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Why I Like Homebuilders This Fall -- But Hate the ETFs

And it's worth noting that while housing starts have rebounded, they're still far below their historic averages. In fact, they're still lower than they were at anytime between 1959 and 2008. Even in a recession, the housing market can absorb more inventory than is coming online right now.

Let's not forget that interest rates are near zero, inflation's tipping 2.2%, and debt-to-disposable income here in the U.S. is now at one of the lowest rates of all OECD countries. So banks have lots of free cash, but they're getting penalized for holding onto it, and there are a bunch of borrowers who are a whole lot more credit worthy than they were just a few years ago. There's probably a way to connect those dots.

Have Homebuilders Rallied too Far?

A lot of folks are worried that homebuilders have already rallied too far. I understand the concern, but I don't buy the logic.

Here's the bottom line: Who cares if a stock is "more expensive" today than it was yesterday as long as it keeps getting more expensive until you sell it?

From a relative strength standpoint, the homebuilder rally isn't showing any signs of fizzling out yet. In fact, relative strength lines for many homebuilders have been accelerating in the last month or two. Statistically, that indicates to higher ground yet to cover in 2012.

So which stocks make sense to buy?

>>5 Big Stocks Set to Slingshot Higher

I like the big ones, namely Toll Brothers (TOL), Lennar (LEN), and NVR (NVR). For starters, the big ones have a lot of eyes on them. That's important -- maybe more important than you'd think.

In the wake of the "Great Recession," suddenly all of the new homes and empty land sitting on builders' balance sheets had to be written down substantially -- and the persnickety auditors at Big Four accounting firms were going over those asset lists with a fine-toothed comb. Big is important for two reasons: it means that more eyes are on the balance sheet and it means that accountants have a higher volume of transactions to use to value the rest of these firms' assets.

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