Best Time to Invest in Homebuilders

I’m sure many of you are wondering if I’ve lost my mind. Our financial system is teetering on the brink. Our economy is in the midst of the worst recession since the Great Depression. The markets are down more than 40% from their all time highs. And, I’m suggesting you invest your hard earned dollars in one of the hardest hit industries?

I must be crazy… crazy like a fox that is.

Remember, the stock market is always looking to the future. Investors are constantly discounting expectations about future events into today’s stock prices.

We see examples of this phenomenon every day.

A stock moves higher on expectations the company will post better earnings than analysts expect. A stock dives because an economic report suggests the company’s business will suffer.

You get the point.

Understanding this key market principle can make a huge difference in your investment returns. By training yourself to think like the markets, you can spot long-term trends as they’re developing. (And, that’s when you make the big money.)

Long term trends are serious money-making opportunities you can’t afford to miss. A few well-timed investments can be the difference between early retirement and no retirement.

I think a new long-term uptrend is just beginning in the homebuilders.

Savvy investors who climb aboard this trend early stand to make a fortune. But, more on that in a moment.

First, let’s take a look at the state of the homebuilding market.

At first blush, the March report on new home construction is anything but positive. Housing starts fell almost 11% during the month after jumping more than 20% in February. The March figure is the second lowest level on record. It’s just ugly…

But, the report does have a silver lining.

New construction of single family homes – the biggest part of the housing market – held steady again in March. It was a huge decline in multi-family homes (apartments and condos) that caused the March drop. With single family home construction finally stabilizing, it appears the decline in homebuilding is starting to bottom out.

Homebuilders are optimistic the tide is turning.

A key measure of homebuilder confidence levels jumped 50% in April, the biggest monthly gain since May 2003. Driving the surge in confidence was their outlook for sales over the next six months. They believe low home prices, lower mortgage rates, and generous tax credits will lure more buyers off the sidelines.

All of this suggests the homebuilders’ worst days could be behind them.

In fact, David Crowe, chief economist for the National Association of Home Builders was quoted as saying, “[t]his is a very encouraging sign that we are at or near the bottom of the current housing depression.”

And, the market is starting to factor this into stock prices.

The SPDR Homebuilders ETF (XHB) has jumped more than 50% from its March low to around $12. And, they still have a long way to run. XHB would have to more than double just to reach its 52-week high near $25.

Clearly, investors are starting to look through the negative data and seeing sunnier days ahead. The time is now to establish a position in XHB. Start small and don’t be afraid to add to your position on any dips.

You may have to show some patience as you wait for the recovery to develop. But, at least, you’ll collect some dividends along the way. XHB is currently yielding 3.45%. (Nothing wrong with getting paid while you wait.)

Remember, it’s better to be early than late to this party. The homebuilders are a cyclical industry that tends to surge when the economy starts to recover. If you wait until the all clear signal is sounded, you’ll miss a big part of it.