Uh-Oh: Bonfire of the Builders

by: Barry Ritholtz

I have been stating for quite some time that we are only halfway through the Housing downturn, if that. The huge inventory overhang, increased mortgage rates, tightening credit regulations -- and a lack of new buyers -- are conspiring to make this cycle at least a 5 year or so process.   

Now, we have heard many many erroneous Housing bottom calls from all manner of folks: former NAR economist David Lereah was a notorious bottom caller, as has been Treasury Secretary Hank Paulson, and even in CNBC/RealMoney's Jim Cramer (November '06).

All those prior bottom calls turned out to be dead wrong. 


However, a recent item caught my eye, and suggests that perhaps we are closer to a bottom -- at least in the Builders -- than I may  have realized: the cover story of the most recent BusinessWeek.

Now, before you run out and buy Toll Brothers (NYSE:TOL) or Beazer Homes (NYSE:BZH),  quite a few caveats are in order.

First, magazine covers are notoriously imprecise to use as a Buy/Sell timing signal. We often do not see the true results -- did a cover story truly mark the top or bottom of an issue --  for many months if not years. Consider the Time Magazine Cover "Why we are going gaga on real estate" -- it was a mere 2 months from the peak in the housing cycle. Shorting the Home Builders then would have been painful for a few months, but then became highly lucrative.

Second, the jury remains out on the more recent BW: It's a Low, Low, Low, Low-Rate World: Why money may stay cheap longer than you think. That was back in February, and since then rates slipped lower, moved much higher, and then retraced some of those gains. The author of that cover story, Mike Mandel, noted that the Magazine cover curse had been evaded--so far. While that's mostly true in terms of interest rates, it is far less so in terms of the availability of credit (see The Credit Window is Now Closed).       Still, it's premature to say that cover was a great indicator.

And it's worth noting that BusinessWeek may be a less reliable contrary indicator than a mainstream publication like Time or Newsweek -- if only because they cover these sectors anyway. When an economic issue makes the cover of Time, it's guaranteed to be already very late in the game. With BW, that's not necessarily so. I think BusinessWeek gets lumped into this group -- more so than Barron's Fortune, or Forbes -- because they have never lived down the Death of Equities cover article . . .


A nice table accompanies the issue, showing the Home Builders performance
click thru for full table



For more on the Magazine Cover Indicator, see these articles


Bonfire Of The Builders
Mara Der Hovanesian
Businessweek, AUGUST 13, 2007

Home Builder's performance Table

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