April 13th, 2010 
Vanessa Williams Now’s the time to find a home for homebuilders in your portfolio again.
The economy is improving, and there are signs that jobs are coming back, which should make more people confident enough to buy homes. Lots of people are already itching to make the move while houses remain cheap and interest rates are low. In fact, in many markets, home prices have been on the rise for eight straight months — added incentive for potential buyers to jump into the market.
Sure, the bears are throwing around lots of negativity: that recent demand is driven by government incentives, that mortgage rates will go up, that a fresh round of foreclosures will kill the market. But their horror stories are all fairly easy to knock down.
Meanwhile, no less a source than Warren Buffett thinks the worst is nearly over. In his most recent letter to Berkshire Hathaway () investors, in February, he wrote that “within a year or so residential housing problems should largely be behind us.” Other value investors I follow for their great records have started moving into housing stocks. “We now think the homebuilders are beginning to look quite attractive,” says George Putnam of the Turnaround Letter, consistently ranked one of the top investing newsletters by Hulbert Financial Digest.
These types like to get in early, which means the recovery may not be on quite yet. But when it kicks in, watch out; there’s plenty of room to grow, Putnam says.
By my calculations, U.S. new-home sales averaged just 366,000 a month for the 12 months ending in February. In contrast, the average for 1963 through 2002 — before the recent bubble years — was 650,000, according to Census Bureau numbers. That room to rise just back to normal is one reason JPMorgan Chase analyst Michael Rehaut reiterated his bullishness on homebuilders in an April 5 research note.
He also thinks home stocks look cheap, trading as a group at 1.18 times book value, a common measure of a company’s net worth. That’s the low end of their historical range of 1 to 2 times book value.
Click graphics to see interactive charts
Toll Brothers
Lennar
Value investors such as Chris Armbruster of the Al Frank Fund (), NVR (), Toll Brothers (), Lennar () and M/I Homes (), for reasons I’ll explain below.
You can also play the group via exchange-traded funds such as SPDR S&P Homebuilders () and iShares Dow Jones US Home Construction (). They’re still well down from the levels of three years ago — 50% and 60%, respectively. But they’ve risen fairly steadily since hitting bottom nearly a year ago.
If you move in, remember two things: You’re investing with a time horizon of three to five years, and you could see some volatility as the rebound plays out. But here are two good reasons to be bullish.
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