The Economy Stinks, But Housing Keeps Picking Up

By Steven Russolillo

Yes, the housing bust is over.

As the broad economy continues to struggle, the housing market — one of the most beleaguered pockets of the economy for years — continues to exhibit signs that the worst is in the past.

Today’s data represent another indication confirming that mindset. U.S. home builders’ confidence registered the biggest monthly jump in nearly 10 years, another piece of evidence that housing is potentially becoming a source of strength for the economy.

Earlier Tuesday morning, the National Association of Home Builders said its housing market index jumped to 35 this month, the highest level since March 2007, and up six points from a month earlier.

‘While upcoming data on housing starts and home sales will provide a better indication of whether this surge in optimism is entirely justified, the housing market has certainly improved this year,” said Cooper Howes of Barclays. “2012 is expected to be the first year since 2005 in which residential investment will provide a positive contribution to GDP growth.”

Stocks reversed earlier losses and were firmly in positive territory. The Dow is up 85 points, the S&P 500 is up 10 points and the Nasdaq Comp is up 14 points.

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• Homebuilders Higher on Hovnanian Hit

Still, homebuilding stocks — among the top S&P 500 performers this year — are struggling Tuesday. Raymond James downgraded KB Home and DR Horton to underperform, noting both builders have “the most exposure to entry-level buyers, which we believe are continuing to face difficulty meeting the stringent qualification standards being imposed on new mortgage underwriting.”

KB Home is down 1.6%, DR Horton is down 1.4% and Lennar is off 1.9%. But all three of those stocks are up about 50% this year (albeit still down more than 50% from their bubble highs.)

Banks that have reported earnings throughout the last week have reported upbeat results tied to the housing market. Wells Fargo, the nation’s biggest mortgage company, said revenue from mortgage banking jumped 80% from a year earlier.

J.P. Morgan’s second-quarter mortgage-loan originations jumped 29% from a year ago. Citigroup’s quarterly results also benefited from a booming mortgage business driven by low interest rates and government programs for struggling homeowners.

Despite the upbeat homebuilder survey, analysts caution that the index is still well below historical levels. A headline reading above 50 would suggest builders are more optimistic about business conditions. The indicator hasn’t been above 50 since April 2006.

But for now, today’s results offer much needed hope on the housing front.