Friday, September 26, 2008

How Imminent Turnaround in Real Estate Markets?

Homebuilder stocks, historically, tend to rebound six – 12 months before the real estate market itself. True to form, shares in DR Horton (DHI-$13.92), KB Home (KBH-$21.16), and Toll Brothers (TOL-$25.88) are up more than 40 percent, 46 percent, and 50 percent from their mid-July lows, as investors speculate that a rebound in housing activity is just around the corner.

Evidence continues to mount, however, that it still may be premature to bet now on a real estate rebound: sales of new U.S. single-family homes in August fell sequently 11.5% from July 460,000 new homes, its lowest point in more than 17 years,
according to a government report released on Thursday.

In addition,
new claims for jobless benefits jumped for the week ending September 20 by 32,000 to a seasonally adjusted 493,000, their highest level in seven years. Erosion in consumer purchasing power suggests that less folks have the ability and means to step up and purchase homes – irrespective of prevailing incentives and discounts currently being offered by the homebuilders.

The fishermen know that the sea is dangerous and the storm terrible, but they have never found these dangers sufficient reason for remaining ashore. ~ Dutch Post-Impressionist painter Vincent van Gogh (1853-1890)

In my opinion, aggressive discounting by home builders to convert window-shoppers into buyers and steeper drops in the value of unsold homes/lots could result in further margin compression and asset writedowns, respectively, delaying the expected fundamental turnaround beyond 3Q:09. Ergo, the realized gains in their stock prices since mid-summer could see reversal of fortunes. Then again, the fisherman knows he won’t catch a 500-lb blue fin remaining ashore.

Original new stories can also be found at BNET Energy & BNET Insight: 10-Q Detective.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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