When Is the Time To Buy Homebuilders?

2009 is looking great.

With the Dow Jones Homebuilders Index down roughly 75% from the peak, it is tempting to do some bottom fishing and try and pick the bottom.

If my previous research on mean reversion in asset classes, country equity indexes, and industries is any indication, 2009 could be a good time to look to invest in the homebuilders. By that time they will have experienced a down year in 2006 and 2007 – favorable conditions for a nice bounce back. And if 2008 is down as well, watch out!

My research has shown that negative returns 2 and 3 years ago produce approximately 6% outperformance in the current year. If you are lucky enough to have 3 down years in a row, the outperformance jumps to well over 10%. ITB is the homebuilder ETF.

PS What are the best papers on mean reversion? If you have any links or great papers, please leave a comment.