"Homebuilders, meanwhile, continue to suffer from lofty inventories of unsold homes."

This line struck me as a bit wrong on a couple of fronts. First, I have been under the impression that the stocks of homebuilder companies have been doing quite well recently. And what inventories are they talking about: new unsold homes that have been built by the homebuilders or just the inventory of existing homes? I thought I would see if I could find an answer to these questions.

I find the easiest way to check on a sector's performance is to find the appropriate ETF and see how it has been performing. For homebuilders we can look at the appropriately named SPDR S&P Homebuilders ETF (NYSE:XHB). Since the bottom after the market crash of October and November XHB has gained 51%. For the same time period the S&P 500 has tacked on 20%. It appears that at least for the last 2 months shareholders of homebuilders have not been suffering.

On to the inventory question. We all know the existing home inventory is bursting with foreclosed properties and seems to be stuck at about a 10 month supply. But homebuilders sell (or don't sell) homes from the inventory they build. With new housing starts and permits setting record lows every month for the last year I was curious whether homebuilders have been able to sell any inventory they had built up when the market was strong and had built in the intervening months.

Last week KB Homes (NYSE:KBH) reported their 4th quarter results so I took a look at the press release and listened to the conference call to get an idea of where their inventory level is. Most of KB Home's inventory is in lots. Their current lot inventory is about 40,000, down 28% from a year earlier and off 75% from the peak in early 2006. They have definitely reduced their lot holdings and the current level is in line with their current building pace and sales. At the end of the 4th quarter KBH had 774 homes in production that were unsold and 543 homes that were completed and unsold. Looking at the sales figure of 3,912 homes sold in the 4th quarter, the 1,317 homes in unsold inventory represent a 1 month supply. The company has an additional 1,770 homes in production that are sold. I would say KB Homes has their inventory well under control for their level of sales. Currently, they are working more on a build-to-order approach and not starting a new home until they have an order in hand.

If the other homebuilders' inventories look like KBH's it appears that these companies have their inventories under control. At this point they are building only the number of homes they are selling and waiting for market conditions to improve.