Housing's Bright Spot: Stocks

Research firm Bespoke Investment Group turned positive on home builders at the end of last year. "It still has a long way to go to make new highs, but it's formed a nice uptrend there," said Justin Walters, co-founder of Bespoke.

He said that historically, bubbles follow similar patterns, and the decline of home builders' stocks has gotten as bad as that of the Nasdaq composite index when the tech bubble burst. From March 2000 to October 2002, the Nasdaq fell 78 percent over 943 calendar days, according to Bespoke's research. From July 2005 to January 2008, home builders' stock dropped 77 percent over 902 calendar days. "We don't think it has a ways to go down," he said.

Other industry experts and economists disagree, pointing to the recent drop in new-home sales and median prices. Foreclosures will continue to rise, they said, as homeowners with adjustable-rate mortgages see their interest rates balloon. That will dump more properties onto the market, which means that an already bloated inventory will remain so. And with the tightening of credit, fewer people will be eligible for a mortgage. For home builders, that means slashing more prices or offering more incentives -- and little or no profit.

"A lot of people say we've hit bottom. I don't buy it," said Seth Jayson, a senior analyst at the Motley Fool, a financial Web site. "It's going to be a while before any of these folks see a turnaround."

Investing in home builders, in particular, is fraught with risk. Many of them have too much debt, too much land and too many unsold homes. Some builders, including Centex and Lennar, have sold excess land to money managers at a discount to raise cash and move the land off their balance sheets. Analysts expect builders to continue taking write-downs and impairment charges.

Yes, stock prices have dropped, but they are down so significantly-- some as much as 80 percent from their peaks -- that enthusiasm for them should be tempered.

"I think individual investors would get killed if they try to get into home builders," Jayson said.

Here's why: You want to buy a stock when it is trading below the company's book value, or the value of its assets under accounting rules. But Parrish Glover, an equity analyst for Morningstar, said it's too difficult to assess home builders' true book value because their land is not worth what it used to be.

"It's not a risk-free investment," Glover said. "For the home builders, the stated value on the books has been overblown."

Furthermore, some of the companies have large bills coming due. "Lines of credit could disappear," Glover said. "You end up in a situation where Monday afternoon, everything is fine and Tuesday, you're having to write a check for $300 million."

Still, Morningstar has singled out some home builders as fairly valued, including NVR, Meritage Homes and M/I Homes, mainly because they don't have as much land as other companies. Reston-based NVR, in particular, should do well, said Glover, because it did not get involved in land speculation. In fact, he said, the company owns no land outright and keeps little inventory.

Luxury home builder Toll Brothers is another one that should be able to survive the crisis, said Morningstar analyst Eric Landry in a recent report. Although the company has a large inventory, it has a modest amount of debt, Landry wrote.

Even though home builders have curtailed their construction, a recent tour of one Toll Brothers community, Marlboro Ridge in Upper Marlboro, showed that the company is still betting on home buyers returning to the market. Construction cranes dotted the landscape, as did signs promising an equestrian facility, swimming pool and hiking trails.

Sales began about a year and a half ago, and at least 100 of the nearly 1,000 planned units have been sold, said William Gilligan, regional president for Pennsylvania-based Toll Brothers. "Obviously we're not going right now at the pace we were going when we opened," he said. "We're optimistic that over time that pace will return."

Regionwide, sales were slow in January but picked up in the past month, he said. The problem, he said, is that many prospective buyers have been stuck trying to sell their current homes. "That's our biggest obstacle," he said. "It's not that there aren't willing buyers. It's that they have to sell their homes."

With many builders themselves warning of tough times still to come, financial advisers and analysts say investors should remain cautious. Keep a diversified portfolio, and don't make any drastic moves, said Fernandez, the financial planner in McLean. "It's very hard to time when an asset class or when a particular group of stocks is going to do well," he said.

And despite a promising first three months, no one knows what the next three will bring, said Jeremy Payne, senior vice president for S&P's Capital IQ. "Stocks go up and stocks go down, and it's very hard to say why," he said.