If you think about it, the current carnage in the housing markets has consisted of two stages. The first stage began a little more than a year ago and involved simply a cooling of overheated home prices in several key markets.
But that stage soon triggered a second stage defined by problems for subprime and some Alt-A borrowers; those declining prices prevented many with adjustable rate mortgages from refinancing their homes when their loans reset to higher levels. The question now, it seems to me, is whether the second stage will complete the downturn. Indeed, it's conceivable that a combination of high inventory levels across the nation and tightened lending standards -- potentially for all classes of borrowers -- could further increase the unsold home inventories, causing yet another down leg for housing.
That potential third stage hasn't really manifested itself yet, and it's not clear that it will. But one of the biggest builders, Texas-based D.R. Horton (NYSE:DHI) has reported its sales figures for its fiscal second quarter, and those figures contain absolutely nothing to indicate that housing has begun to rebound. In fact, the number of homes sold by the company during the period ending March 31 declined about 37%, while price reductions pushed the value of the homes sold 40% lower than a year ago. All the company's regions were affected by the declines, with California's 59% drop in volumes leading the parade.
In announcing the figures, Donald R. Horton, the chairman of the company that bears his name, said, "Market conditions for new home sales continue to be challenging in most of our markets as inventory levels of both new and existing homes remain high. Our cancellation rate is essentially unchanged from the prior quarter, but it remains above our historical range as we continue to see an increase in the use of sales incentives in many of our markets."
Of course, Horton is not alone. Major builders such as Centex (NYSE:CTX), KB Home (NYSE:KBH), and Hovnanian (NYSE:HOV) have recently reported significantly declining results.
In the face of housing's lingering woes, I'll repeat my admonition to those who might be inclined to try to call a bottom to the market and accordingly to invest in one or more of the homebuilders: If you can't justify a longer-than-normal investment time horizon, keep your wallet in your pocket. But if you're inclined to begin slowly building a position in the group, my favorites remain Toll Brothers (NYSE:TOL), whose position as the luxury building leader should insulate it from many of the nation's mortgage lending woes, and Centex, which I know to be an unusually well-managed company.
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Fool contributor David Lee Smith does own shares of Centex, but not the other companies mentioned. He welcomes your questions and comments. The Fool has a disclosure policy.
