Comment: Is the housing tsunami receding?

(Elvis Picardo is an independent investment strategist located in Vancouver, Canada, and a guest columnist on reuters.com. The opinions expressed are his own )

By Elvis Picardo

VANCOUVER (Reuters.com) --Contrary to popular belief, a tsunami is not a single gigantic wave, but is a series of massive waves that can pummel shorelines thousands of miles from its origin, leaving a trail of devastation in its wake.

The current U.S. housing slump - the worst in 70 years - has been likened to a tsunami because of the carnage it has caused in financial markets worldwide, many of which were quite distant from the epicenter. The estimated damage in terms of market capitalization that has been vaporized over the past six months already exceeds hundreds of billions of dollars.

There are signs the worst is over and investors are cautiously picking up the pieces. But before you get too comfortable, realize that hazards remain.

Last week, Linens 'n Things became the latest casualty of the slowdown, as it filed for bankruptcy in the largest leveraged buyout failure since July.

The second-largest U.S. houseware retailer was unable to cope with competition and tight liquidity conditions as consumers cut back spending on home furnishings. Smaller rival Home Interiors & Gifts, a direct-marketer of home decorative products, also filed for bankruptcy last week.

Revenues and earnings at lumber producers have also taken a hit. Weyerhaeuser reported a loss of $148 million in its first quarter, and Canada's Canfor reported a loss of close to $84 million.

The slump has also slashed the market value of homebuilders in the S&P 500 by two-thirds from their peak in January 2006. The five companies in the S&P 500 Homebuilding index currently have a total market capitalization of $16 billion, compared with over $49 billion in the heady days of early 2006.

Nevertheless, judging by the performance of homebuilding stocks such as Pulte Homes and DR Horton, it appears as though investors believe the worst is behind them. The S&P 500 Homebuilding index was up 11 percent for the year as of Friday, led by Pulte with a 34 percent gain and DR Horton with 19 percent.

But the most telling indicator of improving sentiment is that top-rated securities backed by subprime loans rose - albeit modestly - in April, after falling over 9 percent in the preceding six months. As the implosion in U.S. subprime mortgage-backed securities was one of the major shocks that triggered the housing tsunami, any improvement in that asset class would be a positive factor for markets across the board.

For the moment, investors are willing to look beyond U.S. housing data, which continues on its dismal trend. Last week, real estate data company Radar Logic reported that home prices fell in 22 U.S. metropolitan areas in February, as foreclosures reached record levels. Prices per square foot in areas such as Sacramento plunged almost 30 percent from year-earlier levels. Prices in Las Vegas fell 26 percent.

Markets may have stabilized in recent weeks as the leading wave of the housing tsunami recedes, but don't take your eyes off the water: there may be more waves on the horizon.