Big News for Housing

The data last week on Housing Starts sends an important message to investors, says MoneyShow's Jim Jubak.

The financial market has really great news about housing starts on December 18. They came in about 1.1 million and that was a 22% increase from the October number. This was for November. I think the market basically put two and two together and came up with five, but two and two, in this case, still equals four and that's a reason to take a look at the housing sector. What you really have is greater demand and I think it's going to step down a bit because I don't think this big jump through a 1.1 million is sustainable, so we may go back a little bit in December to, say, a million. That's the two plus two doesn't equal five. On the other hand, a million is a pretty strong rate.

You have the Fed, who has decided to taper, but it hasn't tapered much, so it's still buying mortgage backed securities, which means, I don't think mortgage rates are going to sky rocket. You have a Fed that has basically said, "We're going to keep short-term rates," which are not the same as mortgage rates, but still important. Short-term rates down near zero until sometime in 2015. All those things, plus a real lack of inflation. Inflation is running at 1.75 or something like that. Again, that means there is not a whole lot of upward pressure on mortgage rates.

All that means is that the big, big, sort of, worry that was holding down housing stock prices is gone. That's why you had a big jump, so, if something like Lennar, symbol (LEN) went up like 6.3% on the 18th, all those things, big jumps.

Going forward, I'd be very careful and look at just, the best in the sector. Lennar, for example, is one I'd look at because they've been doing a lot of buying of land, when the land prices were relatively lower, so they have a big amount of real estate in the bank, on which they can build houses, so they're not going to have to worry about buying more real estate at higher prices; that's the stock I would look at right now.

Another one might be Lumber Liquidators, symbol (LL). They've taken a big hit recently, because the FBI is doing an investigation on the sourcing of their lumber, some of which seems to be questionable. I think the company would be insane to be sourcing lumber from illegal countries and illegal operations. There are probably a couple of glitches. There are probably some fires where there is all this smoke, but it doesn't concern the whole spread of their products, so it took a beating on that. It started to recover. It was also up about 6% on the Fed news, but that's a stock that normally trades much higher and has a really good expanding retail sales story. I'd look at those two if I'm going to try to play the housing recovery, if you will, on the housing starts number, rather than looking at the whole sector.

This is Jim Jubak for the MoneyShow.com video network.