The Real Reason to Avoid Homebuilders

Includes: BRP, DHI, KBH, PHM, TOL, XHB
by: Michael Church

Just a thought here regarding the homebuilders. They are cheap and do present some interesting value here. Wages are growing. It is mostly a supply issue which can be worked off. Sentiment is at all time lows. So is it time to buy them?

Not yet. Something far scarier than a supply glut or slowing economy is staring them right in the face.

It's called regulation and investigation. The real estate industry is riddled with corruption, beyond that even seen on Wall St at its worst moments. Ask anyone remotely familiar with the Mortgage industry. Or anyone who understands the dynamics of a "buyers agent".

Appraisers, Real Estate agents, Mortage Brokers, Lenders, Title Insurers. All in bed together. And conspiring together to make a sale and inflate the price. If you work in the industry you know exactly what I am talking about. Or if you are savvy and recently purchased a home you may have noticed it as well. There are obscene amounts of obscure fees involved in each of these transactions, from title insurance to points on a mortgage. And even more egregious is the bogus appraisals that are determined by the pockets of Real Estate agents and mortgage brokers.

They have been fleecing the average American of significant sums of money, in numerous ways, yet no one mentions them. The financial press loves to harp about the housing bubble, and as a result have helped spark this cool down. But they have missed their call to duty, which is to expose such behavior.

So to my point, I think the most significant headwind of all for the home builders is looming regulation. We know as well as anyone what a bursting bubble can do to an industry, and it starts and ends with regulation and investigation. When big money is being made, corruption is bred. Real Estate markets are no different. You can analyze all the economics and fundamentals, but the real reason to steer clear of these companies is staring right in our faces. Corruption.

Call me a cynic, but I doubt the big home builders were the exception to this. If history tells us anything, we should guess they were leading the charge. Options backdating will be a misdemeanor compared to the things Eliot Spitzer could find were he to divert his attention away from Wall St.

As a disclaimer, I have no hard evidence of this and it is really just a hunch. But as they say, where there is smoke… there is fire.

Disclosure: Author has no position in homebuilder stocks