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Builders a "Buy" Despite Falling Starts

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When you read today’s New Home Construction report from the Department of Commerce, it seems pretty ugly at face value.

Starts are down 6.2 percent and building permits (an indicator of future starts) are down nearly 9 percent. Sounds pretty bad, right? Not if you’re looking for a bottom in the new home market.

Inventory has been the crux of the problem in the new home market. Builders simply glutted the market with far too many homes during the housing boom, and with affordability out of whack, a major correction was inevitable. With starts and permits down well-below the million-unit mark, that could signal more health in the market.

“There's still a heavy overhang out there and the demand for new homes really hasn't stabilized yet,” says Dave Seiders, Chief Economist at the National Association of Home Builders. “So I view it as, actually believe it or not, as a positive development as helping us get to a point where we can eventually truly bottom out.”

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Stephen East of Pali Capital agrees, titling his blog today, “Ugly is Beautiful.”

As for the stocks, East writes: “We believe there is a real opportunity to make money going long the builders, and while we will have some type of correction that could be sharp, we now look at that as a buying opportunity—the first time in a long time we have felt that way.”

Questions? Comments? RealtyCheck@cnbc.com