Tuesday, July 25, 2006

Real Estate Buyers Continue to Bail ...

The most recent data show that the real estate market continues to soften, with sales volumes down between 8-15% (depending on the category) over a year ago. As always, prices remain the lagging indicator and have posted very minor increases (1.1%) over a year ago. However, with inventories continuing to rise, overall national price declines on year-over-year comparisons are now not far off.

Around the net, I've seen a few financial bloggers postulating that home-builder's stocks - having fallen to levels of half of that one year ago - might now be buys. This is bull thinking, in what is very likely to be a long bear market for real estate. You can't have the kind of appreciation stemming from practically free money boil off in just a year. These down turns are almost invariably longer and deeper than most imagine at the outset, as discussed over here by Don Tomnitz, CEO of the No. 1 home builder, D.R. Horton.

In my other life, I too have seen these types of real estate downturns, and they can be absolutely brutal. Think it's safe to buy shares in home-builders or land developers (they're often intermingled, given that large builders like to hold substantial land banks) on a 50% decline (as has already occurred)? How about if it goes down another 50%? This is a very real possibility and one that I've personally witnessed in the underlying land stock.

Home builder's confidence is lower than any point since late 1991 and, realistically, isn't likely to get any better in the near future, as inventories continue to build, and year-over-year prices finally start their much discussed decline, on the back of the "end of free money" Fed policies.

No, the time to buy shares in home builders isn't when their prices are at PE's of 4 or 5. It's when their PE's are in nose-bleed territory of 50, 80, 130 - or don't exist, because the "E" in "PE" is missing.

It won't be pretty out there in 2-4 years. So patience is in order. Patience my friends. The wound is only being opened just now.


The Confused Capitalist


Nick said...


I just wanted to say that I enjoy reading your blog almost daily. Keep up frequent updates.


Anonymous said...

Thanks for the specific realistic advice. I can't stand recommendations that are vague, innuendo like, broad based, wishy-washy, namby pamby, well you get the idea. My best guess based on reading and listening to people I trust is the that the US will do nothing until close to the year end then have a window dressing rally. Bonds have started behaving better and will continue to do so for a quarter or two. I think the 3rd quarters GDP will come in around 2.5% led by energy and pharmaceutical stocks. Tech will find a bottom some time in the 3rd Quarter and will start back up in anticipation of Mr.Softy's Vista operating system. Japan will pretty much stall out until the end of the year also but will start another bull run in '07. Options on Patience (a virtue) will see a nice run up in value. Tom in Indy

Jay Walker said...

Thanks Nick and Tom.