Homebuilder stocks are among the biggest price gainers in the market on Thursday, as there are reports that Congress is considering an extension of the first time home buyers tax credit. At this point, the $8,000 tax credit is set to expire at the end of November, but unless home buyers are already under contract on a home, most future buyers will miss out on the credit. Estimates suggest that as many as one-third of home buyers in recent months have taken advantage of this program. Obviously, there are concerns that demand will drop off when this tax credit expires, much like the demand fell off for cars in the aftermath of Cash for Clunkers (Cash for Clunkers Saps Demand).
The New York Times is reporting that lawmakers are working with the White House on a plan to extend the tax credit, but also to make it available to current homeowners as well. Not only would this continue the program, but it would expand the scope. Clearly, this would be a great benefit to homebuilders, and many residential construction firms are seeing their
stocks advance. Among those benefiting from the speculation, Lennar (LEN), KB Home (KBH), Ryland Group (RYL) and Standard Pacific (SPF) are all trading much higher on the day.
The proposed extension would help out homebuilders, but at this point the stocks are advancing on little more than speculation. Some analysts are not convinced the extension will materialize, among them Deutsche Bank’s (DB) Nishu Sood who thinks that the “government acts on housing only when the situation is plainly deteriorating.” In addition, a few consecutive monthly improvements in housing prices, as measured by the S&P/Case-Shiller Home Price Index, he believes that the general improvement in the economy may make this a tougher sell on Capitol Hill.
At Ockham, we do not advise investing based on speculation on legislative actions. Politics can be tough to predict, and we always prefer to invest based on fundamentals. After the extremely rough last few years which entailed massive write-downs, the residential construction sector is one of the least attractive, according to our methodology. This advance and the proposed legislation is noteworthy but is still too speculative to receive our endorsement.
