Should you buy stock in homebuilders?

Posted by: Dean Foust on March 15, 2006

Jan Hatzius at Goldman Sachs is one of my favorite economists on Wall Street (as you can tell from earlier postings). In a new report, Hatzius tries to gander a guess at predicting the future for homebuilders. Best guess? That we’ll see a peak-to-trough drop in housing starts by between 15% to 30% (!). Hatzius figured this by comparing housing starts to the growth rate in the housing stock and then comparing it all to the number of households.

Why should you care? Two reasons. For one, Hatzius believes that homebuilding – which has been a major contributor to economic growth (some estimates have it that housing contributed just about all the net employment growth since the turn of the century) – is about to become a substantial drag on GDP growth.

Hatzius estimates that homebuilding will subtract about 0.75% from real GDP growth by 2007, on top of a similar drag from reduced mortgage equity withdrawals. So subtract about 1.5 points from GDP growth. Which suggests the Federal Reserve will have to stop raising rates, and soon. Either that or they’re going to be cutting rates by this time next year.

The other reason, which Hatzius doesn’t get into, but I will: I think this all suggests that anyone trying to buy into homebuilding stocks should…

... think twice. I know that the major builders believe that if there’s a slowdown, they’ll use their financial muscle to steal market share from weaker builders. And at first glance, builder stocks do look cheap: Lennar, for instance, only trades at about seven – seven! – times last year’s earnings. But a 15% to 30% drop in activity is a pretty serious headwind for any company to overcome.

Reader Comments

Drew

March 17, 2006 9:54 AM

You've got my vote. Homebuilders have always been cyclical stocks. They are all out there arguing, basically, that "it's different this time." Nonsense.

The thing that really sticks in my craw is the whole "we'll steal market share in a downturn" argument. In a housing downturn, there is no market. That is the problem. If I could wipe out the comptetion, in, say, the cheeseburger market, great. What then happens if no one is willing or able to buy a cheeseburger? Do you want to own my stock? Hell no, because if I can only sell a few burgers my profit will be reduced, probably drastically.

Dogcrap Green

June 25, 2006 12:32 PM

If there was no telecom bubble that evyone was saying wasn't there. Therr would be no talk of a housing bubble.

Look at who the biggest housing bubble clown is... Bank of America!!! Remember Andrew Hammerling of Bank of America? was the clown telling everyone to buy Worldcom, buy Level 3, buy Cisco because in 2001 the bottom was here.

People over try not to make the same mistake twice.

So we now have our next bubble... Where are the clowns? By definnation they are the majority. Look around you. No one ever seems to argue with the bubble heads anymore. You have the people recommending to buy home builders out number by at least 10 to 1.

You are the new clowns othe bock. And once again Bank of America is your leader.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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