Home Builders Appear Stable: The Worst Is Likely Over

The debate on whether the housing market has hit bottom continues to rage. But what makes it even harder to reach consensus is that there are so many definitions on what it means to have hit "bottom" (e.g. prices, sales, starts, completions, homes under construction etc).

But one thing that does appear clear is that (in general) home builder book values appear stable. A look at new home inventories reveals new home inventories are as low as they've been in a long time:

When measured per capita, new home inventories are as low as they've been in the last 50 years.

Of course, this doesn't mean prices are going to rise any time soon. Continued foreclosures as a result of continued job losses will likely act as a drag on prices. However, these low inventory numbers (which continue to decrease) on new homes suggest the days of massive writedowns are also over.

As such, investors can likely trust the book values of most home builders. As we saw earlier, stock prices of home builders tend to rotate around their book values over time, offering profit opportunities for those who buy at discounts.

Of course, this doesn't mean all home builders are safe. Of the list we compiled showing homebuilder debt levels, several have already gone out of business. Further uncertainty also remains for builders who have large payments coming up and/or those who are dependent on specific regions.

But for well-capitalized, diversified builders, the worst is likely over, and discounts to book value should serve as opportunities.

Comments

[Donald Ingram:]

Of course the worst is over for the home builders! There are virtually none being built! OK maybe a few here and there - not enough to even budge the nation wide stats. Most builders are gone. The tool belts have been hung up and the hammers and saws rusting.
It will take a generation for some semblance of normalcy to return to the housing market. The new reality for a long time to come is that a house is somewhere to live - not an ATM card!

Aug 06 01:44 PM

[Mad Hedge F...:]

Only until the next downleg. Deutsche Bank has put out a report on residential real estate that will raise the hair on the back of your kneck if you still own your own home. Prices have not hit bottom and have another 14% to fall by 2011, putting in a 42% fall from top to bottom. By then, almost half of all mortgage holders in the US will be underwater. The top underwater cities in the US is not good news for the Land of Fruits and Nuts, where lending was the most aggressive and imaginative:

Merced, CA 85%
El Centro, CA 85%
Modesto, CA 84%
Las Vegas, CA 81%
Stockton, CA 81%

The murder weapons in these nearly home equity free cities break out as the following:

Option ARMS 89%
Subprime 69%
Alt-A 66%
Jumbo 46%
Conforming 41%

These forecasts tell us that a second stimulus package is a sure thing, that unemployment will soar over 10%, and that a “W” shaped recession is a lock. Gee, do you thing the stock market might go down on this?

Aug 06 04:30 PM

[Fred W:]

I hate agreeing with Mad Hedge's "multi-posts" but there is much more downside for housing.
How long will it take before Treasury bails out CA? 6, 9, 12 months?

Aug 07 10:31 AM

[Bigman16:]

After looking at Standard Pacific's 10Q yesterday, "I am going to have to sort of diasgree with you on this one". If I was holding mortgages on my books for sale and had significant debt maturities, i would be quite worried at this point in the market. Builders are now down to Skelton crews with no more ways to cut G&A, so now its a waiting game.

Aug 07 12:15 PM

[Harry Tuttle:]

"...are as low as they've been in a long time:..."

I must confess that I did not read past that line.

Aug 11 09:37 PM

[Scalpulator:]

Cash burn mode just like everyone else....

Aug 12 12:39 AM

[lower98th:]

Housing does not equal Homebuilders. Existing housing will not recover meaningfully or well. New-home builders, however, will do much better. Why? Foreclosed or abandoned, vacant housing is increasingly deteriorating over time, taking bubble-era production neighborhoods along for the ride. Once mostly owner-occupied, these neighborhoods add more empty and rental units into the mix, becoming less desirable to owner-occupants. The cost to fix longer-abandoned houses increases. The neighborhood HOA's become more underwater and common maintenance is deferred.
New buyers avoid these blighted neighborhoods. Indeed they don't have the financial resources to take the risk of buying there, even at a lower price. They want and need new homes (with warranty, free of foreclosure repair and HOA assessment issues) in new, financially intact neighborhoods. These new neighborhoods will be built and sold to the new buyer, at the new price-point, by the same old homebuilders! Buy the same old Homebuilders!

Aug 12 09:57 AM

[Scott Weitz:]

This is a very geographical dependent topic.

In Vegas, perhaps the worst is over, but now they've got 10s of thousands of empty homes.

I live in Seattle. We are not even close to bottom yet.

On a whole, I estimate that there is still a significant more amount of pain to come as most high end neighbordhoods have not fallen, yet the income fundamentals are not strong enough to support the inflated prices.

Aug 12 04:27 PM