Homebuilders to return in 2007
For Homebuilders across the country, 2006 could be viewed as the year the housing bubble finally released some hot air. Similar to the 2000 dotcom bubble, these homebuilder stocks have dropped 50% or more from their all time highs. While the media loves to report on how terrible the housing market is, I believed this is the best opportunity for investors. In some parts of California, new homes that were once selling for 400K is now having hard time moving at 340K. Despite incentives such as free upgrades and cash back, buyers are not willing to commit.
The fundamental problem is the prices have gone up so fast in some areas that everyone is tapped out. Affordability is the major factor as wages have not increase at similar pace. It will take some time before there’s equilibrium again. Fortunately, the market has already begun to correct itself. Given most of the investors and speculators are now gone, the homebuilders must continue lowering their prices until long-term buyers can afford them again. While prices should continue to drop slightly in 2007, the time to buy the homebuilder is today.
Looking at Toll Brothers (TOL) and DR Horton (DHI) performance over the past year, it is clear these stocks are moving in tandem. While most experts are not fully convinced these stocks have hit bottom, we are of the opinion that the bottom was in November, 2006. The primary reason has to do with excess inventory and favorable interest rates. Now that these homebuilders have sold most of their excess inventory, they are not as nervous. The overall economy appears to be doing well and jobless rates are at 4.4%. These conditions should translate into continued growth. The market has realized this and the homebuilders stocks are moving up. The bottom line is, do not let the media scare you from investing in the homebuilder stocks. Consider buying shares of any of the homebuilders today and you will be rewarded in 6 months.
