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At this time last year, the government was doing its best to stimulate economic growth and stabilize the housing sector by offering a first-time homebuyers tax credit of $8,000. The government had hoped the credit would spur buying and eliminate a multiyear precipitous downtrend for home prices. Unfortunately, all this tax credit did was slow an inevitable housing price correction.
I keep hearing the term "double dip" being tossed around in reference to the housing sector and it just bugs the heck out of me. How can you call something a double dip if it never actually rebounded in the first place? Just because the government artificially propped up the housing sector by offering a credit doesn't mean a rebound actually occurred; and recent housing data absolutely support this idea.
U.S. housing starts released in March tumbled a staggering 22.5% to a near-record low as mortgage lenders tightened their grip on available credit and foreclosures continued to glut the marketplace. The Case-Schiller index that measures home values also fell 3.1% for January, a telling sign that home values could still have a long way to fall.
Then there was the chilling data we received yesterday from homebuilder KB Home (NYSE: KBH ) , which builds middle-to-high-income homes, predominantly on the West Coast. It demonstrated just how exposed homebuilders still are to a softening housing market. The company reported a 32% drop in orders and a loss of $1.49 per share, well beyond the $0.30 loss analysts had been expecting. Some analysts are now looking for sales at KB to drop as much as 30% this year.
So what is there for an investor to do?
One tactic is to avoid the sector altogether and allow homebuilder valuations to come back to reasonable valuations. Most homebuilders rallied in excess of 100% thanks in part to revenue derived from the homebuyers tax credit. With that credit now removed, homebuilders like Beazer Homes (NYSE: BZH ) and PulteGroup (NYSE: PHM ) are going to find their revenue stream rapidly drying up.
Another strategy is to seek out homebuilders that have rock-solid balance sheets. This was actually a lot easier than I had anticipated, because most balance sheets in the sector are an absolute disaster. NVR (NYSE: NVR ) is the standout of this group. Despite the worst downturn in the housing market in 70-plus years, NVR has remained profitable throughout. It sports an insane $185 per share in net cash (about one-quarter of its share price) and trades at under 15 times its forward P/E.
MDC Holdings (NYSE: MDC ) might be another company worth keeping an eye on. With $270 million in net cash and a conservative management team, it could come out of the gate faster than the rest of the sector when things finally do rebound.
What I do know is homebuilders had their foundations rocked yet again by yesterday's KB Home report. Investors need to take off their blinders and see things for what they really are: the continuation of a multiyear downtrend.
What are your thoughts on the housing sector? Are these stocks at bargain-basement levels or is the foundation literally buckling from under them? State your case in the comments section below and consider tracking these stocks and your own personalized portfolio of companies with My Watchlist.