“As if investors in home building stocks need more to worry about. They’ve already watched their shares get hit by the slump in home sales and the weakening economy.
Now add this concern to the list: Companies writing down their land values because they aren’t worth what they paid for them. It’s not a matter of if that could happen, but how serious and widespread those write-downs turn out to be and what they do to earnings…..
In recent weeks, the decline has spurred some talk on Wall Street over whether it is time to start buying home building shares, as the ratio closes on a level where it historically has bottomed. D.R. Horton, for instance, has a price-to-book ratio of 1.05.”
This last point in the article is one reason to be careful when shorting stocks. Some people might just decide that these home builders are a good buy now. One little rally gone wrong, and what happens to your short position?
Land write-downs are a double whammy for these builders. What happened to the home builders during the last national bust, or did we ever have one? Perhaps this is the first time that national builders are facing 50% share price drops?
If I remember well, during the 1990 downturn the national builders weren’t as large. The market was much more fragmented with countless private companies. There’s been a lot of consolidation in the home buidling/RE industry but there’s still plenty more to be done.
In 1990 S&Ls made much of the development loans. The industry crashed and they had to be bailed out a taxpayers expense. Even S&Ls were a fragmented bunch with hundreds of them making loans to builders.
Lenders did not securitize their mortgage portfolios and shift risk to the extend they do now. And there was little activity in the exotic loan business. The subprime lenders are now big business and represent a big portion of lending.
Home building used to be a local business. I beleive that this is the first decade of truly national home building.
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