Homebuilder's pain to continue in the short term
The homebuilders and the overall mortgage industry is about to go through another round of pain. The February new home sale basically validates the notion the housing market growth is over and bottom has not been reached. To those of us who follows the real estate market, this is hardly news. The decline which started in late 2005 continues to show signs of further correction.
New Homes Sales: Similar to how people were carelessly investing in any company with a dotcom in their name during the late 1990s, people were buying up properties hoping to sell it quickly for a handsome profit. For five years (2000-2005), the market was great. One would buy a new home and before it is built, the investor would turn around sell it for a huge profit. The low rates and flexible payment options resulted in an environment of complacency. Once the interest rate and price reached the point of insanity, buyers all of the sudden disappeared.
Now that the speculators are no longer buying these homes, the market should now be entering a normalcy phase. Meanwhile, we do see some opportunities in KB Homes (KBH), Lennar (LEN) and DR. Horton (DHI). These stocks are now trading at or near their 52 week lows. While this sector is currently out of favor, we believed it is merely temporary. In our view, the Feds will likely cut short term interest rate the second half of this year, which should have an effect on the long term interest rate. Our forecast is long term interest rate will decline, which should theoretically help the housing market.
In the mean time, if you are a real estate investor or just need a home to live in, this would be a great time to consider buying. The foreclosure rates should continue to climb. For real estate professionals, there should be lots of bargains. Home prices will likely continue decline in most markets, creating a great opportunity for buyers.
On a side note, the recent subprime woes will unfortunately force more American out of their homes. Therefore, we remain reluctant to invest in any of any financials that is highly exposed to the subprime sector.
