Housing Rout Turning into Bloodbath
Our crystal ball did not see the rout in the market for subprime paper becoming this acute. But we ran a series of pieces on the homebuilding sector late last year and earlier this year that deserve a follow-up.
Maggie Whelan and Ivy Zelman enjoy higher profiles across the Street, but my favorite homebuilding analyst might be more clairvoyant:
In early December he opined:
There is an old saying with the bulls, "don't try to catch a falling knife". I think the opposite is true too "don't stand in front of a bullet. At this juncture I would wait for the momentum to start to fade and then I would look to short a basket of the builders keeping my stops fairly tight.
I do not expect a strong turn in the spring. About $1 trillion in adjustable rate mortgages are due to reset next year and I think that while some will be refinanced, some of the riskier credit risks will not be able to do so. This could lead to higher inventories of houses on the market and lower prices. This scenario would be very bad for the homebuilders, particularly if the economy is slowing or we are heading into a recession. Here are some sample price targets for a few of the homebuilding stocks if a spring rebound failed to materialize. BZH ($48.19), target: $37; CTX ($57.84), target: $43; DHI ($27.53) target: $22; TOL ($33.01), target: $25.
Great Call
If we were playing golf it might merit a predictable “you da man”. But for now Wayne Nef will have to settle for being the Tiger Woods of homebuilding analysts.
He recently relocated his independent research outfit to bucolic New England, and we will check in with him next week in his new digs far from the maddening crowds.
For now you will have to settle from more commentary from the media whores at Pimco:
The worst is yet to come for the U.S. housing market.
The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, according to the National Association of Realtors.
``It’s a blood bath,’’ said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds. ``We’re talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.’’
Confidence among U.S. homebuilders fell in June to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index released this week. Housing starts declined in May for the first time in four months, the Commerce Department reported yesterday. New-home sales will decline 33 percent from 2005’s peak to the end of this year, according to the Realtors’ group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession.
The news is so dire that we almost want to start nibbling at these stocks across the board. But don’t try bottom fishing the builders until Wayne weighs in next week.
Mortgage Rate Rise Pushes U.S. Housing, Economy to “Blood Bath”
Bloomberg
Wayne Nef’s
Sniper Research
Sign(s) of The Times
1440 Wall Street
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The content contained represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No position in securities mentioned
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