For accounting purpose, you can only value your inventory at cost (land, fees, material and labor). That’s why they realize a gross profit when they sell. In fact, if there is convincing reason that says your inventory is worth less than cost, then you take a charge, called “inventory write off”. So depending on the quality of their inventory, i.e. how many are built on spec, how many cancellation, etc, price needs to go down quite a bit for them to take a charge on inventory.
Yes, it’s possible that these homebuilders lose money for a while, and the psychology takes the market price way below book value, and the book may decline too if they take charges/lose money. From an investment point of view, that’s a time to buy. To bet that it’ll happen within a certain time frame is a bit risky (as what buying a put is about) in my mind. These home builders stock have come down a lot already.
I won’t short GM either (in fact, I bought GM at around 19 in December last year). Charlie Munger once commented on that one shouldn’t short a stock of 15B market cap with 200B in revenue when someone asked him about GM. Its problems are deep, but well known. Things can go wrong, but can go right as well. If it can somehow address its legacy cost issue (i.e. health care for retirees, pension actually isn’t too bad ’cause it has a well funded pension), then the stock should be worth more than today’s price. It has a high short ratio for a while, so many hedge funds got burned on the short side.
CFC is a different story. Even though the CEO may recognize the risk, individual loan officers may still be motivated to generate a loan and get a bonus/commission. Wall Street’s pressure on them to is continue to grow. It has come down 15% from its peak, while DHI has dropped about 45%.
Again, anyone buying options should be ready to lose it all, even as you do all the calculations trying to make money.
