Filed Under: , ,
Tickers in this Article: TOL, PHM, ITB, XHB, KHB, HOV
As one of the more storied sectors of the stock market, the homebuilders had an interesting 2009. As one of the major players in the Great Recession, as a group, the stocks performed well as the United States government's $8,000 tax credit took hold. The two broad-based proxies for the sector, the SPDR S&P Homebuilders index (NYSE:XHB) and the iShares Dow Jones U.S. Home Construction index (NYSE:ITB) are also on the rise. IN PICTURES: 20 Tools For Building Up Your Portfolio

Despite the group's performance, there are several problems still in place. Even with the stimulus, consumers' construction spending is still well below the heights fueled by cheap credit. Reports by the U.S. Census Bureau state that residential construction spending is still more than 23% below last year and a whopping 63% below peak spending set in March 2006. Housing inventories, while dropping, are still facing stiff competition from foreclosures that are only few years old. High unemployment and ever-increasing mortgage defaults will continue to plague the sector for some time to come.

Looking for the Turnaround
The year 2009 saw plenty of doom and gloom for the sector,but there were a few bright spots. Luxury McMansion home builder Toll Brothers (NYSE:TOL), while reporting a 68-cent loss per share due to asset sales and write downs, did report a glimmer of hope: a 42% jump in new home sales. CEO Robert Toll is bullish on home prices and predicts a "serious good time again".

Toll was also bullish on the continuation of mergers in the sector, as stronger players swallow the weaker ones. The segment got a taste of this activity as Pulte Homes (NYSE:PHM) completed its merger with struggling builder Centex in August.

The industry also received a boost from a change in the tax code, which allows one year's operating losses to be spread over previously profitable years, resulting in a tax benefit for the builder. Both KB Homes (NYSE:KBH) and Hovnanian Enterprises Inc. (NYSE:HOV) expect to receive more than $200 to $275 million in tax refunds in 2010. (For more, see Finding Profit In Troubled Stocks.)

Bottom Line
Housing got a boost during 2009 due to the arrival of government stimulus, but the real question remains: will new housing starts continue to grow when the tax credit expires in April?High unemployment and tighter credit restrictions will continue to plague the builders. Look for more consolidation in the sector.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center