The Double Dip That Never Was

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.

Add KB Home, Beazer Homes, PulteGroup, NVR, and MDC Holdings to My Watchlist.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He would like to remind you not to forget about our friends in Japan who could use a helping hand. You can follow him on CAPS under the screen name TMFUltraLong. KB Home is a Motley Fool Big Short short-sale pick. Motley Fool Alpha LLC has written calls on KB Home. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always on solid ground.


Read/Post Comments (9) | Recommend This Article (7)

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  • Report this Comment On April 06, 2011, at 4:42 PM, Melaschasm wrote:

    You can't have a double dip until you have a rebound from the first dip!

    I think builders are an okay place to make a small investment with high risk, high reward money. It looks like most of the remaining builders will escape bankruptcy, and I expect the housing market to start to recover in mid to late 2012. I think 2013 will be a good year for housing.

  • Report this Comment On April 06, 2011, at 5:56 PM, xetn wrote:

    There are an estimated 1 million plus homes that are scheduled for foreclosure in 2011. With all of that new "inventory" becoming available plus the existing huge supply, why would anyone build at this point?

    Just curious, not trying to make any points.

  • Report this Comment On April 06, 2011, at 6:34 PM, TMFUltraLong wrote:

    Melaschasm & xetn,

    Precisely my point.... There hasn't been a rebound and who wants to buy homebuilders in an environment overcrowded with foreclosures.

    TMFUltraLong

  • Report this Comment On April 07, 2011, at 12:54 AM, omarfidel wrote:

    It's really disgusting to think that people act like the last 15-20 years were normal.

    My father was a builder in NW indiana, and sure chicago money came in via Dr's and lawyers running away from an overpriced market and cheaper liability insurance, but in reality there was no other money.

    I went to school with all these people and i wonder how so many peoples parents could afford all these great homes. How do crap jobs equate to great homes.

    Your more astute builders realized their clients in previous decades couldn't afford to build nice homes so what changed?

    The rules at the banks changed, and they changed to find more suckers, more chumps and more fall guys.

    Money that banks made from artificial and technical means were nothing more than a grand and complicated Ponzi scheme legalized.

    You create a wealth of fake/artificial money and then you borrow and lend against it. You leverage holdings against debts, you then rate those debts equivalent to cash. DEBT is not cash, yet there are so many trillions of dollars to be made for doing roughly nothing that the banking industry and world governments will never let go of this particular "crack pipe".

    YES, i said a truism, bankers do roughly nothing, and like wise they should be paid roughly nothing.

    It's high time for nationalization of the banking industry, abolishing of hedge funds and an end to free money.

    If countries can absolve the debts of other countries why cant the US absolve the debts of its citizens.

    The problem is that the bankers and those with money are too powerful and corrupt... all hail the american plutocracy.

    That is it, end of story.

  • Report this Comment On April 07, 2011, at 6:31 AM, dbtheonly wrote:

    xten,

    Until (& unless) the question of mortgage ownership, & thus the right to foreclose, is settled; there will not be foreclosures coming on the market. I see the mess taking years to flush out. So I question whether a million foreclosed homes will make it to the market.

  • Report this Comment On April 07, 2011, at 9:07 AM, mbastockpro wrote:

    jpmorgan keeps strong buy based on margins improving buy at low guys sell at 20

    Standard & Poors KB Home Raised To Hold From Strong Sell By S&P Equity Research

    THE SHORTS get squeezed in April, 1/3 stock shorts, cover in 11's

    THE SHORTS TOOK THE STOCK FROM 16 COUPLE MONTHS AGO TO THE LOW BEFORE EARNINGS AS THEY HAD INSIDE INFO, HOWEVER GOOD NEWS IS WE HAVE TRIPLE BOTTOM KBH SAID ENCOURAGED BY SPRING ORDERS AND WITH THAT NEAR $9 BOOK VALUE, STOCK WILL BE RIGHT BACK TO THE 12 TO 13 AREA NEXT WEEK WHERE IT WOULD TRADE WITHOUT HTE HIGH SHORT INTEREST, REMEMBER THE SHORTS WERE SHORTING FROM 16 TO THIS 11 PRICE AND LOOK WHAT HAPPENED TOTHE SHORTS WHO DIDNT COVER AT 11 IN NOV OR DECEMBER ETC... THEY GOT SQUEEZED TO 16 SO SHORTS WILL COVER IF THEY DONT THEY HAVE NO PROFIT AND WILL LOSE IT ALL AS ECONCOMY IMPROVES AND KBH IN SUMMER IS BACK TO THAT 15 TO 16 AREA

    Tuesday 8:26 AM KB Home (KBH) "We are encouraged by spring sales ramping up as orders are up this spring, despite the many headwinds that persist in today's housing markets, our year-over-year pretax results... improved for the fourth consecutive quarter."

  • Report this Comment On April 07, 2011, at 10:36 AM, AquaSpearo wrote:

    While the home buyer credit was active, especially in california where there was a double credit, I stayed away from buying, immediately after the rush to qualify had ended, the prices readjusted to where they were originally after a slight uptick. All that demand pulled forward going into a typical slower winter season was going to result in lower numbers. I took the oppurtunity to buy during one of those panics..and not just your typical mcmansion, but the kind of high style tudor home that only comes on the market very rarely. I still havent seen a comparable home sell for anywhere near this price, so you can get tommorows price todady easily ifyou play your cards right. In california, there are alot of homes for sale, but most of them are not the good homes people actually base their home ownership dreams about.

    There are two points to consider for the SuperBears. (both buyers and investors)

    1. When the market actually hits bottom, Investor money will flow into the market so fast you wont have a shot at competiting for the purchase of a home. (this was already on full display in the Bay Area, non-all cash buyers did not stand a chance last year)

    2. It doesnt take to much thought to short homebuilders (just going along with the mob), leading me to believe they have been dramatically oversold when you consider the backlash effect of the HB tax credits. (Think Ford after Cash for Clunkers). Q1 earings will be dismal, but this spring could be hot.

  • Report this Comment On April 07, 2011, at 1:41 PM, ionthemarket wrote:

    Double dip. Don't think so. You actually have to get out of one dip to go into another. KBH with a 32% drop in orders and people actually believe that new home construction is coming back anytime soon??

  • Report this Comment On April 07, 2011, at 5:13 PM, LemonMeister wrote:

    Mezger KB Home CEO (Up for re-election today) is still lying to the investors; himself and to potential new KB Home buyers, he is ignoring hundreds of properties that KB Home has to buy back because of major construction defects. This set of Directors at KB Home is the worst. None of them are responsible, they do not reply to complaints, like the KB Home owner does not exist, some of us who were conned by KB Home and their non-disclosures (Lies and deceit, anything for them to sell you a bill of goods) stuck in a home so poorly constructed it can’t be sold or rented out. http://www.akbhomesucks.com Just Google KB Home sucks and also Google Mirasol in San Antonio, TX. 275 shoddy constructed homes. The FBI should look into KB Home for racketeering? They can’t keep getting away with ripping off consumers while their white collar criminals just walk.

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