Both the House and Senate overwhelmingly passed the American Housing Rescue and Foreclosure Prevention Act of 2008 last July and which was subsequently signed by President Bush. The law is intended to help nearly 400,000 homeowners avoid foreclosure and save struggling mortgage companies Fannie Mae (FNM) and Freddie Mac (FRE). The law aims to help at risk borrowers, increase the role of the FHA (Federal Housing Authority), permanently increase conforming loan limits, give grants to states to buy foreclosed property, and create an affordable housing trust fund.
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WHAT DOES THE BILL MEAN FOR INVESTORS?
Investing in homebuilding stocks could be the smart play, especially for those looking to buy undervalued, battered stocks. However, due to volatile net asset figures and market unpredictability, spreading the investment in low cost exchange traded funds may prove smarter than owning individual stocks, which could produce a terrible surprise.
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Two promising funds include the iShares Dow Jones US Home Construction Fund (ITB) and the Standard and Poor’s Homebuilders Fund (XHB). The ITB ETF currently has a covered call investing position available for September stock options expiration with a potential return of 4.9% and 8% downside protection. The 4.9% potential return could be realized in only 45 days and the 8% downside protection allows for a profit as long as the ITB ETF does not drop in price more than 8%. The XHB ETF has a covered call investing position available for August stock options expiration with a potential return of 3.9% – in only 10 days.Individual companies worth taking a look at include Lennar (LEN), Toll Brothers (TOL), Hovnarian (HOV), Centex (CTX), and D.R. Horton (DHI).
Lennar constructs and sells single-family homes, and to a lesser extent, multi-level residential buildings. The company also offers mortgage financing, closing services, title insurance and other services, including cable television and high-speed Internet. Lennar’s CEO Stuart A. Miller exudes confidence about the new housing bill, predicting the bill will “stabilize the housing market and create renewed confidence in the broader economy.” He spoke particularly well of the bill’s $7,500 tax credit for first time home-buyers. Lennar is currently trading at less than 1/3 of its 52-week high. A covered calls investing position for Lennar is available for August stock options expiration with a potential return of 6.4% – only 10 days.
TOLL BROTHERS (TOL)
Toll Brothers designs, builds, markets, and arranges financing for single family homes in luxury residential communities. Founded in 1967, Toll Brothers manages 368 planned communities containing almost 28,000 home sites. It also develops, owns, and operates golf courses and country clubs associated with its planned communities. Toll Brothers is trading well off its 52-week high. A covered calls investing position for Toll Brothers is available for August stock options expiration with a potential return of 3.9% – only 10 days.
Hovnarian markets homes in 431 communities in 19 states to first-time buyers, move-up buyers, luxury buyers, and empty-nesters. Established in 1959, it also provides financial services, such as originating mortgages and title insurance dealings. Do your homework before investing. Currently trading at 33% of its 52-week high, Hovnarian is either a deep value or a potential value trap. A covered call investing position for Hovnarian is available for August stock options expiration with a potential return of 4.3% – only 10 days.
Centex Corporations constructs and sells single-family homes to first-time and move-up buyers under the name Centex and Fox and Jacobs. It operates in 22 states and has sold more than 27,000 homes. Centex also builds resort projects, offers mortgage financing and refinancing, title insurance, and property and casualty insurance. Like Hovnarian, Centex, currently trading at 60% less than its 52-week high, is either a deep value or a potential value trap. A covered call investing position for Centex is available for August stock options expiration with a potential return of 5.6% – only 10 days.
D.R. HORTON (DHI)
D.R. Horton builds traditional single-family detached homes in addition to condominiums, duplexes, triplexes, and town homes, marketed and sold through commissioned employees and independent real estate brokers. Its financial services department provides closing services and title insurance. It also originates, packages, and sells mortgages to third party investors. D.R. Horton’s efforts to bring supply in line with demand by reducing future starts has positioned it for a rebound after falling below half its 52-week high. A covered call investing position for D.R. Horton is available for September stock options expiration with a potential return of 8% – only 45 days.
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