I’ve many buyers who are currently bemoaning the lack of inventory; we’re down to under six months in most of the inner East Bay.  I also have REO insiders who tell me that we’ll see banks unloading properties this Spring.  Which way is the market going to go?  I suspect both: we will see declining inventory in the hottest areas – those with good access to transit and developing,  walkable commercial zones; we’ll also see increased inventory and dropping prices in the further afield suburban areas.

One way to track investor sentiment on these matters it to watch the stocks of homebuilders.  The Wall Street Journal just published this today:

By JUSTIN LAHART

For over five years now, people have been saying that home builders fortunes were about to turn a corner. And for over five years, that has been wrong.But it is beginning to look as if this will be the year when some housing bulls are actually right—with the caveat that, as always with real estate, location matters.

In 2011, only about 300,000 newly built homes were sold in the U.S., down from a peak of 1.3 million in 2005, and the fewest since records began in 1963. Builders also continued reining in new construction of single-family homes, and their volatile shares went nowhere. The Standard & Poors index of home-building stocks is within a percentage point of where it was a year ago.

Below the surface, however, there has been progress. With U.S. household formation picking up amid an improved economy, and with up to 300,000 homes falling to disaster and demolition each year, the housing glut that has been weighing on the new-home market is slowly being whittled away.

That doesnt mean there is no longer any excess housing inventory out there. But much of it remains, along with the “shadow inventory” of homes in foreclosure but not yet on the market, in busted bubble markets like Las Vegas. Most of the home builders have reduced their exposure to those areas M.D.C. Holdings is an exception, and stand to gain from improved markets in the many parts of the country where owning a home is looking increasingly attractive.

A Goldman Sachs model based on population, income, financing, construction costs and other factors shows that nationally, home prices are close to equilibrium. When Goldmans economists used their model to examine what is occurring at the local level, they found that in 94 of 147 metropolitan areas, prices are at least 5% undervalued. And in the case of the Memphis, Tenn., metropolitan area, 59% undervalued.

As a group, the home builders stocks look inexpensive—most are trading at about 1.5 times book value, according to FactSet data. But trying to figure out which one has the best geography is a challenge.

The builder in the safest spot geographically may be D.R. Horton, which, according to Deutsche Banks count, has its chips spread across 101 housing markets. That probably wont make it the one home builder that investors wished they owned in 2012, but it also isnt likely to be one they wish they had avoided. And it is a good proxy for those who believe in a housing comeback overall.

Toll Brothers, at 1.4 times book value, has well-established operations in the Northeast, where there is relatively little land available. But limited competition must be weighed against the fact that home prices in the Northeast look to be among the most overvalued.

Meritage Homes, at 1.6 times, still looks like the best pick. It does much of its business in Texas, where tighter lending regulations shielded the housing market from the bubble and bust and where the economy has been bolstered by the strength of the energy sector. The major caveat is that it wouldnt be wise to put it in any portfolio already chock full of oil stocks—a Texas hedge isnt something to bet the house on.

via HEARD ON THE STREET: Framing Out a Recovery for Home Builders – WSJ.com.