Friday, September 28, 2007

Are We There Yet for Homebuilders - Part III ?

New home sales were reported yesterday by the government. Aside from the obvious problems with this measure that I discussed here:

It may be a useful exercise to see when this and other metrics bottomed relative to the stock prices of the Homebuilders during previous cycles. New home sales bottomed in January 1991, at a seasonally adjusted rate of 401,000. Months supply of new homes peaked at 9.4 months also in January 1991. This data was not reported until March 4, 1991, due to the lag time in collecting it. Also, at the time that the January 1991 data was released, an investor would not have known it was the bottom until several more months of data had been released. The chart below is a monthly chart of new home sales from 1963 to August 2007.

Lennar bottomed out in Oct 1990, and had risen significantly by March 1991. Other Homebuilder stocks have shown similar patterns of recovery.

The bottom line here is that if you wait until these metrics to bottom as your buy signal, you missed significant upside.

1 comment:

Jay Walker said...

OK, lets assume that the bottom isn't there yet.

Say that the actual bottom of the housing market is when foreclosure pressue is the greatest - perhaps about six to eight months after the peak of the teaser re-sets.

This, I understand, occurs about April 2008, putting the bottom of the housing market probably about October-December 2008.

If we assume that the forward look is about the same as it is in 1990/91, about four or five months, then the bottom for the housing builder stocks should be about the early summer 2008.

I realize this likely isn't a perfect correlation (all housing versus new housing), but probably if you buy sometime slightly after the maximum re-set period wouldn't be too bad of an idea.

You might have to hold your stomach as a further 25% loss might be possible (or you might have missed the first 25% bounce), but I'd think that'd you'd be timed pretty close to the bottom.

Jay Walker
The Confused Capitalist