Time to Buy the Homebuilders

by: Herb Morgan

Yesterday’s report from the FHFA showed a very robust 1.7% increase in home prices from December to January. The .1% increase previously reported in December however was revised to a .2% decline. Regardless, this is a very good sign pointing towards stabilization of the housing market. Eight of nine regions reported an increase with only the Pacific region showing a .9% decline. The Pacific region is obviously dominated by California where buyers were likely holding back in anticipation of a $10,000 state tax credit for first time home buyers that is now law. Particularly interesting is this tax credit only applies to purchases of newly built homes.

Homebuilders wisely took any and all losses possible last year in order to receive checks from the federal government. They had to show losses to benefit from rebates of taxes paid during better times. This was a gift from the 2008 stimulus bill. It is even rumored that many sold land holdings at losses with agreements to repurchase the same property in the future in order to obtain these lucrative rebates. No need for me to pontificate here on the tax payer fleecing. My job is to look for investment opportunities.

Fundamentally, business for home builders and their supporting industries has to improve. Our population grows by about 3.5mm people annually. This represents a need for about 900,000 living units. Currently, we are building less than half that amount.

iShares Dow Jones US Home Construction Index (NYSEARCA:ITB) is the best pure play, being largely concentrated in home builders themselves. It also includes home improvement retailers Lowe's (NYSE:LOW) and Home Depot (NYSE:HD) along with furnishings sector members Leggett & Platt (NYSE:LEG) and Mohawk Industries (NYSE:MHK).

Spider S&P Homebuilders ETF (NYSEARCA:XHB) is a less concentrated play with Home Depot, Lowe's, Bed Bath & Beyond (NASDAQ:BBBY), Sherwin Williams (NYSE:SHW) and Masco (NYSE:MAS) in the top ten.

Shorts are likely to cover soon as stabilization numbers continue to trickle in. Add some new long positions to that and some anticipated better news over the next year and you have the makings for a very nice multi year investment.