Citigroup analyst Josh Levin picked a gutsy time to initiate coverage of home builder stocks. It’s telling too that he called his first report House of Blues.

Levin paints a still gloomy picture of the industry. He doesn’t think the recently passed housing bill will do much to stimulate new home sales despite tax credits for first time home buyers. Levin sees home prices falling another 10-15% in the next year. He doesn’t think prices for existing homes will begin to appreciate again until 2011.

Sales of new homes should bottom out this year at around 550,000 per year. Just a couple years ago the industry was selling more than twice that.

Still Levin says it may be time to purchase two builders that look like they will weather this storm. He says Pulte Home’s management has been taking steps to strengthen the company’s balance sheet. And luxury home builder Toll Brothers has burnished its finances by reaching out to an Abu Dhabi investment fund for cash. One builder told Levin: “Gas prices are killing us.” Toll Brothers found a way to get some of those petrodollars back.