Slump in Housing Market Continues

In our posting dated Sept 26 we said we failed to understand who were still buying stocks of the nation's largest home builders like KB Home (KBH), Lennar (LEN), Pulte Homes (PHM), Toll Brothers (TOL), Beazer Homes (BZH) and Hovnanian (HOV) because an ugly sky was looming large over the housing market.

All those companies have been lowering guidance on home sales in recent weeks, reporting lower prices and excess supply of homes on the markets. Today morning luxury home builder Toll Brothers Inc. said home-building revenue fell by 10% and signed contracts were down by 55% compared with a year ago. The company, which released its quarterly outlook ahead of earnings, also said it will incur a hefty charge against profits as it pares down the number of lots it controls.
Also, Beazer Homes USA Inc. reported a 44% decline in profit as higher revenue was offset by squeezed margins. The company said there was "significant" discounting in most markets. New orders for Beazer fell by 58% to 2,064 homes from 4,937 last year, as the housing market continued to slow. It has cut 1,000 jobs, or 25% of its workforce.

Back in September we were surprised because at that time these stocks had managed to register some small but positive gain. Surely some people out there were getting greedy and expecting these stocks to have a similar run they enjoyed over the last few years. Some part of the media was propagating a dream that the housing sector would come back faster and quicker than expected.

We told you to just remember faces and names of those analysts and 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.

We repeat ... 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. True to our prediction, that process has started already.