Housing Market Sinking More

Early this week the National Association of Realtors said median prices for existing homes fell in August for the first time in 11 years. The median sales price fell 1.7% year-over-year to $225,000 in August.

We fail to understand who are still buying stocks of the nation's largest home builders like KB Home (KBH), Lennar (LEN), Pulte Homes (PHM), Toll Brothers (TOL) and Hovnanian (HOV). All these companies have been lowering guidance on home sales in recent weeks, reporting lower prices and excess supply of homes on the markets. Today Lennar Corp. issued another profit warning, this time for its fiscal fourth quarter, saying the U.S. housing market has pulled back further and faster than anticipated.

All these stocks sank in similar fashion by 30-50% over the last few weeks. We are surprised because in last few sessions these stocks have received some small but positive gain. Surely some people out there are getting greedy and expecting these stocks to have a similar run they enjoyed over the last few years.

Some part of the media is propagating a dream that the housing sector would come back faster and quicker than expected. Just remember faces and names of these analysts. After one year find them out and grill them again with your questions. They would surely have lot of intelligently manipulated reasons why the dream propagated by them were not seen anywhere. But by that time you would loose money in these stocks and those analysts will not be responsible for that.

Make no bone about it -- the housing sector is in real trouble. Over the last few years people bought more than what they could afford by accepting (without thinking) those terms and conditions of interest-only loans or ARMs and now they are getting squeezed by increased interest rate. The single-digit PE ratios of those home-building companies look cheap but uncertainties in months ahead are clouding over them and it's better to avoid them until they sink further and find some other lower ground.