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Builders Not Yet a Safe Bet

The Federal Reserve's rate cut may have sent homebuilder stocks jumping, but the rally already is proving fleeting. Lower short-term interest rates will do little to help the beleaguered housing market or the builders.

Wise investors continue to stay away from these clunkers. Their reason: Why put money into companies that can't turn a profit, and can only shed homes at fire-sale prices to satisfy hefty debt burdens?

Hovnanian's (HOV - Get Report) weekend "deal of the century" price cuts exemplify the sad state of the industry. With the housing market continuing to deteriorate, Hovnanian and many other builders are finally paying the price for years of irresponsible land buying.

Now price cuts are the only way to clear inventory, and they hold ugly ramifications that the lower interest rates cannot solve.

After the Fed's rate cut Tuesday, the Philadelphia Housing Sector Index jumped 6%. It has already given back ground, falling 0.8% Wednesday, and recently sliding another 2.6% Thursday.

"I don't really think this Fed cut is going to help the fundamentals for the builders," says Alex Barron, senior homebuilding analyst at Agency Trading Group.

"I suspect a lot of people are probably going to use [the post-Fed rally] to come in and start shorting the builders again, knowing that all these weekend sales they are doing is going to cause them to report more impairment charges over coming quarters."
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HOV $1.60 -2.70%
MDC $24.41 -0.81%
NVR $1,644.11 -0.42%
RYL $40.83 0.67%
TOL $26.96 0.07%


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