Tickers in this Article: MDC, RYL, TOL, XHB, MHK, OC
Many investors adhere to the notion that the best time to invest in a company is when it is in the midst of a problem. An excellent case in point is BP (NYSE:BP) during the height of the Gulf oil spill a couple of months ago. Trading at a high of $62 a share, BP shares were drilled down to $27 in a manner of weeks. Today, shares sit at $37, and if BP can overcome financial and legal consequences - which many feel it can - then the shares still offer opportunity.

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Trouble at Home
No industry, except for maybe banking, has been hit harder than homebuilding. The industry has suffered for over two years, and there are those who feel that it is near to hitting bottom. After the first-time homebuyer's tax credit expired, housing sales fell off a cliff. And since markets are forward looking mechanisms, might today be a time to consider these names. Many have cleaned up their balance sheets and are in a great position to benefit when the cycle, dare I say, goes up. And as many proponents of the industry like to tout, land is a finite resource and homebuilders who have the scale and balance to buy at today's depressed prices may benefit greatly years from now.

Names like M.D.C. Holdings (NYSE:MDC) and Ryland (NYSE:RYL) have no net debt and trade for approximately book value once you account for their tax assets. After a couple of brutal years with significant losses, homebuilders have built up some tax assets that can be used to offset taxes on profits. Toll Brothers (NYSE:TOL), another name with a quality brand and strong balance sheet, focuses on the high-end housing market. In way, high-end housing may have a better bounce back than starter homes. After all, someone in the market that can afford a million-dollar house can probably also handle a $1.2 million house, meaning that Toll may first in line to benefit from rising prices.

Hoping for a Lot
Despite the above, it is very likely the demand for housing will be muted for many years to come. The prior housing rally was fueled by a lot of speculative home buying, a segment that may never fully come back for many years. Going back to the business of selling homes primarily to home buyers will likely mean a reduced volume of homes sold. Over the long run that will mean better quality mortgages being made, but it will probably reduce annual home price appreciation due to the absence of speculators. Indeed, homebuilders' share prices may be cheap and they may not be headed for another fall, but that doesn't mean they will head higher.

Those wanting exposure to this area can consider the SPDR S&P Homebuilders (NYSE:XHB) ETF, which counts all the major homebuilders as top holdings. But in addition, you get exposure to leading suppliers to the industry like Mohawk Industries (NYSE:MHK) and Owens Corning (NYSE:OC).

The Bottom Line
The cost of renting still looks attractive when compared to a mortgage payment, but that gap continues to diminish. If that relationship continues in favor of the ownership side, then the sun may shine on homebuilders sooner than expected.

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