Housing Stock Advance OverblownThe housing market has clearly reached a bottom and is turning upward. After years of dismal sales, a lot of foreclosures and short sales, and declining home prices, there’s strong optimism, which has resulted in a sizzling demand for homebuilder stocks.

The current situation has vastly improved to the point where housing stocks are hot.

Triggering the buying has been a combination of historically low mortgage interest rates, lower home prices, and renewal in the jobs market. (Read “What the Government Doesn’t Want You to Know About Jobs Creation.”) And as more people work, I expect the housing market will continue to strengthen, as shown by the strong housing starts and building permits trend. In February, there were an impressive annualized 917,000 starts, which was above the Briefing.com estimate of 905,000 and the 910,000 in January. The reading was still below the annualized 954,000 reported in December.

Also lending support to the housing market recovery was a strong building permits reading of 946,000 in February, above the Briefing.com estimate of 915,000 and the 904,000 in January. The strong reading indicates builders are expecting a good flow of buying in the housing market, and this could only bode well for homebuilder stocks.

The S&P/Case-Shiller 20-City Home Price Index, comprising the 20 largest U.S. metropolitan cities, increased a better-than-expected 6.8% in December, representing the 11th straight up month. While the reading is positive, Gary Shilling is not as optimistic toward the recovery. In an interview posted on Yahoo! Finance, Shilling said, “It may have bottomed, but I am not sure it has a strong recovery,” and “I think the risks are on the downside.” (Source: Curtin, S., “Housing Will Limp Along at Best: Gary Shilling,” Yahoo! Finance, March 19, 2013.) Again, the housing market has bottomed and is improving, but there is still a lot of risk, especially with the run-up in housing stocks.

Technical analysis of the chart of the S&P Homebuilders Select Industry Index (NYSE/XHB) below suggestsan upward trend from the October 2011 bottom to the current high. The upward break around the $27.00 level was bullish after breaking out from some topping action, but there appears to be some stalling.

XHB SPDR S&P Homebuilders index stock chart

Chart courtesy of www.StockCharts.com

The NAHB Housing Market Index was soft, with a reading of 44 in March, below the Briefing.com estimate of 48 and the reading of 46 in February. What is interesting is that the reading is approaching the 50 level that hasn’t been reached since April 2006, more than six years ago.

I expect the housing market to continue to improve, especially if the jobs market and economy strengthens; but at the same time, there’s the question of the degree of the recovery.

At this juncture, if you hold some of the hot homebuilder stocks, take some money off the table after the run-up in the housing market stocks.