The Homebuilder's Question

By Gregory S. Davis | February 26, 2010 AAA

Is now a good time to get into homebuilding stocks? A rebound in the US economy could help homebuilders like Toll Brothers (NYSE:TOL) and KB Homes (NYSE:KBH). High unemployment and even high lumber prices are strong signals for investors to stay away. Let's take a look at a couple of reasons to either break ground on homebuilding stocks or store our shovels for another time.

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Toll Brothers Pulse On The Housing Market
Investors hoping to break ground should be happy that the luxury homebuilder, Toll Brothers, reported a $40.8 million net loss for the first fiscal quarter of 2010 versus an $88.9 million loss a year ago. Toll Brothers Chairman and CEO Robert I. Toll remains optimistic although Toll Brothers revenues slid 20% to $326.7 million and unit sales dropped 10% to 596 versus the prior year.

While the sustainability of the country's economic system was the main concern a year ago, Mr. Toll believes the current downturn in the housing market will take a similar recovery pattern as those witnessed in the 1980s and 1990s.

Investors Perspective

The worst of times may offer the best opportunities to enter into an investment. However, based on the comments of Mr. Toll the worst is behind us. Investors can use the comments as a signal of a slow and gradual turnaround for the housing market.

Factors Supporting a Housing Recovery

  • The extension of the $8,000 tax credit for first time homebuyers
  • Qualified repeat homebuyers ability to qualify for a $6,500 tax credit
  • Extremely low 30-yr mortgage interest rates

Caveats To A Housing Recovery

  • High rate of unemployment
  • Fear of homeownership
  • Uncertain economic outlook

Slices Of The Housing Market
KB Homes tends to target a different customer than Toll Brothers. Toll Brothers most recent average selling price of $555,000 denotes luxury. KB Homes closed out last year with an average selling price of $203,400, signaling comfort and affordability. The lower selling price could be particularly attractive to first time homebuyers taking advantage of the $8,000 tax credit giving a stronger boost to KB Homes during the recovery. (For related reading, check out Exploring Real Estate Investments.)

Lennar Corporation (NYSE:LEN) home prices compete closely with KB Homes. Lennar reported an average selling price of $238,000 at the end of last year. Lennar would be another option to follow, especially if the housing credit is extended beyond April 2010.

D.R. Horton (NYSE:DHI), America's Builder, sells homes ranging from $90,000 to north of $700,000. D.R. Horton's wide selling range allows them to take advantage of customers using the tax credit. The upper end of its home selling prices also allows them to compete with luxury homebuilders like the Toll Brothers.

D.R. Horton also differentiates itself by volume. KB Homes hammered out 8,488 homes last year, while D.R. Horton nearly doubled KB's production by delivering over 16,000 homes.

The Bottom Line
Investors have every right to be cautious. Several issues including the economy, interest rates and demand all have to come together for the housing play to make sense. For investors interested in waiting for the good news to arrive a dollar cost averaging approach into the homebuilders is one way to get your foot in the door without having the anxiety of buying the entire house.

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