iBooyah.com: Homebuilders – Is this the bottom?
Today, we received further evidence of a real estate downturn. Headlines such as “Existing Home Sales Off 4.1 Pct. in July” have been all over the news. This is hardly news though; one does not have to be a real estate investor to notice the changing market environment. The slow down has been going on for several months now. First, it was the new homes having hard time; we are now starting to see the rippling effects in existing homes.
All the homebuilder stocks are down about 40% from their highs. Companies such as DR. Horton (DHI), Toll Brothers (TOL) and KB Homes (KBH) are at their 52 week lows or close to it. All have reported declining sales and increased cancellation in the past several quarters. While it is impossible to call the bottom, one can reasonably assume these stocks have now priced in the expected downturn. Is this the right time to start buying these stocks?
The answer to this question depends on your situation. If you are looking to make quick cash, these stocks are probably not the best place to put your money in the short term. In my view, the Feds are not yet done with their tightening. The recent pause is just that, a pause. They are taking a breather and waiting for their previous hikes to come to fruition. An increase of .50 basis points in the next 6 months is highly possible.
While the economy has cooled somewhat, inflationary risk remains. Look at the cost of fuel as our economy is all connected to crude and gasoline prices. For instance, the company that delivers your vegetables to the supermarket has to increase their delivery rates to cover the rising cost of fuel. In turn, the supermarket then needs to raise its prices to cover the rising delivery fees. In the end, the consumer is left with the actual bill. Furthermore, wage increases have been lagging. Most companies average pay raise these days are around 4%. After taxes is taken out, you are really only looking at about 2.5%. This is if you are lucky! Meanwhile, the cost of fuel has gone from $2.75 to $3.05 per gallon. That is almost 9% increase. You don’t have to be a genius to figure out mathematically, things just doesn’t add up.
It is my opinion these stocks still has additional room to fall further in the next three months as buyers will be less incline to jump back into the market. TOL is will probably be in the low 20s, DHI will be around $18 and KBH will be $35 or less. I will revisit these stocks again in December of 2006.
