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PulteGroup, Inc. Message Board

  • gordonnicko gordonnicko Oct 25, 2007 4:49 PM Flag


    This is just another business cycle. The homebuilders are trading below book value and to value investors they are eagerly buying.

    Of course you will say that this time its different but as per sir John Templeton "the four most expensive words in investing is: "This Time its different"

    The Homebuilders

    Homebuilder stock prices were slammed in 1990 as everyone concluded that earnings were going to take a big hit. The same thing happened in 1982 and it also occurred more recently as housing weakness became more apparent and sub-prime worries spread. From the peak on October 9, 1989, the S&P 500 Homebuilders Index fell 52.9% to its bottom on October 29,1990.27 On an average annual return basis the homebuilders fell -51.02% versus a -12.36% drop in the S&P500. Earnings did take a big hit, but that came in 1991 after stock values had fallen sharply.28 Nevertheless, stock prices rebounded sharply beginning in the fourth quarter of 1990 ~ right in the middle of a recession ~ and by 1991 they had recovered most, if not all of their 1990 losses, although company earnings were less than half of 1990 levels in many cases. This recovery took place before the housing market recovered. In November 1991 it was noted in TIME that housing starts remained �dismayingly weak� despite drops in mortgage rates from 10% in 1990 to 8.75% in 1991.29

    More recently, stock prices fell sharply from peaks that occurred around the time of the peak in starts and permits. Following a rebound in late 2006, homebuilder stocks again fell sharply amid the sub-prime lending fallout and increasing concerns about full-blown recession. From recent peaks in mid-2005 some homebuilder stocks have seen their prices decimated, falling by half or two-thirds in the last couple of years. From the peak on July 28, 2005, the homebuilders index fell 67.7% to its most recent bottom on September 25, 2007, under performing the S&P 500 dramatically. On an average annual return basis the homebuilders index lost 40.21% versus a gain of 11.71% in the S&P500.30 The gain for the broader S&P500 differentiates this period from the previous one, which witnessed a decline in the overall index. This could be a sign that the market is not pricing recession presently, as it was seventeen years ago.

    Whether or not and how much homebuilding stocks recover from present levels remains to be seen. However, what is worth consideration is that buying homebuilding stocks the last time that sentiment was so depressed proved to be a productive strategy. In 1990, homebuilder stocks generally bottomed around the end of the third quarter. Five years later from that October 1990 trough, the S&P 500 Homebuilders Index was up almost 175% in price terms and this includes the sell off that occurred as the market priced the mini-housing-recession in 1995-1996.31 Comparatively, the S&P500 advanced in price by a cumulative 93% from October 29,1990 to October 31, 1995. On an average annual return basis the S&P 500 Homebuilders Index gained 24.41% versus a 17.38% gain in the S&P500 between October 1990 and October 1995.

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    • Yea, and I've got some beach-front property in Arizona, I'd like to sell ye! I've been shorting this sector since this past Spring, and nothing has changed. Not even the bottom calls by the Bulls! Good luck, nothing personal, but this time around it is much different.

    • How much have you lost so far with your PHM long???

    • Apples and oranges. The two examples cited were periods of an overall economic recession with high interest rates, which included the housing market as a part. In 1981, interest rates were around 18%. As those rates came down in 1982 and 1983, of course housing rebounded. 1990 was a brief recession, but also marked by higher rates and unemployment.

      This (for now) is a housing recession, boarding on depression. Recessions are marked by 2 consecutive quarters of negative growth. The home builders have reported losses for 2, and some cases, 3 quarters now. So they are in it, although the overall economy is not. The savior of lower rates and more jobs won't help this time, as interest rates are already at historically low levels and we are near "full employment". The fundamental problem is for several years, individuals that should not have qualified for a mortgage were put into exotic financing agreements that can no longer be supported. Full employment doesn't matter since wages have not kept pace with inflated values placed on properties. The consumer, and in some cases speculators with several properties, in the end, just quits paying.

      This has led to the contagion effect with the spill over into financial companies - which is ironic since they were pumping up the bubble with the home builders. Smaller mortgage brokers have already gone bankrupt and the major players are dealing with record write offs. So the financials are at the start of their own industry recession.

      As the companies deal with foreclosures, inventory keeps coming back into the market, at distressed prices. This at a time that the homebuilders are trying to do the opposite and hold up margins and reduce inventory. But this is a cycle that will continue to repeat, with both groups placing downward pressure on the other, until what the consumer can afford on housing comes back into equilibrium with what the housing and financial markets should charge to keep people in their homes or bring new buyers into the market.

      The problem with the buyer market is those that were foreclosed on will not be able re-qualify, so the pool of consumers is likely to contract for sometime.

      As far as S&P performance, I believe there is still spillover to other industries. home construction & remodeling stores, retailers, furniture companies, luxury goods (swimming pools, boats, Harleys, pool tables) are all suffering as home equity is no longer available to help finance other purchases. Home builders will not catch up to the S&P performance of last year or this year, it will be the S&P following the builders and financials downward as this cycle progresses.

      One other difference, the run up in prices in the last housing expansion is better compared to the dotcom bubble. Properties in some areas doubled and tripled in price within a few years. Incomes to pay on properties with such inflated values have not kept up, without the use of non-traditional loan devices. The correction to again establish equilibrium between buyers ability to purchase and sellers (financiers), will be greater than the historical norms. The length of correction will also be longer, which places in doubt the very survival of some of these companies.

      • 4 Replies to ptgkc
      • Wow...well said!

      • "This (for now) is a housing recession"

        My eyes have seen the glory of the coming of the Lord!

      • PTKC, your are very correct in your assessment. Let's not forget that 80% of Americans live pay check to pay check. Americans are saving negative 2-3% of thier net income. Approximately 70% of young adults can not afford to buy a home now, espically in the expensive housing markets with tightened morgage requirments.

        The shorts do have this market predicted right. You longs will have up to two years to see todays prices again. All the longs and institutions are doing is prolonging this envitable drop. Get a clue longs, why would any body want to buy into this HB stock. Go check out RYL, they don't suck nearly as bad. Remember, LEN and PHM bond stus is now junk according to Cramer.

      • there is no such thing as apples and oranges. Financial comparisons are on broader basis and can not be taken to minute details. The bottom line is HB stock rebound faster and earlier than the earning recovery. THe time to buy is when you do not see the day light and thats hard for most people to do. On risk adjusted basis it is a fair bet.

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