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Saturday, April 13, 2013

Homebuilder Stocks Ready to Soar

Banking District
Banking District (Photo credit: bsterling)
By Investment U

Los Angeles, Apr.13,  free investment ideas .- During the housing bubble a few years ago, I editorialized repeatedly [Alex nailed it in 2006] that the whole affair was likely to end badly for speculators, mortgage companies and - not least of all - homebuilders.

It wasn't just a lucky call.

There were plenty of intelligent, sober-minded people in the real estate brokerage, mortgage and homebuilding industries telling anyone willing to listen that the fundamentals were unsustainable and the craziness couldn't last.

They were right.

But now these same insiders are telling me just the opposite. The housing market is not just coming out of its slump. It is snapping back fast.

Lookin' GoodBuilding the Foundation

Shares of the leading homebuilders will soon be prime beneficiaries. While the sector has already begun to lift off - along with sales and earnings - they are still quite cheap and likely to lead the market higher in the second half of the year.

Consider the Federal Reserve. Not only is it keeping short-term rates near zero, but it's also buying longer-term bonds and mortgage securities in the secondary market, keeping those rates artificially low.

Don't underestimate what a powerful tonic this is.

Before the Fed started buying mortgage-backed securities in late 2008, a borrower paid more than 6% for a 30-year fixed-rate mortgage. If a couple could qualify for a $1,000 monthly payment, they could get a $165,000 mortgage.

Today, with a 3.5% rate, the same borrowers can borrow as much as $222,000.

Banks, of course, gave mortgages to anyone with a pulse during the boom times and now that prices are low, they have suddenly discovered lending standards. In the process, they have boxed out some potential buyers.

But sources tell me that banks are finally loosening those standards and - while no-money-down mortgages may never (and should never) be common again - borrowers with decent credit are getting financed more easily.

Also, according to The Wall Street Journal, inventories of homes available to buy have fallen to 20-year lows. This comes as a shock to those used to hearing about unsold homes and a potential avalanche of foreclosures. But, with prices coming back, many sellers have decided not to take a loss and have withdrawn their properties from the market.

Plus, banks are selling fewer foreclosures. And cash investors have scooped up many homes, converting them to rentals.

Rising rents are making home ownership look attractive again. And since homebuilders have added little in the way of new construction over the last five years, the inventory of new homes is selling fast. Many homebuilders have reported quarterly sales that are up by 30% to 40%.

Across the country, prices of existing homes rose 10% in February from a year ago. And as the spring buying season hits full stride, they should rise even further.

If you believe, as I do, that this trend will continue, the easiest way is to play it is to buy the entire sector.

Three of the best exchange-traded funds are the SPDR S&P Homebuilder ETF (NYSE: XHB), the iShares Dow Jones US Home Construction Index Fund (NYSE: ITB) and PowerShares Dynamic Building and Construction Portfolio (NYSE: PKB).

According to my research, homebuilders are set to beat consensus earnings estimates by a wide margin in the weeks ahead. That gives them plenty of short-term trading potential....
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