Home-builder stocks plunge

By Ilaina Jonas

NEW YORK (Reuters) - Investors who bet in recent months on the recovery of U.S. home builders were dealt a another blow on Tuesday as subprime mortgage woes sent several construction stocks to lows not seen in over two years.

The stocks, trading down since early February, caved further after the Mortgage Bankers Association reported that subprime borrowing helped push the proportion of mortgages in the initial stages of foreclosure to its highest level in 37 years.

"It's not the kind of day where people are trying to differentiate," said JMP Securities analyst Jim Wilson. "They're just selling."

Pulte Homes Inc. (PHM.N), the second-largest U.S. home builder, reached a two-and-a-half-year low of $25.51 before paring its losses to close down 5.1 percent Tuesday at $25.99.

Shares of Beazer Homes USA Inc.(BZH.N), which builds homes predominately for first-time buyers, also touched a two-and-a-half year low of $31.66 before regaining some ground to close down 6.4 percent at $32.02.

Subprime mortgages are loans made to people with poor credit histories. Defaults have risen in response to rising interest rates and declining home prices in some markets.

Property foreclosures could add to the high inventory of homes for sale that has depressed prices and cut into home builders' profit margins.

Legg Mason fund manager Bill Miller, whose record of beating the Standard & Poor's 500 index 15 years in a row was snapped last year , had bet heavily on home builders.

At the end of December, the latest data available according to Legg Mason, Pulte still ranked among Miller's Value Trust fund's top 25 holdings. Pulte Homes stock is off 17.22 percent this year and Value Trust was off 1.76 percent through Monday.

The Dow Jones U.S. Home Construction Index .DJUSHB, a yardstick that measures home builder performance, fell on Tuesday to 594.7, its lowest level since September, erasing gains from a rally fueled by investors who believed the U.S. housing downturn reached its bottom. By the close, the index was down 4.4 percent at 602.99.

"No one really knows what percentage of the home builders business this (subprime crisis) affects," Wilson said.

Shares of upscale home builder Hovnanian Enterprises Inc. (HOV.N), which tend to be more thinly traded and more volatile, closed down 6.8 percent to $25.71.

Centex Corp. (CTX.N) shares closed down 4.8 percent at $42.76 after hitting a two-year low of $42.12. Shares of D.R. Horton Inc. (DHI.N), the largest U.S. home builder, closed off 3.7 percent at $22.31. Meritage Homes Corp. (MTH.N) closed down 6.5 percent at $31.77 after touching a more-than-two-year low of $31.45.

Toll Brothers Inc. (TOL.N), the largest U.S. builder of luxury homes closed down 2.4 percent at $27.34.

There are signs some investors are playing it safe by snapping up defensive put options, several analysts said.