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.

The WSJ Is Wrong on the Housing Crisis

"Existing Inventories" is a difficult concept.

Suppose I'm in Chicago and want to move to Denver. I put my home on the market (that's 1 home in existing inventories). But I ask too much and it doesn't sell. And I won't buy a house in Denver until my Chicago home sells.

Jim lives in Denver and wants to move to Miami. He puts his house on the market (that's 2 homes in inventory). It's ideal for me, but I won't buy it because my house hasn't sold.

Sallie lives in Miami and wants to move to Chicago. She puts her home on the market (that's 3). It's ideal for Jim, but he's not biting because I haven't bought his house.

This situation creates an "existing inventory" of three houses for sale. Months of inventory looks even worse, because homes aren't being sold at a very fast pace.

But then I finally get realistic I finally get realistic about price and sell to Sallie. I buy Jim's house. Jim buy's Sallie's house. POOF! The "existing inventory" is gone - without any need for household formation...

Because of this, many people focus on the number of vacent houses. This number looks big (all time high, they say), until you realize that it's been on an uptrend for 40 years - and it really isn't that much more than it was 1, 2 and 5 years ago.

The builders are currently building at a rate much lower than household formation, whereas the problem was created when they built at a rate much higher than household formation. This will eventually work itself out - just like any commodity cycle.

The investment decision rests on just how long you think this will take...