Those Who Know and Those Who Don't

Here we go again: another big difference of opinion between those who think they know what is going on and those who actually do.

In one camp are equity traders, who keep claiming to see a bottom in all manner of markets. The other group includes those on the ground, who have to deal, first hand, with the ugly fallout from a plethora of bursting bubbles.

While no one can say for sure what will happen next, I'm pretty convinced I know which ones are the real experts as far as the housing market goes -- and by extension, what that likely means in terms of where homebuilders' shares are headed in future.

Feel free to check out the following Bloomberg report, "KB Home's Broad Says Home Prices May Drop Another 20%," as well as the little graph I've put together, and decide for yourself.

click to enlarge

Comments

[DCM]

Mr. Panzner:
Is it not possible to have a bottom in the price of housing stocks and still see declines in the prices of homes? I don't think their is a direct correlation between the two but I may be wrong.

The bigger question is how can builders maintain any profit margin when building costs are staying level if not increasing and sale prices are declining by 30 to 40%? Were profit margins that enormous (40 to 50%) at the beginning of this decade? I was under the assumption that builders were operating at about 20 to 30%, in which case there should not be any profit margin left. Assuming that traditional credit underwriting will remain the norm where are the buyers going to come from? In many previously active markets, there is a 3 to 5 year supply of homes. How can a builder sell into an oversupply of existing homes that sell at a discount to new construction? I must be missing something here.

[tradersystemguru]

See seekingalpha.com/artic...

According to the latest data, builders are building 947,000 homes per year into a market that is buying 526,000 homes and their is an 11-month supply... Can't see how we could logically expect an upward lift on profits in that environment...

We've seen homebuilder rallies before but until there is solid evidence that the environment for housing has changed, any long position should be considered a short-term play....

[drmalaka]

Being an equity trader or broker is far removed from being an economist. These guys work on trading trends and manipulation in the market, not reality. They all keep referring to a bottom in prices and sales later this year, which helps their book tremendously and probably helps them make money trading over a short period.

Reality of course is different, as told directly by the homebuilders themselves. The concept that housing will bottom towards the end of next year is as rational as blowing yourself up and getting 47 or 57 or whatever virgins as a reward.

The homebuilders have all dropped dramatically from their highs in 2005/6 so it is true the market is a forward looking mechanism. While the market was running in 06-07 these stocks were already collapsing. So you have to dive these guys some props. However, the thought that some of these companies are not facing a serious risk of bankruptcy is rediculous.

Furthermore, real estate has such a long cycle, to think these stocks will find a bottom and go up in the near term is psychotic. If this is actually the bottom it would not be crazy to think that the homebuilders will trade in this range for years to come. This year alone they will add 500,000 net new homes to the supply at the rate they are going. When are they every going to make a profit. YEARS!!!!