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October 14, 2008
Home builders have been suffering with
falling home prices are they out of the
woods yet? In this article Andrew
Gordon gives you some insight into things to
come in the home building industry . --
editor
Home
Builders- The Next Shoe to Drop?
By Andrew Gordon
As the market
crumbles, shares aren’t the only things
getting cheap. So are words. And the
cheapest, most glib words are these: “We’re
almost at a bottom.”
What the heck does that mean? The Dow fell
over 1,504 points last week. That tells me
we’re 1,504 points closer to a bottom than a
week ago. That I get.
Without even looking, it also tells me that
the VIX (the volatility index) is
unbelievably high and the technical
indicators (like RSI which measures
momentum) are way oversold...
As they were in the middle of last week. It
didn’t prevent the market from dropping
another 996 points.
“We’re nearing a bottom” is devoid of
meaning. It could mean we’re anything from
200 to 2,000 points away. It could mean
we’re anything from one day to a few months
away from a bottom. “Almost” doesn’t help
you invest.
Nor does making the less cautionary
pronouncement like, “we’ve hit a bottom” or
“we’re at a bottom.” How many times have you
heard this about housing? Or banks?
Just last week, when Wells Fargo trumped
Citi’s offer to buy Wachovia by offering $6
more per share, it was immediately presented
as proof that value was returning to the
banking sector ... and that the bottom had
been reached.
WRONG. It didn’t stop the banking index from
going down another 17 percent last week.
The banking sector is now down 40 percent
for the year. In theory, the government
rushing in and giving banks hundreds of
billions of dollars should staunch the
bleeding.
Government intervention so far has been
clumsy and wildly inconsistent. If anything,
it has created more uncertainty in the
banking sector and has done nothing to quell
investors’ anxiety.
Far be it for me to call it a bottom.
And now there’s another sector lining up to
take its lumps. Not that it’s entirely
escaped the market’s downward spiral. It
hasn’t.
For homebuilders the crap is about to hit
the fan.
The housing market has been going down for a
couple of years. But the monthly numbers
keep getting worse. August housing starts
dropped to a seasonally adjusted annual rate
of 895,000. That's the lowest it's been
since back in early 1991, and 6.6 percent of
all loans are at least a month past due. And
sales of pre-owned homes fell by 2.2 percent
in August. OUCH.
Most homebuilders haven’t been profitable
since 2006. But it wasn’t until recently
that they flashed two clear signs of
desperation.
• They’re cutting dividends. Lennar, the
biggest homebuilder in the U.S., cut
dividends by 75 percent last week. More
dividend cuts will come from the sector.
• They’re selling their property at
fire-sale prices. That makes them even more
desperate than banks. Banks refused to sell
their toxic debt at huge discount prices.
That’s a big reason why the government had
to step in and offer to buy this stuff at
higher prices than what they could get from
the private sector. Horton, for example,
recently sold a San Diego property for 25
cents on the dollar.
Yes they’re getting tax-refund checks from
Uncle Sam for the losses they take on these
sales. Still, healthy, or even semi-healthy
companies don’t sell their property for
pennies on the dollar unless they’re in dire
straits.
Even homebuilders themselves see tough times
ahead. Here’s what Lennar said:
“While we expected the housing market to
remain constrained throughout the third
quarter, the weakness in the market actually
accelerated as a result of increased
foreclosures, weakened consumer confidence
and tightened mortgage lending standards.”
I believe that housing will remain
“constrained” much longer than through the
third quarter. I think the third quarter of
next year is more like it, especially with
foreclosures increasing and driving down
prices.
In a middle-class neighborhood in South
Florida, not far from IDE’s Delray Beach
office, you can buy pre-owned homes in
foreclosure for less than $85,000. Why would
anyone buy more expensive new homes when
they could just buy a foreclosed one at a
steep discount?
And the credit freeze that occurred right
after Lehman fell is killing home builders.
One of these days credit is going to thaw,
and I hope it’s sooner rather than later.
But banks won’t go back to their
free-wheeling lending days, and in the
meantime it’s extremely difficult to get
home loans.
Morningstar says, "It's likely that these
home builders are going to enter an even
more difficult period in terms of cash
generation."
O'Donnell /Atkins, a real-estate advisory
firm in California, says, "There's going to
be a rash of builders shedding assets.”
Prudential Realty in California, says, "The
downside is they are never going to see the
kind of margins when lots were doubling and
tripling in value in the time it took to
build a house."
Banks are hogging the headlines but home
builders are in big trouble. The 20 percent
they’ve dropped so far this year is nothing
(the blue line above is the Spyders home
builders ETF – XHB). It’s only half of the
banks’ drop.
Like every other sector, home builders are
having a terrible October. Unlike other
sectors, there’s nothing to save these
companies from doubling and perhaps tripling
those losses.
Most likely, a falling market has taken a
big chunk of change from you. Here’s a way
to get it back. All you have to do is short
these companies or the home builders ETF.
Invest well,
Andrew Gordon
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Some of the greatest
fortunes of all time were made during the
Great Depression. The key is to have
as many tools at your disposal as possible.
With home prices falling, and home
inventories high, Andrew Gordon
presents a valid way to make money even in
this crisis. Shorting stocks of companies
destined to do badly in the current market
environment is almost a sure fire way to
make money for the well prepared. --
Tim McMahon, editor
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