Tickers in this Article: DHI, KBH, HOV, NVR, XHB, LOW, HD
Back towards the end of 2009, when the market was climbing higher and the economy was coming out of the recession, many analysts predicted that 2011 would be the year homebuilders and other related stocks rebounded due to a turn in the real estate market. That clearly hasn't been the case, as the real estate market has remained depressed.

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No Activity
Residential real estate activity remains depressed and that continues to be the underlying catalyst for the industry. After the excessive homebuilding activity in 2006 and 2007, housing starts have fallen off a cliff and remain at historic lows. With real estate purchases also at low levels, the excess inventory build continues to keep housing starts depressed. Even today's historically low interest rates haven't been enough to turn renters into buyers. As such, 2011 was another unpleasant year for homebuilding stocks, as they responded negatively to the lack of real estate activity.

Shares in all major homebuilders were laggards in 2011. Leading the depression was small cap Hovnanian (NYSE:HOV), as its heavy debt load and write-offs continue to concern investors. Shares in HOV are off nearly 60% thus far in 2011. KB Homes (NYSE:KBH) was another major laggard, down nearly 40%. Diversification paid in the homebuilding sector in 2011. The SPDR S&P Homebuilders (NYSE:XHB), a leading ETF, is down only 4% year to date thanks in part to its holdings outside of traditional homebuilders. In addition to investing in the actual homebuilders, XHB also invests in names like Home Depot (NYSE:HD) and Lowe's (NYSE:LOW). While these retailers are heavily reliant on a strong housing market, they are not as directly exposed as homebuilders. Looking ahead into 2012, this approach to investing in the housing industry may be the way to go again. (For related reading, see Mortgages: How Much Can You Afford?)

A Ray of Hope
Not all homebuilders were thrashed in 2011, however. As depressed as the industry is, some investors see a ray of hope in names like D.R. Horton (NYSE:DHI), which is up about 2.5% so far in 2011, outperforming the S&P 500. Another high quality homebuilder, NVR (NYSE:NVR) has had a relatively flat performance in 2011. Yet, unlike its peers, NVR has been a relatively steady stock throughout the entire housing crisis, due to its asset-light and debt-free balance sheet. Unlike many other homebuilders, NVR did not engage in massive land purchases during the boom, so when the bottom fell out, NVR was not forced to take significant asset writedowns.

The Bottom Line
Looking ahead in 2012, housing activity shows no real signs of picking up soon, but it appears that the industry has hit bottom, as housing starts seem to have plateaued. When activity does start to pick up, even if only modestly, residential real estate stocks could soar due to today's severely depressed prices.

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

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