4 Top Homebuilder Stocks: Life After the Tax Credit

NEW YORK (TheStreet) -- The springtime expiration of federal tax credits for homebuyers created more uncertainty in the already-unstable housing market. Industry players like D.R. Horton(DHI) and M.D.C. Holdings(MDC) seemed to benefit the most from new home sale volumes in the run-up to the April 30 deadline, but there is still time for the patient investor to reap the benefits.

D.R. Horton and M.D.C. Holdings outpaced sector peers on volume, primarily because the two homebuilders were willing to go out and build spec homes, explained Stifel Nicolaus analyst Michael R. Widner. In other words, they were willing to take the risk of building new home inventory without contracted buyers in place. The bet paid off when hoards of homebuyers showed up in April wanting to take advantage of the credits, and were willing to make a rushed deal to qualify for the incentives.

While spec building helped D.R. Horton and M.D.C. Holdings grow closed sales volume by 60% to 6,805 homes and 71% to 1,135 homes, respectively, in the second quarter, the pair may now face a new risk of having overbuilt, potentially overexposing themselves to excess inventory now flooding the market.

"They both have more inventory than I'd like them to have, but I'm not overly negative," Widner told TheStreet. "It just means they slow down on spec building for a couple months and hope the market bounces back a little bit."

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The Commerce Department estimated 210,000 new homes were on the market nationwide at the end of June, the lowest level of inventory in more than 40 years. Still, it would take 7.6 months to sell through that inventory at the current sales pace, down from 9.6 months in May. Six months of inventory is considered normal market conditions.

Sales of newly built homes rose 23.6% in June to a seasonally adjusted rate of 330,000, ahead of expectations, from a revised record-low rate 267,000 units sold in May.

While any increase in the rate of home sales is seen as a good sign for the economy and housing market in general, the uptick in June home sales still represented the second-weakest month on record after May's depressed figures. It was also 76.3% lower than the 1.4 million-peak in July 2005, at the height of the housing bubble.

>>Home Prices Weaken, Sales Rise

The still-struggling housing market saw sales ramp up in March and April as consumers rushed to take advantage of the federal tax credits that offered as much as $8,000 for first-time homebuyers. Those credits expired April 30, leading to a dramatic decline in demand for the month of May. Some of that weakening clearly spilled over into June but not as severely as in the prior month. Lawmakers later extended the deadline to close on a home purchase and still qualify for the tax credit to Sept. 30.