Homebuilder Stocks Still Not A Good Buy

| August 11, 2008

Stay away from the homebuilder stocks.  Mark my words.  Now’s not the time to go bottom fishing in this beat up industry.  Despite a rally in the S&P Homebuilding Index (XHB), now’s not the time to buy.

Why am I so convinced?

Because 62% of homeowners are crazy.  Yes, Crazy.

Let me explain myself.  Just a few days ago I came across a really revealing article.  It was published in the Wall Street Journal . . . and they’re a reputable publisher – right?

I couldn’t believe what I read.

I’m sure you’ve all been watching home values fall.  If you’re like me you’ve seen the destruction in your own neighborhood.  Conservatively, I’m estimating home values in my neighborhood are down 20% to 25%.  I can’t tell you how many for sale signs are up.  Some signs even post in bright red lettering “Bank Owned.”  It’s almost like the realtors are proud of it.

“We’ve got a nice three bedroom two bath home.  It has a beautiful pool, air conditioning, dual pane windows, a two car garage.  Oh, and don’t forget its bank owned.”

I often wonder what people are thinking.  Apparently real estate agents aren’t the only ones who are a little crazy.

So back to that article.

It was a short piece discussing a recent study conducted by a big online real estate website.  They surveyed several thousand homeowners, and one of the questions was about the value of their own home.

Now keep in mind this survey was conducted in the last few months.

The question was simple . . . something along the lines of:  In the last year did your home

a) go up in value
b) go down in value
c) or stay the same.

Now this is an easy one to figure out . . . Right?

Not so fast.  Foreclosures are at a record high.  Bank owned real estate is skyrocketing.  Estimates on sub-prime mortgage defaults are upwards of 20%.  And mortgage backed securities are now valued at $0.22 on the dollar.

So back to the survey . . .

How did the majority of homeowners respond?

An amazing 62% of homeowners said their house had gone up in value. Yes, you read that right.  62% of homeowners thought their home values actually increased.

Like the Twilight Zone we’ve entered an alternative reality.

The same website who conducted the survey noted more than 77% of homes in the US had lost some value in the last year.  So what’s the take-away from this news?

Despite all the bad news, homeowners are turning a blind eye.  It means more and more homeowners have unrealistic expectations of value . . . and anyone trying to sell a home is going to price it incorrectly.

With more and more homes priced wrong, we’re going to see more homes on the market.  And those homes for sale are going to take longer to sell.

This is horrible news for everyone in the real estate industry, especially the banks and homebuilders.  As more and more homeowners realize just how upside-down they are, banks are going to see more borrowers default.  This means more bank-owned homes and foreclosures.

New homeowners are the most susceptible.  They have the least amount of equity to fall back on.  This is horrible for the builders.  As a potential buyer why would you buy new when you can buy used at a discount?

I’ve seen it first-hand.  In one new neighborhood I visited this weekend, a homeowner has put their house up for sale.  It was built less than 2 years ago, and they’re asking significantly less than what a new home right up the street costs.  Who do you think is going to sell their house first?  The homeowner with the reduced price, or the homebuilder?

See the problem?  The homebuilders are not even close to the end of this rough road.  I’d avoid this industry like the plague.  You might consider bottom fishing sometime in the next few months.  But for now I’d stay far, far away.

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Category: Real Estate

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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