Homebuilder CEOs Talking Down The Markets

You hear it everywhere right now: housing is just not getting better. The funny thing is where these comments are coming from - the CEOs of the major homebuilders like Toll Brothers (NYSE: TOL), Hovnanian Enterprises (NYSE: HOV), KB Home (NYSE: KBH), and Pulte Homes (NYSE: PHM). CNBC clips from a real estate investment banking conference today in NY show CEOs decrying the rapidly deteriorating market.

So how bad is it really? For a long time now, I've been vacillating between hesitant and downright bearish on the housing market, especially when it comes to the crazy bubblish things that people were doing in the go-go markets like Northern California, Las Vegas, and Miami. I still happen to think that there could still be some flatness or weakness ahead for the housing market, particularly in the markets mentioned, but at this point it doesn't look like there's going to be an out-and-out crash in any markets.

For example, Las Vegas has seen really fast population growth to go with the spike in real estate prices and housing buildout. This is evidenced by the public schools putting up educational "outhouses" as they can't grow fast enough to keep up with the number of new students. Of course, water supply is a key issue out in the desert, but if the migration keeps up it should put a floor under housing prices there to some extent. Likewise, in the Bay Area (an area I'm all too familiar with as far as housing prices go), housing prices aren't rising for no reason. There is so much government owned land in the Bay Area that there simply isn't enough room to build new homes for everyone who wants to live in that geography. The result is that existing homes in the area keep going up and new developments 1.5 - 2 hours away are snatching nice prices from people who are willing to make atrocious commutes. Miami - well, that may be another story...

In any case, I'm figuring that the homebuilders are taking the tactic of "the best offense is a good defense" when it comes to the public markets right now. Business is not as much of a sure thing as it was, and what the market hates the most is downside uncertainty. So the faster and harder the homebuilders are able to talk down the markets, the sooner the companies can start meeting, and perhaps slightly beating analyst earnings projections.

I still think that if this does happen that housing stocks are a longer term play - six months to a year at the very least, but the strong names like Toll and KB should come out the other side with little more than some flesh wounds.

Where I could still have some worries on this whole real estate thing, and still need to do some more research into, is on the banking side. Exotic loans were given out all over the place during this housing run-up and fraud and questionable loans were rampant. I think that these loan practices are going to lag the tough times of the real estate market since a lot of them were done towards the tail end, and they are generally 3 - 5 year ticking time bombs. As I am a shareholder of Bank of America (NYSE: BAC) (through their DRIP program), I sure hope that it isn't too severe, but I certainly have concerns.