Housing Bottom and Homebuilders: No Sign of Improvement

So we are nearing the one year anniversary of the official start of the Credit Crunch. Big news this week as Merrill Lynch (MER) continued to write off and sell of subprime sludge. Are they out of the woods yet? Definitely not. We won't see an end to this Credit Crisis until we see a bottom in the housing market.

Speaking of the housing market, D.R. Horton (DHI) and Pulte Homes (PHM) continue building up inventory. According to the Phoenix Business Journal, D.R. Horton started 2132 homes in the Pheonix area during the first six months of the year, and Pulte started 1764! I think these builders are gambling that we've hit bottom.

And it's a big gamble, but for the big builders, there's no choice; they have to keep money flowing in however they can. If we're not at the bottom, these builders and all those who keep adding inventory may very well be in trouble. Remember, right now, there's almost a one year inventory of homes on the market, and there's arguably little sign that the number will improve any time soon.

I still have a short position in DHI, and I'm sticking to it.

Disclosure: Author holds a short position in DHI

Comments

[Norman Lepo...:]

Very interesting article.

2008 Aug 03 10:00 AM

[Tony Rand:]

J.C. is correct. We're not yet out of the woods and these builders must be desperate or making an unsafe gamble. The only way to really answer this is to look at their land inventory - are they stuck with too much and forced to develop it and move it because it is costing more to have it just sit there?

2008 Aug 03 10:55 AM

[Tom Lindmark:]

Actually, new homes are selling at a pretty brisk pace in Phoenix, so it might not be as much of a gamble as you point out. Resales, are also improving. June 2008 sales were above June 2007 and July sales appear to be above last July's.

I have no axe to grind either way, and I am probably in agreement that we are not close to the end of the credit crisis. However, there are signs-not just in Phoenix-that the tone of the market is changing. Here is a link to an article that I wrote that contains further links dealing with that issue-blog.metro-real-estate....

Personally, I don't think that a bottom in housing translates into an end to the crisis. There are a number of structural issues yet to be faced and the impact of deleveraging is going to continue long after housing begins its recovery.

2008 Aug 03 12:51 PM

[Bonanza36:]

I say we put Campos and Tom Brown (aka Larry Kudlow) in an UFC ring to duke this out.

My money is on Campos.

2008 Aug 03 01:10 PM

[Tom Lindmark:]

I'll take Brown. At least he has data.

2008 Aug 03 01:26 PM

[Urbane Gori...:]

Normally what builders do during a downturn is to place options on raw land in areas the are expected to develop in the future. This doesn't seem to be what's happening here. There have been some **anecdotal** stories of **some** builders buying land cheaper than when they had to sell it at a loss last year, but I haven't seen this activity as a widespread phenomenon, nor have I seen any real numbers.

In and out of SRS!!!

jegan ;-)

2008 Aug 03 04:21 PM