For the first few months of 2008, it appeared that homebuilding stocks would generally trudge toward higher ground. During the past month or so, however, the group has retrenched. While Pulte (NYSE:PHM) and Toll Brothers (NYSE:TOL) still linger around their end-of-2007 prices, rivals like Centex (NYSE:CTX), Beazer (NYSE:BZH), Lennar (NYSE:LEN), and Ryland (NYSE:RYL) are all in negative territory for the year to date.
Where do we go from here? Are we nearing another inflection point that will once again move the builders' share prices higher? If you read "It's Only Going to Get Worse," an article in the latest issue of The Weekly Standard by Lawrence B. Lindsey, a Harvard-trained economist, presidential economic advisor, and former Federal Reserve governor, you'll likely leave the builders' stocks alone.
Lindsey cites mostly quantitative reasons for his gloomy outlook. If you build a million houses each year in the U.S. (as we're doing), tear down half a million, and form 850,000 households, you'll only whittle away the excess inventory by about 350,000 units. In addition, about 18.5 million of our 129 million total units are empty -- the highest vacancy rate since the data was first tracked about a half-century ago. In short, it could take eons to get our housing inventory low enough to halt falling prices.
Lindsey discusses a couple of provisions to help housing currently rattling around in Congress. One, in the form of "net loss carryback" tax provisions, would help the builders. The other, in the House, would help roughly 500,000 homebuyers struggling to meet their payments.
But with several times that number destined for foreclosure, how much good would that bill truly do? And as Lindsey also asks somewhat rhetorically, with builders still tossing up too many units, would a tax bill benefiting them be in everyone else's best interest?
It's even harder to argue for a swift housing rebound when you factor in a phenomenon that Lindsey doesn't mention: the effects of skyrocketing energy prices. Housing and energy are often considered unrelated phenomena, but they're not. Housing needs confident consumers to spark a rebound, and potential buyers who get gouged at the gas pump are seldom confident.
For these and other reasons, I'd suggest that my Foolish friends keep the homebuilders' stocks at an awfully long arm's length for now.
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