Quehubo,
I think homebuilders are good candidates for shorting for a couple of reasons. Like Dabum, I'm trying to keep it simple here, down to concepts I can understand so that I can try to time my sell and btc transactions to capture most of the gain available to a wee little tadpole such as I.
My reasoning is roughly, the nation is in recession and coming off a couple of bubbles, the tech bubble but also a general stock bubble, fueled many times but most recently by the Y2K liquidity infusion and now the 9/11 liquidity infusion. The first infusion sent the stock market over the top and we were in collapse from that mistake when 9/11 hit. Stocks have now fallen sharply, but I'm not sure we've seen the bottom. Folks have gotten hammered in their 401(K)s, their salaries, finally their jobs (layoffs)--what's left to get hammered? Their real estate. What in real estate is likely to get hammered the most? High end real estate, since it has the farthest to fall and since it is by its nature discretionary (you need approximately 250 sq. feet per person to live, that's a single wide for most "living groups"--anything beyond that is discretionary; some people might say anything beyond a trailer park is discretionary).
So, what's my thesis? Supply and demand. As I noted on the TOL board, real estate is a little like gold: with gold every ounce that's ever been mined is out there depressing the market, it never gets used up; for a rare and precious commodity it has trouble becoming "rare". The same with modern high end housing. Every 4,000+ sq foot modern house (1975 - present) that has ever been built is still out there, along with all the developments and spec houses put in the pipeline during those fabulous 90's. So supply is fat.
What about demand? Well, uncertainty, anxiety, job cuts, stress, 401K collapses--tons of reasons for 38 year old Mr. Go-Go to think, well, I'll just stay put with my family in my 2400 sq foot house, or in my condo, or in my rental apartment until things shake out. Remember that the true living costs in an upscale neighborhood go way beyond the mortgage and taxes: you can't drive a 12 year old Dodge beater, you can't have the neighbors over for Old El Paso Taco Dinner and Bud Lites, you can't have your kids waiting for the school bus while all the others get driven to school in Mercedes, you can't go camping in a state park for a 4 day vacation while the others are at Destination Resorts. Lots of hidden costs when you be movin' on up.
Demand is falling on an illiquid commodity, supply is steady and, for at least a while, still rising as projects are finished. So it's simplicity itself. Prices must fall; homeowners will get scalded, builders will get stuck with 4,000+ sq foot homes to sell in Kirkland, Bellevue, Issaquah or Silicon Valley or West Chester county and their earnings will take a hit. Their p/e ratios, which I suppose to be reasonable will remain the same, which means their stock prices will fall.
I think this is the scenario even if the economy stabilizes or starts to recover, btw. The low interest rates are the only thing still propping up new home sales and existing home sales, and the prices at the high end are falling anyway.
I've been shorting this sector with success since August, and have had positions in TOL HOV RYL AHMH WLT. I'm currently short TOL (2 positions) HOV and WLT.
Kb |
