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Tickers in this Article: DHR, NVR, LEN, KBH, PHM, BZH, HOV
Recently released data from the National Association of Realtors (NAR) showed sales of previously owned homes in the U.S. fell sharply in the month of May. Reported home sales were down 2.2% from April, surprising many analysts who had expected an increase of over 6%. However, the 5.7 million units sold in May were still considered by NAR to be above average when compared to historical sales.

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The elevated level of sales was apparently due to "... the ongoing effects of the home buyer tax credit, which we'll also see in June real estate closings" according to NAR chief economist Lawrence Yun. In addition, he noted that "approximately 180,000 home buyers who signed a contract ... may not be able to finalize by the end of June". This means we will continue to see the effects of the tax credit on home sales through June and July, at which point we'll finally start to get a more accurate picture regarding the underlying condition of the housing industry.

With that said, the home buyer tax credit is just one of the many government interventions still propping up the housing market. The government continues to offer loan modifications through its Home Affordable Modification Program (HAMP) and to purchase mortgage-backed securities through the Federal Reserve. Many analysts have begun to expect a double dip in the housing market as the government stimulus wanes and as other housing metrics deteriorate. Meredith Whitney, a well-respected Wall Street analyst, is one of the more well-known analysts to predict the housing market will face a "double dip" recession.

In addition, the latest report on new residential sales in May showed a massive 33% decrease in new home sales compared to April. Sales of new single-family homes dipped to 300,000 from a rate of 446,000 in April; May's number was also down from the 367,000 units sold in May 2009. Inventory levels remain high as well, with 8.5 months of supply at the current rate.

At the mortgage level, the latest Mortgage Bankers Association (MBA) survey reported that delinquencies for residential properties rose to 10.06% for the first quarter of 2010, an increase of 0.94% from the first quarter of 2009. This could be worrisome as it may lead to a repeat of the charge-offs banks faced during the peak of the crisis.

How have the home builders fared in this environment? The performance of some of the largest homebuilders year to date are below (ranked by forward price-to-earnings ratios):

Company FY P/E YTD Return
D.R. Horton, Inc. (NYSE:DHI) 12.3 -5.98%
NVR, Inc. (NYSE:NVR) 14.26 -7.42%
Lennar Corp. (NYSE:LEN) 15.6 +11.2%
KB Homes (NYSE:KBH) 19.8 -20.45%
Pulte Homes (NYSE:PHM) 22.7 -11.4%
Beazer Homes (NYSE:BZH) N/A -19.83%
Hovnanian Enterprises (NYSE:HOV) N/A +1.56%
Data retrieved June 22, 2010

One of the companies that has seemed to be able to go against the grain is Lennar Corp., posting an 11.2% gain for the first half of 2010 in addition to a forward P/E that is lower than an average of its peers. However, the confluence of negative data appears to suggest that the housing market may be headed for another double dip recession absent any additional government stimulus. As such, it may be best to sit on the sidelines and see how this plays out in the second half of 2010. (For more stock analysis, take a look at Play The Bakken With Oasis Petroleum.)

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