Abe Mishima

What's Book Value Worth for Homebuilders?

P/B is meaningless. Cash flow is far more important. The burn rate and projected time to reverse negative net income are the critical numbers to get an estimate on. The longer the recovery takes, the more likely we are to see credit downgrades and possible bankruptcy. In BK, the common shareholder would probably get nothing. If just one of the major homebuilders has to file for BK, it will take all homebuilders down. Even if no builder goes belly up, the time to straighten out the balance sheet keeps growing longer and longer. Thus a 2:1 to 4:1 drop in the stock price relative to the 52-week high is not only a reality, but a deserved decline in the pps of these stocks.

Desperate Homebuilders Bringing Back Bubble-Era Financing - Housing Tracker

Of particular note is the reference to hedge fund investing in firms with "valuable" real property. There is a hidden market out there, which only the very rich seem to have insight about. Since they drive the very high end of the real estate market, it is in their best interest to keep top end homes at $10 Million and above. Based on simple economics, aka the trickle down theory, this requires stabilizing the $1 Million end of the market as well. And, of course, the $500,000 market too. If the bubble is tamped down but not burst, the housing sector will recover in a year or two. That's where the big bets are lining up. If you bought any homebuilder at their 52-week low, the sentiment is that your money has or will double (in the near future). You cannot deny that people like homes. Take note, but buyer beware.