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A Home Builder Rally

|Includes: D. R. Horton Inc. (DHI)

When I was in Austin, Texas I had an interesting conversation with a now local business man. Austin is going through some what of a boom in technology and it is being called "Silicon Hills". This has resulted in a lot of tech company relocations. This business man who relocated there had a very hard time finding a house and this was after the sub-prime mortgage crisis.

The Bad Area
The sub-prime mortgage catastrophe is some what well know. People who shouldn't of got mortgages did. The question is, who were all these people? Were they all just lower class citizens? There is a simpler explanation to not only to why the derivatives lost so much value but why the situation as a whole got so bad.

People were getting houses in areas that could not support them. High unemployment areas, low economic growth, etc. So when these people gave up their mortgages to the bank the banks were not only left with unpaid mortgages but they were left with bad underlying assets.

A House Builder Rally
The sub-prime mortgage might of created a lot of houses, but a portion of them were in bad areas. If unemployment continues to drop (this is key), there will be a demand for houses in the good areas again. This might catch a lot of people off guard because of the common general understanding of what caused the sub-prime mortgage collapse. The volume of houses is not as important as where the volume is.

I am not alone in this belief, Warren Buffet is also banking on a housing recovery.

A stock to watch is D.R. Horton (NYSE:DHI) because this is one of the biggest homebuilders in the USA. If they start to pull up substantially, the other stocks in their sector will also certainly start to climb.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.