Wednesday, January 30, 2008

Still Too Early to Buy Homebuilders Other than for Short Term Trades

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As I have been saying, we will get 25-35% type of bounces off of oversold levels in homebuilders from time to time. This has been going on for nearly 2 years now. We are in the middle of another. Eventually these will be "buys to hold". But I just don't think it's time even with the government abandoning any sense and allowing lenders to stuff Fannie and Freddie full of $700K+ mortgages (up from $417K). [I do believe this could prove catastrophic in the long run and a tax payer bailout might ensue in 3-5 years from this action but this government is all about solutions that fix things today, not in the long run]

Yesterday's Centex (CTX) report shows some of the signs why it is too early - it's not the numbers (they have been bad, remain bad, and will continue to be bad) but the commentary.
  • Centex (CTX) shares tumbled 6% Wednesday after the homebuilder's loss more than quadrupled in the latest quarter, while cash flow generation came in lower than expected.
  • On the conference call following the third-quarter report, the company said the level of discounts being offered for new homes are at record levels and that housing inventories and prices have not stabilized.
  • "The housing market continues to correct and tighter mortgage underwriting standards are affecting home prices," Centex CEO Tim Eller said in a statement.
  • For the quarter ended Dec. 31, Centex's loss swelled to $975 million, or $7.94 a share. That was substantially worse than the loss of 78 cents a share that analysts expected, according to Thomson Financial. (to analysts <--- oops)
  • In a note to clients, Pali Reseach analyst Stephen East said the results were disappointing. Centex underperformed on cash flow generation, orders, land charges and operating margin before charges, he said.
Again you want to buy these stocks maybe 6-9 months before a turn in the housing market. People now believe with the flooding of liquidity, lowering of 30 year rates, and the ability to stuff Fannie/Freddie with overpriced expensive mortgages, the housing market will be back by summer or fall. I just can't get on that bandwagon. In my opinion mortgage rates can be zero and for many people if they are forced to put a down payment down (in a country full of people who do not save), they still can't afford homes. So I am not sure where this flood of new buyers comes from. Without a return to 0% down mortgages we won't see any swift recovery. It's as simple as that.

What I do expect to see is a flood of refinancing so people can reduce their home payments (which is good for them), and/or extract equity to pay for day to day expenses (which is just a repeat of the bubble we came out of in 02-06). But this (housing) was an epic bubble - and epic bubbles do not get solved in 18 months. Especially with all the foreclosures that are just now beginning. All those homes need new buyers too... along with all the homes that people will just walk away from since they are upside down on. So we are going to see a "great reversal" - many homes bought in 2005-2007 are just going to be right back on the market - they won't have to be sold to be put back on the market. Owners who abandoned them (walked away) or were forced out (foreclosure) will be the cause for them returning to the market.

But the home builders are doing their part - they are doing "record" discounts on home prices... this will drive down median home prices. As I keep saying, it's existing home owners that will be the last to fall. They will refuse to sell their homes because they will get less for it than they bought it for in 2006 or 2005. But they will succumb and face reality eventually. When that happens in droves we should be near to a bottom.

From a new buyer perspective, I simply ask - why would people be rushing in to buy an asset when they see no bottom/floor. How many people (even those with cash) are going to running in to buy an asset that could be worth 10% less a year from now? I just don't see it... this huge rush of buying this summer.

Doesn't mean one cannot make some great near term trades (as the past week in the homebuilding stocks), but we are still quite a ways off from "buy and tuck away" time.

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