Will a Tax Credit Extension Help Homebuilder Stocks?

Home building stocks are recovering from their recent selloff as House Speaker Pelosi is discussing extending--and possibly expanding--the first time homebuyers tax credit. Congressman Rangel is also saying it should be extended.

But will it make a difference? You'd be surprised how many skeptics there are. Credit Suisse's housing analyst, in a note to clients this morning, said that the credit was likely to be extended but that "traffic will still suffer."

"We see a significant chance that the tax credit will be extended," he said, "but even so, we think that demand will fall off, as we do not think that consumers assumed that the credit would be extended so that most first-time buyers contemplating a purchase planned so that closing could occur prior to November 30th."

Others are arguing that extending the credit puts the housing industry on permanent life support, or that it merely postpones the inevitable drop in sales. Just ask auto makers after the 'cash for clunkers' program.

It is interesting to note that homebuilding executives were out SELLING their shares in September. JP Morgan notes that the sales were led by a large 4.9 million share sale from Toll CEO Bob Toll and several other executives at Toll. Much of this was due to the expiration of stock options at the end of the year.

JP Morgan noted that "On a historical basis, we note there has been a strong correlation between insider sales and declining stock prices and P/E multiple contraction."



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