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
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
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
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.
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.