After the silly Citibank analyst report (which actually did make some people some money) stated that the home builders were a buy because the news just couldn't get any worse and this group tends to rise well ahead of the fundamentals, I simply threw my hands in the air and sighed. Since when does recieving bad news mean it can't get worse? To even print such trash is embarrasing. Then there is the stocks rallying hard ahead of fundamentals. Of course they do if you cut rates and issue silly bullish, yet nonsensical analyst reports from one of the worlds biggest banks. Yet, as the man said, these stocks rallied hard, and rallied high. I know they have a high short interest (ex. BZH has over 80% of their float short) that makes for a serious short squeeze when the faint of heart are involved, but for the stronger players; "we" are short these stocks for a reason.
Let's bring back up that home builder chart that shows the effect of the housing boom on the industry, and the consequences (thus far) of the bust (click the graph to enlarge it).
Now, we are talking about companies who rallied from 400% to over 1,400% in less than 5 years despite the fact that they averaged less than 10% per year nearly every year before the BOOM. Here comes the bust, now beleaguered with problems, they are falling down but are much richer than their historical pricing calls for. Book valuations are useless in this rapidly falling market, and PE valuation is difficult without the E. Laden with debt, lawsuits, loan covenant defaults, bad mortgages on their books, and all of the other stuff, they rally hard on a call of a near term market bottom.
Let's take a look at where the futures market calls the bottom. Oh yeah, 4 years ahead with some of the most home builder laden markets (Vegas, Florida, CA) forecasted to drop between 15% to 28%. Most of the very few who trade this market tend to know a little something about the local areas (I know I do), and there is no near term bottom to the housing market in site. None! Picture Lennar making a "biggest loss in history" press release (like the one they made last week that caused their stock to jump in price) for SIXTEEN quarters in a row!!! That's right. They paid near top dollar for the properties in the bubble, and the prices look to trend downward significantly and for a long time. Even if we were to assume that all of these experienced real estate guys are wrong in the financial markets, we still have to deal with the fact that the builders are STILL building. They have to monetize that land even at a loss. This makes the aggregate losses that much worse. They they have to compete with each other, slashing inventory prices (hence value) by 50% in some cases. They still need to compete with foreclosure auctions. They need to compete with bank REOs. They need to compete with existing home sales, which is the vast majority of home sales.
Take a look at this. 1.2% of a few dozen million is a lot for the average LEN, CTX, or BZH to contend with. All of these problems, and many of these companies have not returned from their artificially inflated 1,000% plus, bubble invoked runs. Now that rates have been cut, and EVERY single major risky asset class has rallied (I mean all of them, from emerging markets to stocks to commodities), the home builders have been pulled into this sucker's bet as well. The only difference is, these guys build and sell real assets. Illiquid, hard to move, highly overvalued and currently out of favor real assets. The bubble game, after being popped, will be very hard for these guys and the long speculators trying to bottom fish in a bottomless pit to play.