SHartwell

Are Homebuilders Ready for Another Drop?

The author makes much of the fact that a stock that goes down can always go down some more. He says that you can't like a stock just becasue the share price has fallen. How true.

He then bashes XHB and PHM primarily because they have gone up.

This is the other edge of the same sword. While it's pointed out that a stock that's gone down 80% can still be cut in half, the author neglects to point out that a stock that's doubled can always double again. And again. In both cases, however, the sword the analyst is using is the sword of fools.

Yes, homebuilding still faces hurdles. But, with the Fannie and Freddie takeovers, 30-year mortgage rates have gone from 6.40% to 5.80% - an astounding 10% increase in affordabilty in just one month.

Oil prices have dropped from nearly $150 to $100, freeing up disposable income to potential home buyers.

And, while existing home inventories so far remain stubbornly high, we are finally building new homes at a rate much less than the annual demand increase from our ever-growing population. So new home inventories have declined, and declined dramatically.

We're certainly not out of the woods yet, but with valuations in most cases well below (written down) book values, and with most of these companies now cash-flow-positive, the 'cost of waiting' is low.

This is unlike many of the financials now going under. They needed capital, desperately. Here the 'cost of waiting' was much, much higher. Indeed, the market won't let them wait it out - hence bankruptcy.