The Case for the Homebuilders

Last Thursday, September 3, I suggested that Daily
readers might want get some exposure to the homebuilders
through a position in Beazer Homes (NYSE:

Daily Profitreaders
have made money on the builders before. I recommended bottom-fishing
Hovnanian Enterprises (NYSE:
HOV) around $1.90 a share last year. But after the surprise +5% jump in
pending home sales for July, the upside story for the builders, and Beazer,
just became a lot more compelling.

Beazer is cheap, no doubt. Beazer carries a trailing P/E of
4 and a price-to-book ratio of .69. For investment purposes, the price to
book is the important metric because it takes into account the companies
assets, rather than just earnings.

The homebuilding business is a long-term business. It’s
important to take into account the value of their land holdings as well as
current sales. For the last couple of years, homebuilders have had the
opportunity to buy land on the cheap, and this is what sets them up for
future growth.

is reporting that builders have been buying land
at less than half the original price. According to this article, the 12
largest builders have added over 16,000 to their inventory over the last 6
months. And because labor and materials costs are lower, some development
projects that were suspended are being revived.

Toll Brothers (NYSE:TOL) has reportedly $340 million on new land in
the last 9 months.

Of course, renewed activity by the builders might make us
question the wisdom of adding to housing inventory in the current
environment. But at the same time, building now is an investment, one the
builders can make while costs are very likely at a low point.

Part ofthe process
of de-leveraging that the
U.S. economy has been going through for the last two years involves
re-pricing valuations to account for current demand. And by valuations, I
mean everything from assets, to wages, to consumer goods, to ticket prices
for sporting events. Everything.

The foreclosure/auction process is one of the primary ways
the housing market gets re-priced. People that bought houses at unsustainable
prices are being forced to sell at lower prices.

And while it’s clear that there is still a significant
amount of housing inventory on the market, and more “shadow” inventory coming
from potential foreclosures, the decline in housing prices has slowed
dramatically. And prices have reached levels that are attractive both to
potential homeowners and developers.

Increased activity from the homebuilders may also be helping banks unload bad commercial
loans and assets they’ve been forced to absorb.

I recently saw an estimate that banks were about two-thirds
of the way through writing off bad debt. If so, I expect some of the credit
can go to the builders, who are investing in their own, and the housing
market’s future.

As expected, the
stock market has extended the rally that started last week after new jobless
claims showed a surprise drop. Also, the trade deficit tightened a bit and
oil inventories fell.

The S&P 500 is up against resistance in the 1108-1115
range. After that, the next important point is 1130.

As always, let me know what you’re thinking: [email protected].

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