Another Absurd Homebuilder Rally

Wondering why the homebuilders are up huge this week? Surprisingly simple explanation:

NEW YORK [AP] -- Housing stocks rallied for a third consecutive day Wednesday, as sentiment increased that the long-battered shares may have reached a bottom, even if the beleaguered housing market has not. With no industry data to guide them, investors appear to be taking their cue from an analyst who earlier in the week upgraded the entire sector.

Citigroup Global Markets analyst Stephen Kim wrote in a client report Monday he does not foresee the stocks falling much more. However, he does not expect conditions in the industry to improve anytime soon.

"We are not trying to suggest that trends in the homebuilding sector are about to get much better," he said. "It is precisely when things have gotten this bad that the stocks start looking good."

For a moment, I thought I had been transported back in time to December 6, 2006, date of a previous Stephen Kim research report:

Citigroup recommended that investors buy shares of homebuilders now as order trends are expected to turn positive in the first quarter of 2007."While many wait for an improvement in fundamental data such as prices or inventory to signal an 'entry point' in the stocks, we urge investors to look back to prior cycles, when the group rallied far ahead of fundamentals," Citigroup analyst Stephen Kim said in a research note.The brokerage firm raised its price targets on the following companies:

Pulte Homes Inc. - $45 [now $16.25, off by 64%]
D.R.Horton Inc. - $48 [now $14.84, off by 69%]
Lennar Corp. - $88 [now $25.90, off by 71%]
Centex Corp. - $83 [now $29.28, off by 65%]
Toll Brothers Inc. - $42 [now $22.79, off by 45%]
KB Home - $92 [now $28.60, off by 69%]
MDC Holdings Inc. - $85 [now $43.52, off by 49%]
Ryland Group - $95 [now $25.5, off by 73%]
Beazer Homes USA Inc. - $80 [now $10.08, off by 87%]
Hovnanian Enterprises Inc. - $63 [now $13, off by 79%]
Standard Pacific Corp. - $43 [now $6.24, off by 85%]
Meritage Homes Corp. - $87 [now $16.62, off by 81%]
Technical Olympic USA Inc. - $18 [now $1.94, off by 89%]

Stephen Kim sounds like a guy you should listen to if you want to lose two-thirds of your money.

Here's how the builders have done since he called the bottom on December 6, 2006 (click to enlarge):


See that tiny blip upwards on the very far left? That was the effect of his report. The bullishness carried through until it became clear that the "spring selling (buying?) season" was never going to materialize.

I worked in the industry and I remember what people were thinking. They honestly thought that spring of 2007 would come and the real estate market would kick right back into high gear.

That didn't happen, and now there are key problems that make it even less likely that we have reached the bottom of the housing market.

• Lending is tight. Homebuilders do great when there is no-questions-asked lending.
• Prices are still too high. High relative to rents, high relative to median incomes, high relative to other goods' historical increases, high relative to building costs. They need to come down much further - and the Case-Shiller HPI futures markets are predicting it.
• Inventory is huge in absolute numbers and in number of months' sales, and keeps getting bigger by both measures.

Given these challenges, and the tarnished balance sheets of the builders (with high debt, loads of difficult to sell homes, staggering amounts of lots and land, and problematic off-balance sheet vehicles loaded with land and debt), it's unlikely that the builders' stocks have reached bottom.

Mr. Kim: We have not reached the end of the housing bust. We are only now reaching "the end of the beginning."

Comments

[financeGuy13:]

Nicely written. How stupid does Stephen Kim (and Citigroup) think his audience is ? I'm surprised he still has a job..

2007 Oct 04 08:27 PM

[lsuavecito:]

Right on! Kim and others like him have hidden agendas(huge loans to the bldrs.?). Where were all these geniuses when the writing was(still is)on the wall? A year from now half of these bldrs. will be history.
Anybody remember Citi's Jack Grubman(Worldcom)? I've said it before, most of these "analysts" are probing in the dark. That's why they work a 9 to 5 job.

2007 Oct 05 11:55 AM

[Etz:]

Actually, this is WHY he still has a job.

2007 Oct 08 01:47 AM

[fakuretarde...:]

Stephen Kim is a know phucktard a-hole with hidden agenda. check his records. phuck kim's retarded whoremama.

2007 Oct 04 11:08 PM

[razormd:]

...financial markets seem to be driven more by fear and greed than by hard facts...and if institutions decide to start chasing housing stocks, who am I to argue?...as long as I profit, I could care less.

2007 Oct 05 12:38 PM

[BxCapricorn:]

Now that was an excellent article, with real numerical information and a timeline that supports the writer's opinion, vice the usual "the world's going to end" non-sense that Seeking Alpha has far too much of these days.

2007 Oct 05 04:52 PM

[RW:]

True, but Kim gives us a chance to pick up long term puts at a discount. I wonder how many of his colleges are taking advantage of this?

2007 Oct 06 08:36 AM

[David Lentz:]

"Stephen Kim sounds like a guy you should listen to if you want to lose two-thirds of your money."

ONLY two-thirds?

I think that a much better indicator of when to buy would be when the holders of hundreds of thousands (millions?) of repo'd homes that they are unable to re-sell, begin bulldozing them and writing down the losses.

Similar to the time during Nixon's Adventure with Wage and Price controls in the 1970's when I saw TV news video of farmers burning trays of baby chicks alive, as it was the cheapest way to avoid the huge losses incurred by raising them to a marketable size, where they couldn't be sold for even a fraction of what it took to raise them. I knew then that the end of wage & price controls was at hand.

When the holders of all these repo'd homes destroy them to get them off their books (selling them at auction for any price would create unrealistic expectations for home prices and further retard the housing recovery with a significant number of homes being traded at sub-market prices), then a recovery will finally be able to begin. What all the families that formerly occupied those homes will do, I can't imagine.

2007 Oct 06 10:27 AM