Is It Safe to Buy Home Builders?

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Falling Interest Rates Will Boost Home Builders

The past few years haven't been what you might call a happy time for shares of home building stocks. Consider that the Homebuilders Exchange-Traded Fund (XHB) plunged from $40 per share in early 2007 to just $8 per share earlier this year.

Since March, however, things have improved. There are signs that the housing market is getting back on its feet — or at least, declining less slowly. Existing home sales recently registered their biggest gain in more than a decade. Seasonally-adjusted single-family building permits are up 27% since bottoming in March, while single-family housing starts have increased five straight months and are up 36% since March.

I've also seen many hopeful signs with interest rates. Freddie Mac said that the 30-year fixed mortgage rate fell to 5.12% last week, and the 15-year rate is now down to just 4.56%. With lower prices and very low mortgage rates, housing affordability hasn't looked so good in many years. Measuring from the March low, shares of XHB have nearly doubled in less than six months.

So is it safe to go back into homebuilders? The short answer is yes, but cautiously. I do see some compelling values among home building stocks, although I should add that no major home builder receives my highest grade of A, or strong buy.

Let's run through some of the home builders I like. The following four stocks all receive a B grade from me, which signifies a buy.

Next – Home Builder Stock #1