On January 9, 2006, shares of homebuilder Beazer Homes closed at $80.95. Exactly two years later, on January 9, 2008, the shares closed at $4.99 a fall of 94%. “They’ve fallen that much, eh?” legendary speculator Doug Casey said last week at our private gathering on Jekyll Island.

Even Doug – who’s made a career out of making hundreds of percent returns on left-for-dead investments – didn’t know they’d fallen this far.

If Doug didn’t know they’d fallen that far, then most investors don’t know it.

Here’s the thing… Not only did homebuilders get obliterated… they’re coming back. Shares of Beazer have already more than doubled since January 9.

Homebuilders have a history of getting obliterated, then and making ridiculous gains. You just need to know when to buy them. I’ll give you a hint… You buy them now!

The Datastream Homebuilders Index started on January 2, 1973, at a value of 100. By the end of 1974, the Index stood at 13. Shares of homebuilders as a group had lost 87% of their value in two years. (Sounds like Beazer Homes now!)

As the chart shows, shares of homebuilders jumped from 250 to 1,600 – more than 500% – after the 1982 recession. They jumped 500% again – from 400 to 2,000 – as we came out of the 1990-1991 recession. The big gains come quick… It takes about two-and-a-half years.

Here are the biggest worries I hear from people who are reluctant to invest in homebuilders: “There’s simply too much supply of homes.” And “Consumer confidence is terrible.”

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Funny thing here, though… When these two things are terrible, it’s the perfect time to buy shares of homebuilders.

Take a look at the chart of consumer confidence:

When consumer confidence crashes, homebuilders soar

When consumers are worried, homebuilders start to take off. You can see a similar effect with when the supply of new homes is high…

Extraordinary gains come when new home supply peaks

The reason these two indicators work is quite simple. When things look terrible, people sell their homebuilder shares. But when the outlook goes from bad to less bad, the shares soar. (Longtime readers know I believe The Secret to 1,000% Gains is to buy when things go from bad to less bad. We’re there now!)

Everyone thinks it’s the end of the world. Meanwhile, you’ve got every government agency in Washington trying to save the homebuilders. A phrase I’ve heard a lot recently is Washington is “Socialize the losses, and privatize the profits.”

Whether you agree with that policy or not, homebuilders will be a huge beneficiary. In other words, things have gotten less bad in the homebuilders.

Homebuilders are incredibly cheap (down 90% in some cases), they’re hated, and now we’ve got a definitive uptrend!

I can’t say it much more emphatically… If you’re interested in hundreds of percent gains over the next two to three years, it’s time to buy homebuilders!

Good investing,

Steve