Why Homebuilder Stocks Should Be Avoided For Now

Includes: BZH, KBH, PHM
by: Jack Holland

Based on recent data from the NY Fed (pdf), the so-called recovery in housing appears to be more Wall Street hype than reality. According to the third-quarter Fed report:

Mortgage originations, which we measure as appearances of new mortgages on consumer credit reports, fell for a second consecutive quarter, to $292 billion. Mortgage originations in 2011Q3 were 17% below their 2011Q2 level and 24.7% below their levels of a year ago. At $292 billion, mortgage originations in 20011Q3 were at their lowest level since mid-2000.

About 2.5% of current mortgage balances transitioned into delinquency during 2011Q3, reversing a recent trend of reductions in this measure. The rate of transition from early (30-60 days) into serious (90 days or more) delinquency also rose slightly, to 31.3%. This deterioration was accompanied by a significantly lower cure rate, with the transition rate from early delinquency to “current” decreasing over four percentage points in the quarter.

S & P’s Case-Shiller National Index (pdf) points to an even more poignant reality that the real U.S economy—the economy of the working man and woman attempting to buy and or re-finance homes—continues to tank as home prices continue their broad decline.


2006 Q4 – 186.53

2007 Q1 – 187.47

2007 Q2 – 182.70

2007 Q3 – 177.59

2008 Q4 – 170.77

2008 Q1 – 162.37

2008 Q2 – 155.36

2008 Q3 – 148.03

2008 Q4 – 139.37

2009 Q1 – 132.19

2009 Q2 – 132.51

2009 Q3 – 134.98

2009 Q4 – 135.92

2010 Q1 – 135.63

2010 Q2 – 137.39

2010 Q3 – 133.03

2010 Q4 – 130.85

2011 Q1 – 129.09

2011 Q2 – 129.34

2011 Q3 – 127.78

It is often difficult for the average investor to ascertain fact from fiction due to the over-use of hyperbole or flowery terms by Wall Street market barkers. How many times over the past three years have we heard the question posed of some real estate analyst: “Is the bottom in for housing?” or the suggestion made: “It appears to be time to buy the homebuilders.” The answers are always similar: “The bottom appears to be near at hand” or “We are seeing green shoots of recovery around the country.”

Based on real data from both the Federal Reserve bankers and Case-Shiller scholars, unless one has a very long-term investment horizon, the investor attempting to make money in the year ahead would be well-advised to steer clear of most housing stocks, including the likes of Pulte Group, Inc. (NYSE:PHM), Beazer Homes USA, Inc. (NYSE:BZH), and KB Home (NYSE:KBH). However, long-term investors setting up a future retirement account may wish to begin dollar cost averaging into positions of the strongest companies.

For those attempting direct investment into depressed real estate, the waters are even more treacherous. Unfortunately, many families and investors are being lured in to purchasing over-priced homes by the appeal of low interest rates and market hype. Before buying a home in this market, a look back in history and to the woes of the 1980s savings and loan debacle may serve those considering such investments well.

In 1991, I was able to purchase a condo in Dallas, Texas, that had originally listed for $140,000 in 1980, for a mere $26,500—a full 10 years after the crisis began. Investors and home buyers who have not lived through a major housing downturn may not be aware of just how long these cycles can last when they are kicked off by economic catastrophe on the back of inflated asset prices. Back in the 1980s, we did not have dozens of 24-hour news programs filling our heads with blissful nonsense of hopeful green shoots. We depended on the Dallas Morning Times and Houston Chronicle’s classified ads and examined the actual prices of homes. And just because the stock market rises does not mean a housing recovery is under way. The stock market can be manipulated. It is much more difficult to manipulate the price of a home after a bubble has popped.

Back in the 1980s, sellers really got creative in Dallas just to get out of their overpriced homes with declining values. I remember one ad stating that the home came with a new Mercedes and a ski-boat at closing. Another offered a $20 thousand dollar furniture allowance.

I would recommend today’s investors do their own research and not listen to the Wall Street barkers. Today’s bargain home buyers and investors alike have much better tools at their disposal by which to examine the real estate market. Not only do we now have access to actual Fed housing data, but we also have new formats by which to examine actual home prices. For example, I have been watching closely the number of ads being posted to a few select Texas Craigslist pages. Even though Texas was not affected by the housing bubble to the extent of Florida, Nevada, California, and Arizona, the number of properties being listed continues to increase month by month and the average price continues to come down. This reflects overall economic conditions in the United States as prudent individuals cut loose of second homes in order to compensate for lost wages and jobs. Based on current trends and the gloomy world economic predictions coming out of Europe and beyond, I personally believe it will be five to 10 more years before home prices in the U.S. actually hit bottom.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.