The stimulus package is already stirring the real estate market, which has seen a huge jump in purchases in February. Half of homes sold were to first time home buyers, who are eligible for a 10% tax credit on the value of the home up to $80,000. Almost all buyers in the current real estate market will be spending $80,000 or more on a home and are set to enjoy a huge lump sum payment with their tax returns.
Playing the Tax Credit Game
The tax credit was a maximum of $7500 for home buyers who purchased in 2008, and this will be repaid over 17 years. The first two years require no payment, but each year thereafter incurs a payment of $500. In essence, 2008 buyers received an interest free loan, which many will end up putting against personal debt obligations or even a down payment. But the 2009 tax credit is far different; it does not have to be repaid. Instead, it’s like an instant rebate on a home just for borrowing – an excellent deal if you’re a first time home buyer.
Cheap Credit is Back
30 year fixed rate mortgages have settled to a record low at 4.85%. The lower this rate plunges, the more homes will ultimately be sold, and at 4.85%, it’s nearly free to own a home after itemized deductions on your tax return. Should the fundamentals of the economy turn around, namely employment, the real estate boom could reignite. This time, however, the boom will have to eat through millions of unsold homes, roughly nine months of supply, before prices move higher.
Thinking New Homeowner
The obvious choice for this tax credit is to buy homebuilder stocks. However, many of these companies are laden with debt and huge stocks of unsold but already constructed homes. The real estate market will have to recover tremendously before these stocks get out of their slump. There are alternatives, however. Invest in what people buy when they buy a new home.
The first thing people do after moving into a new home is obvious; they redecorate, and they do so with even greater tenacity when there’s an $8000 check coming their way. There are several furniture makers that are poised to pop.
Hooker Furniture (HOFT) is a relatively small brand at a market cap of just $100 million; however, it wasn’t always that way. Furniture stocks as a whole have performed just as well as the real estate market and always at the same time. A boom in home sales was a boom for this stock, which traded for $25 per share just one year ago. The stock trades under the ticker symbol HOFT and maintains an excellent PE ratio of 8.65.
Selling high priced mattresses in this economy might seem difficult, but Tempur-Pedic (TPX) is one of the few standing in the high priced game. The competition and the ceiling overhead have thinned for this company, and it is set to be the only major player in the mattress game when the economy turns around. The stock is trading at a discount with a PE ratio of 10 and a PEG of .7. TPX is an excellent stock poised to grow with a furniture boom.
Ethan Allen Interior
Ethan Allen’s stock (ETH) boomed during the latest real estate fiasco, and it’s an excellent pick in the next one. The company benefits from lofty profit margins and a recognizable brand that is known for quality. The company looks good at a reasonable PE of 11, but could use a lower PEG at 1.4.