trek downward, there is little standing between KB Home's current price and its 200-day moving average (red), looming ahead at about $9.25. A rally to that price would represent a 14% gain from Friday's close of $8.10. Additionally, the stock now appears to have found support on its 50-day moving average (blue).
Why are the charts of homebuilders on the rise? The inventory of available new homes has fallen along with sales, to an estimated 162,000. Even at the current slow sales pace, that figure represents just 6.3 months' worth of available inventory.
The market for new housing has reached such depths that more homes will need to be built even if sales remain at their current levels. You never want to say that housing can't get any worse than it is, but the market has deteriorated to the point at which there is considerably more upside than downside.