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Inside the House of Blues

Posted by: Chris Palmeri on August 18, 2008


Citigroup analyst Josh Levin picked a gutsy time to initiate coverage of home builder stocks. It’s telling too that he called his first report House of Blues.

Levin paints a still gloomy picture of the industry. He doesn’t think the recently passed housing bill will do much to stimulate new home sales despite tax credits for first time home buyers. Levin sees home prices falling another 10-15% in the next year. He doesn’t think prices for existing homes will begin to appreciate again until 2011.

Sales of new homes should bottom out this year at around 550,000 per year. Just a couple years ago the industry was selling more than twice that.

Still Levin says it may be time to purchase two builders that look like they will weather this storm. He says Pulte Home’s management has been taking steps to strengthen the company’s balance sheet. And luxury home builder Toll Brothers has burnished its finances by reaching out to an Abu Dhabi investment fund for cash. One builder told Levin: “Gas prices are killing us.” Toll Brothers found a way to get some of those petrodollars back.

Reader Comments


August 19, 2008 2:37 PM

Levin's prediction is in the ball-park but it is probably still a little over optimistic. Predicting appreciation in 2011 is still early. In past real estate speculation-gone-bust, the recovery time was about 5 years. But the current real estate bust is unique. This bust is the mother-of-all bust because of the magnitude of the feeding frenzy, massive liquidity crisis, massive fraud, high crude prices, collapse of major financial banks, and high unemployment in all manufacturing-industries. Even the service sectors has not been immune. This is more than three concurrent storms coming together; it's more akin to 4 or 5 concurrent storms. The severity of this super-perfect storm is so great that even Treasury and Fed Reserves have been unable to stem the downward spiral of the US economy. Their impotency is evident in US economy and elsewhere. To wit: The collapse of BearnStearn, IndyMac, Countrywide and regional banks in Nevada and Arizona; Citigroup, MerrillLynch, LehmanBros, WaMu, Wachovia, and BoA are all in weaken conditions; US auto industries are mired in red-ink; many real estate builders have gone bankrupt or are now so fragile that they may not survive even intensive-care-unit; insurance companies similar to Ambac, MBI, and SCA that insured the mortgage IOUs are on the verge of being TKO. Globally, Europe, India and even Japan is feeling the US Depression as demonstrated by collapse of their real estate prices, faltering banks, rising unemployment and inflation. For months, ominous clouds have descended on the world economy. All Chamans have been instructed to "talk-up" the economy. But neither dance of the Chaman nor chant of Medicine Man has been about to change the script written in stone. All the major "chess pieces" are in place to repeat the Great '29 Depression. The only piece not yet on the board is the Mars, the god of war.

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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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