5 Reasons Housing Stocks Are Still In Trouble

Is anyone out there still trying to catch the falling knife that is shares of U.S. home builders? It's tempting to watch the stocks drop like rocks and think, "I'll get back in when the damage is done." Well, investors have been saying that (and getting burned) for a good chunk of the last year. The optimists are in for more pain. At this point, buying shares of homebuilders is largely a bet that the bottom is close for the housing market. It isn't, so you shouldn't. Here are 5 reasons to keep avoiding the sector:

Obama's foreclosure plan is no help for Wall Street. The $75 billion plan could help nine million Americans avoid foreclosure. That's good news if it works, but investors looking for a chance to bottom-feed on builders are disappointed today. The SPDR S&P Homebuilders ETF (XHB) is down more than 2 percent today and more than 15 percent so far this year.

Home sales are still plunging. Today we get housing start data for January, and it's uniformly grim. U.S. builders began construction on the fewest homes on record during the month. Starts slumped 17 percent to an annual rate of 466,000, the Commerce Department said. Goldman Sachs economists called the drop "shocking" by itself, and even more troubling since it's the third straight month of double-digit declines in sales.

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Leadership is lagging. Luxury builder Toll Brothers normally trades at a premium to the rest of the group, but earlier this month Citigroup's Josh Levin noted that Toll had slipped below both its peer group and its book value. Part of the reason, he says, is worries over the impact of the falling stock market on buyers for higher-priced homes (They're unfounded, Levin says, because home buyers worry more about income than net worth when buying a home). There's still a case against Toll, however, since pricey homes aren't going to be moving anytime soon.

Builders are still bearish. Executives are still predicting gloom and doom for the industry. Some highlights: Donald Horton of D.R. Horton says "the homebuilding industry continued to deteriorate during our first fiscal quarter" and Centex CEO Timothy Eller said his firm faced "unprecedented buyer hesitancy" in its third quarter (via Investopedia). Meanwhile, sentiment among builders still hovers near an all-time low. The National Association of Home Builders/Wells Fargo housing market index rise gained one point to nine in February compared to eight in January. Builders still remain pessimistic about a recovery over the next six months.

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Lost home value is huge and growing. Bloomberg points to a survey by real estate by Zillow showing the U.S. housing market lost $3.3 trillion worth of value last year, and says one in six homeowners with mortgages owed more than their homes were worth.

On the bright side, some big investors are moving slowly back into builders. Barclays Global Fund Advisors recently reported taking passive stakes in eight big builders late last year including D.R. Horton, Centex, Hovnanian Enterprises, Beazer and others. Maybe those bets will pay off. For now, let other people take those risks.