Homebuilders Spiking… What To Do Now!

| April 26, 2010 | 0 Comments

In February, I pointed toward housing stocks as the place to be.  In March, Corey Williams wrote about the tidal wave of pent up demand for housing.  That came on the heels of Warren Buffett’s comment about housing.

In his annual letter, Buffett said “that within a year or so, residential housing problems should largely be behind us.”

Shortly after, you learned all about one of my favorite homebuilders Pulte Homes (PHM).  To say we’ve been positive about the homebuilding sector is an understatement.

And now it’s starting to pay off.

Last week the US Census Bureau released some amazing news about the housing market.  New home sales are accelerating… it was the biggest monthly increase in 47 years.

March sales were up a staggering 26.9%.

And the rebound wasn’t confined to just one area.  Sales in every region of the US are up… even in the hard hit west.

Stock prices are spiking off the news.

Part of the reason for the jump… the quickly expiring government tax credit.  Back in November, the government extended the program till April.  If you’re a first time homebuyer, you’ll get an $8,000 tax credit for scooping up a home right now.

Of course, everyone is in a mad rush to buy something… and that explains a lot of the excitement.

But don’t let these exciting numbers cloud your judgment.

I was talking with my real estate agent this weekend.  He mentioned that while sales activity was still flowing, 58% of all sales in our area were distressed.  Remember, I live in Arizona, we were one of the areas hardest hit.

I asked what he meant by distressed.  He said that’s everything including foreclosures, short sales, and bank owned property.  It’s a lot of properties.

It’s enough to give most investors pause.

So that brings us to the question of the day… What do we do now?

If you took my advice and bought some of the homebuilding stocks, you’re no doubt sitting on a very nice profit.  And a profit is always a wonderful thing to have.

Since most likely the homebuilding numbers were “juiced” by the tax credit, I wouldn’t be surprised to see April or May numbers slide a bit. And that news might cause the homebuilder stocks to falter.  So let’s be smart here and take a little off the table.

You never go broke taking a profit.

However, don’t sell your whole position.  We got in at a good price and the homebuilding stocks are a great long term play… in several years we could see them all significantly higher.

The key is to wait and watch.  Patience is important here.  Let’s see how the numbers look for April and May.  If they’re good, the homebuilders will be off to the races again.  If they’re bad, we need to pay attention to price action.

Here’s what I mean.

If the home sales numbers are bad and the stocks fall… it’s the reaction we’d expect.  Then we’ll look at the data and determine our next move.

However…

If home sales numbers are bad and stocks shake off the news, it means we’re poised to move significantly higher.  It would be a big sign that momentum is taking over the homebuilder stocks.  With investors focused on the longer term recovery, we’d want to be on that train as it’s pulling out of the station.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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