I will not short DHI, or any home builder stocks. The reason is that the current market price (Market cap is $7.1B)is very close to their book value. for DHI, book is about $6 billion with Tangible book about $5.3 billion. So P/TB is only 1.3x. Now most of their book is in inventory, which they made about 27% gross margin in the latest quarter, and 16% operating margin. So they could reduce price/give incentives to move inventory and still make money. About 13% of their tangible boook is long-term investment, which could be option to buy land. While some of that might be written off, probably not all of it.

So for DHI drops to 17, it’ll get close to its tangible book. It’ll be more likely worth more than that over the long run. That’s why it’ll attract a value buyer, not because it sells at 5x earnings – earnings can disappear fast. I personally will likely be a buyer if it’s sold below tangible book.

Personally, I own some long-term puts on CFC (country wide financial). It sells at 1.6x book (was 1.8x when I bought the put), and its balance sheet has expanded rapidly in the last several years. Because it has more financial leverage, higher loss on its mortgage portfolio will do real damage to its book, so I think that it’s a better bet. And I think tha t plenty of knowledgeable people commented on its lax lending practice — I think that these lenders have to retain some risk (usually the highest risk portion) before they sold their portfolio to investors.

They are bets indeed — DHI could very well drop below its tangible book, and CFC could very well stay high. But I think that the odds favors CFC on the short side.