Housing Stocks Should Fall Further (TOL, BZH, PHM, BJZ, KBH, HOV)

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 |  Includes: BJZ, HOV, KBH, PHM, TOL

The Stalwart submits: OK, what does this mean: "Housing Starts Fall, Remain Elevated"? I guess it means that housing starts are coming off their peak but have yet to go to zero. Well that's good. Still a fall is a fall is a fall, right? When you've been red-hot for over a decade and you get a fall that tends to be a sign that things are changing. But, oddly, all the housing stocks are up today. I guess it's because analysts are rushing out in their defense. Gina Martin, of Wachovia, has this to say:

(she) says the report is evidence the housing market is flattening but not dramatically declining.

"We're kind of plateauing here for good reason. Houses are becoming less and less affordable and consumers are not as interested."

Huh. I kinda like that. Prices have gone up and consumers are less interested... interesting. Although, I don't know how you can know from one report that the market is merely flattening, but not declining. In fact, single-family housing starts did decline in October, nearly 3% from September. Run that out a few months, and it won't look like a plateau. But I guess analysts aren't paid to look forward a few months, or anything like that.

Robert Marcin, writing for the illustrious TheStreet.com writes that the homebuilders are too cheap to ignore. Robert Marcin, from what little I've read of him, doesn't seem that bad actually, but this is dubious:

D.R. Horton reported decent numbers Wednesday, and most importantly, its unit orders were up 28%. However, the bears are not writing about these orders the same way they commented on Toll's. Horton delivered 50,000 homes, compared with 9,000 for Toll. Now, you tell me what's happening in the housing market.

I don't think that many investors, not even the sell-side analysts, are aware that what really happened at Toll was a management mistake. They simply filled out existing communities too quickly last year. That maneuver gave them monster numbers then, but is a big problem today. Don't base your opinion of a $200 billion industry on Bob Toll's comments. Look at the entire group.

Horton orders up 28%, Beazer up 15%, Hovnanian up 38% and Pulte up 20%. What am I missing? Seems as if most of the large public builders are managing the current slowdown just fine.

A few thing here. His explanation of Toll's management mistake is pretty interesting. It actually relates to yesterday's lesson on intertemporal arbitrage. Apparently, the other homebuilders accurately guessed that home-prices would be higher this year, and deliberately undersold their communities. Toll's "mistake" was to not play that game, and simply sell the inventory they had. Mistake? Seems prudent to me. Presumably, the homebuilders, who are still confidently projecting big gains for next year, are still playing the game. They may appear to be in good shape, but so too does the man who shoots empty in the first two rounds of Russian Roulette.

And therein lies the problem with the "cheap" homebuilders and their single-digit PEs. While some industries use boom times to clean up their balance sheet and shore up for lean times, the extended bull-run in housing has caused them to get lax and cocky. Instead of caution, they leverage up. Here's Jeff Matthews on Beazer, and the Sacramento housing market:

As reported by Andrew LePage, a Bee Staff Writer:

Sales of new homes in the Sacramento region dropped 40 percent over the past three months compared with the same period last year, according to the local Building Industry Association.

It's the sharpest decline the group has seen for the August-October period since 1989-1990, when sales plunged nearly twice as much - 79 percent.

The most amusing aspect of the article, if there is one, is that, as explained in banner ads surrounding the story on the Bee website, “The Business Section is brought to you courtesy of Beazer Homes.