Homebuilder Stocks Still on Shaky Ground

Updated with existing-home sales figures.

BOSTON (TheStreet) -- Real estate was ground zero for the economic crisis, and homebuilders' stocks bore the brunt as the credit bubble deflated.

To make matters worse, big builders including Toll Brothers(TOL Quote), Pulte Homes(PHB Quote), KB Home(KBH Quote) and D.R. Horton(DHI Quote) carry heavy exposure to Florida and California, states that were hammered harder than most by the recession.

Earnings were crushed as a result of the fallout in the housing market, but some investors think the industry is attractive again. Sales of existing homes climbed to 6.1 million units in October, the highest level since February 2007, with the help of tax credits for first-time buyers. It was a 10% jump from September and a 24% gain from a year earlier, according to new data from the National Association of Realtors.

It's been a mixed bag for homebuilder stocks. KB Home and D.R. Horton have bettered the S&P 500's 45% increase since early March, with gains of 69% and 171%, respectively. Pulte and Toll Brothers have lagged behind, rising less than 35%. Over the past three years, those stocks have dropped significantly, with KB Home and Pulte falling almost 75%.

Optimism about a stable footing in the real-estate market dimmed last week after the Commerce Department said housing starts fell 11% last month and D.R. Horton missed earnings estimates. And to think that the new-home tax credit is still in effect.

Potential homebuyers are gun shy as unemployment continues to rise and existing-home inventory swells, making them worry about their ability to sell if they got into financial trouble.

Analysts are predicting homebuilder losses will stretch into next year. They could very well extend beyond that, given the unpredictability of the rebound. As it stands now, expecting runaway profitability before 2012 is a pipe dream. Homebuilders enjoy the greatest success when they're able to sell into overheating markets at prices that dwarf costs. Since current real-estate markets resemble a frozen tundra more than a frying pan, patience is required if investors are looking for big gains.