Ted Allrich is the founder of The Online Investor and author of Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he offers advice to investors who are just getting started.
Financial institutions continue to struggle with subprime mortgages, but the homebuilders have their own battle: tight credit and wary buyers. While builders target different markets from entry level to luxury in order to define their niche, when no one's buying, it doesn't matter. Sales aren't happening across the housing spectrum.
According to a recent survey done by Bank of America, real estate agents are all saying the same thing, no matter what part of the country they're showing houses: traffic is lower than expected, and buyers are waiting, thinking the bottom isn't here. There is anecdotal evidence that things are even worse than that.
Furthermore, home builders are estimated to be losing money on every new home they sell. The incentives are that generous. They are doing anything to move inventory. In some cases the losses are high. So even though sales may look good for a builder, the losses may only grow. That means hits to equity which means lower stock prices are most likely still to come.
To compound their problems further, the builders have to either sell their undeveloped properties and/or write their values down to current levels. Either way, it's another small bomb exploding in the capital base. Finally, options paid for land to develop will most likely be written off or sold for a loss because very little new building is going to take place until inventories of current houses are much lower.
Homebuilders have a rough stretch ahead. The worst is not over. There will be more losses. Equity will shrink on most if not all builders. Until banks and other lenders loosen their credit criteria and buyers believe the bottom has been found, builders will continue to struggle. If you're going to invest in this area, find the stocks with the most equity, the least amount of land, and the fewest houses for sale. They'll be the ones that come out of this first and best.
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Reader Comments (Page 1 of 1)
12-08-2007 @ 12:58PM
agoodbuilder said...
There has been no one at the helm of this country for 7 years, hence the housing dilemma.
George, Dick, Ben, where the hell are you? Counting your Yuan?
12-08-2007 @ 2:17PM
carl22grant said...
You are deeply mistaken the government did NOt cause the 'housing dilemma'. The cause of the 'housing crisis' is, and historically, has been greedy and morally corrupt 1) land and housing developers, 2) banks and lending institutions, and finally 3) real estate agents. Essentially, 1, 2, and 3 worked in collusion to over-build houses and communities, 'hype' the housing market, convince 'unqualified buyers' to buy over-priced property, and then promoted and issued sub-prime loans. Don't blame the government for greedy people (i.e., developers, lenders, and agents) who ripped-over the middle and lower classes.
12-08-2007 @ 2:29PM
agoodbuilder said...
Good points all, Carl. However, monetary policy made cheap and easy credit available. Just like parenting Carl, sometimes its best to say no, the analagy being telling subprime borrowers NO! (clean up their act THEN apply for a mortgage).
Our current Administration is just not taking care of, and looking out for what is best and good for our citizens and the longterm financial well being of our great country. Dont you agree?
My point again is if cheap money is made available and borrowing criteria is lessened, dont you think any society would behave the same way?
Carl, WE NEED LEADERSHIP IN THIS COUNTRY. GOOD, HONEST, FOR THE AMERICAN PEOPLE LEADERSHIP. SHIT STARTS AT THE TOP AND RUNS DOWNHILL CARL
12-08-2007 @ 10:00PM
carl22grant said...
Builder,
Rather than comment to you 2nd statement (i.e., good points, etc), I will refer you to "The mortgage 'bail-out': Big government at its worst" and specifically to the comments of K Gasner and others.
While emotionally we can all point the finger at someone (including 'point' at the government), we really do need to focus on the greedy few.
12-09-2007 @ 2:18PM
mtaricani said...
The rush to build (and buy) the "bigger" house contibuted. Home size has exploded over the years....3 and 4 car garages....5-6 bedrooms....4000/6000 square feet. Now I believe people will start to get the "home envy" under control and buy smaller. Therefore homes will sit based on their size and expense. Common sense will revive the housing market.
Mike
http://mtaricani.blogspot.com
12-24-2007 @ 9:52AM
Jim said...
I am a new Real Estate Agent, and maybe my thoughts on this may sound crazy or ill informed but:
A lot of the articles on the real estate business, includes mortage company, builders, and the agents. Why cann't we all get together and do the fixing together.
Already it seems that mortage companies, real estate offices, and other parts of the selling and buying process has joined together. And from what I have read, heard, and seen it has been a good combination that has been a great assistance for the consumers.
But I do not know what holds agents and builders apart. I have been giving this alot of thought but as a agent I am only looking at one side of the picture. I do have ideas I believe would work to the same point as the above combination, that it would benefit consumers but it would be a greater partnership between the two fields. I also believe it could move inventory, and save builders from providing more history making offers to agents and buyers.