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
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
This investment news is brought to you by Investor’s Daily Edge. Investor’s Daily Edge is a free daily investment newsletter that is delivered by email before the market opens. It’s published by Fourth Avenue Financial, a subsidiary of Early To Rise (an affiliate company of Agora Publishing). In each weekday issue you’ll receive practical strategies for protecting your portfolio and multiplying your money. You’ll also learn about undiscovered opportunities in emerging sectors and markets, deeply discounted stocks, recommendations for bonds, cash, commodity and real estate investing, and top ETFs. To view archives or subscribe, visit Investor’s Daily Edge.
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
