I have been watching the home builders actually because of their very low price to sales ratios. Toll Bros in particular. Most of their debt ratios also still look good. Since I expect a general market decline, I have stayed clear. I do not think that sector can escape what is developing clearly. However, strictly on a valuation basis, they are good values right here.
I have been talking about the Hedge Funds, and found the following article on another blog. This is a quote regarding Hedge activity in the housing sector. Remember, these funds have been major accelerators of the bubble, and also larger players in creating the yield curve inversion last year. If this indicates they are running to the exits, look out!
“One example Rajan used was the housing sector. The great thing about credit derivatives is that they allow the banks to buy protection for the possibility that borrowers will default on loans. Since last September the market for a particular kind of credit derivative, technically described as ‘credit default swaps on subprime ARM pools,’ has taken off.”
“According to Mark Whitehouse of the Wall Street Journal, such derivatives doubled in price between mid-September and December of 2005. So who is doing the buying? According to Whitehouse, the main players are hedge funds that specialize in debt trading.”
“‘The new credit-default swap ‘allows us to express a bearish opinion’ on the housing market, says Steve Persky, managing partner at a Los Angeles hedge fund. ‘A lot of people debate whether the housing market is overpriced, but, for sure, the credit quality of home borrowers has deteriorated.’”
Also, a comment on interest rates. The Fed does not determine mortgage rates. They control short term rates between banks etc.. Mortgage rates are determined in the free market and mostly correlate with the 10 year note. Now that the yield curve is steepening, look for higher rates in the near term.
We have had a big selloff in the 10 year recently ( higher rates ). Just because the fed stops raising short term rates, that is no lock that the 10 year stops moving at the same time, or in sync with them.
These hedge funds unwinding their longs is in my opinion what has caused the selloff, and the above seems to support that opinion.
Time will tell – Buy or sell if you wish, but do your research and do not get caught up in all the bs!
