Stay Away From Homebuilders

November 21, 2007

On October 9, I wrote an entry to tell people to stay away from airline stocks. Since then, both China Southern Airlines and China Eastern Airlines (CEA) and China Southern Airlines (ZNH) are down 30%. Other airline stocks mentioned by tao2death like US Airways Group (LCC), UAL Corporation (UAUA), and AMR Corporation (AMR) are down between 20-33% since that time. Of course, a lot of stocks are down because of the declining market, but oil is closer to $100/barrel since then and there have been no legitimate talks of a UAL/Delta merger that would help the entire airline industry.

My next advice would be to stay away from homebuilders. We all have been aware of the subprime fallout, credit crunch, and the slowdown in the housing market. Analyst aren’t entirely sure of when the housing market will stabilize and bottom out and many have been forecasting middle to late 2009. A CNN Money article states that some homebuilders could end up bankrupt and while homebuilding was reaching 2 million homes/year in 2005. That homebuilding rate is poised to be about 1 million homes/year in 2008. That does not bode well for US homebuilders like Hovanian (HOV), Pulte Homes (PHM), D.R. Hortan (DHI), and Beazer Homes (BZH). Beazer Homes also suspended their dividends earlier this month and laid off 25% of its workforce. Even historically stronger housing stocks like KB Homes (KBH) and Lennar (LEN), which sports over 4% dividends, are down 62% and 82% respectfully from their yearly highs.

When the 3th largest home builder by market value, Pulte Homes, hit $15/share (57% drop from their yearly high) all throughout October, I was contemplating that it might be a chance to pick up some shares of this discounted home builders. Since then Pulte has managed to drop down to today’s current price of $9.50.

Pulte CFO Roger Cregg is selling over 150,000 shares of the companies stock at less than $12/share and if you own housing stocks, maybe you should too. If you’re fortunate not to have any holding in this sector, make sure to stay on the sideline for the time being. Houses are losing value all across the country and homebuilders are piling on huge incentives for people to buy houses. Buyers are spooked to buy a house, mortgages will be harder to obtain, and people seem to be more willing to rent in the immediate future. To me, it looks like a bleak time where nobody knows where the bottom is and for some of these homebuilders, there might never be a recovery for them.