Quick Take: Housing Is Still Searching for a Bottom

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This morning we received earnings results from homebuilder Lennar (NYSE: LEN) and also received another indicator that housing isn't exactly showing signs of turning around yet.

It wasn't Lennar's earnings being down 78% that was the giveaway -- a poor showing was expected. It was the company's announcement that it was pulling its guidance for the rest of the year and that it wasn't seeing the typical increase in sales activity that normally comes in the spring. Fellow homebuilderKB Home (NYSE: KBH) had slightly better results when it reported last week but made similar comments about the strength of the market. MDC Holdings (NYSE: MDC), another homebuilder and Hidden Gems selection, reported a cancellation rate of 57% in the most recent quarter, but has perhaps the cleanest and most conservative balance sheet in the industry. The recently reported new home sales data for February showed new home sales were down, and these additional data points indicate the trend will continue.

This is why it continues to surprise me that there are folks predicting a bottom in housing. There are still a number of negative factors out there, including the fact that home prices are still too high in many urban markets for the average family, sub-prime teaser loans are drying up, lending standards are being affected, and there's increasing chatter of credit standards tightening. Foreclosures, on the other hand, are still rising, which points to additional inventory of homes coming on the market. That's not a recipe for a recovery, and it looks like there will be more pain before there's a recovery.

That housing is a mess isn't good news, but as an investor, it makes me curious. Things might not get better right away, but when things are the messiest is when they tend to be cheapest. If I can find a home builder that's reasonably valued on its 2003 or 2004 earnings and has a reasonable balance sheet, I think there's potential for a great long-term investment there. It just requires some patience while all the nastiness gets wrung out. I don't know if that's Lennar, KB Home, MDC Holdings, Pulte (NYSE: PHM), or another player yet, but I plan to find out.

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At the time of publication, NathanParmelee had no financial interest in any of the companies mentioned. He was ranked 34th out of 25,100 Motley Fool CAPS investors. The Motley Fool has an ironclad disclosure policy.