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Homebuilder Stocks Have Had Quite A Run. Where Do They Go From Here?

|Includes: HD, LEN, SPDR Homebuilders ETF (XHB)

As we all know, the homebuilder stocks lead the decline in the stock market fall of 2007 – 2008. These stocks actually topped out in late 2005, and have been in a bear market ever since. Companies such as Toll Brothers Inc. (NYSE:TOL) have rallied more than 40% off their 2009 lows. Meanwhile, stocks such as Lennar Corp. (NYSE:LEN) bottomed in late 2008, and are now higher by more than 300% off its lows. The SPDR S&P Homebuilders ETF (NYSE:XHB) which includes homebuilders and other companies such as Home Depot, Inc. (NYSE:HD) is higher by nearly 20% since November 2008. These are dramatic and outstanding moves higher, however, compared to the rally in the markets since March 6th, 2009 they are basically on par with everything else.

Everyday, some analyst or economist says that housing has bottomed, while others will say that housing has not. The fact is that there have been countless stimulus programs trying to keep this sector propped up. For example, the new home buyer $8000.00 tax credit is a major incentive for people to step in and buy a home. There is even a $6500.00 tax credit for for existing homeowners to buy a new house. Then there is the modified home loan program to try and keep people from walking away from their current homes that they are under water on. Even with all of these programs the foreclosure market continues to grow at an alarming rate. Let us not forget about the shadow foreclosures that are out there as well. These are homes that the banks are not allowing to go into foreclosure just yet. RealtyTrac says there are about 600,000 of these so called shadow foreclosed homes in the United States that are yet to hit the marketplace.

Does this look like an area or sector in the market that someone would want to invest in? Sure there are trades in the homebuilders from time to time for savvy traders and investors, however, who in their right mind would want to own a homebuilder as an investment for the long term? The only time this sector would even become an attractive long term hold will be when the government stops propping the sector up and lets these houses get priced by normal supply and demand. The same will unfortunately be said for the entire economy.

Nicholas Santiago
Chief Market Strategist