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The resilience of the housing sector and home builders has been a sight to behold in recent years. Every call by journalists, Wall Street pundits and even Alan Greenspan about “irrational exuberance” was met by even higher home prices. The first signs of a slowdown in the housing boom came late last year and I am glad the bubble only deflated a little instead of going out with a bang. The last thing the US economy needs is a total crash in housing as two out of five private sector jobs created since 2001 have been in housing-related sectors.
I made a negative call on the entire home building sector in the September 2005 edition of InsideArbitrage and singled out St. Joe (JOE) as one of the most overvalued companies in the sector. The reason I made this negative call was on account of all the exotic mortgages that people were resorting to in order to buy a home. With the median price of a home rising above $700,000 in the San Francisco/San Mateo area, more than half the mortgages in the San Francisco bay area were interest only mortgages in 2005. My fear about a massive increase in mortgage defaults in the near future is finally becoming a fact. According to this story, the number of mortgage default notices hit their highest level in two years during the first quarter of 2006. The number of mortgage default notices increased 22.1% in San Francisco, 33.3% in Southern California and a whopping 62.1% in Napa when compared to last year.
St. Joe (JOE) has fallen steadily over the last six months and the home builder took a hard tumble on Tuesday when it reported a 76% decline in first quarter profits and also cut its full-year forecast. The following table lists all the home builder stocks that I have been following and the change in their stock prices since I made the negative call in September 2005.
| Company Name | Symbol | Price Then (8/31/2005) | Price Now (5/2/2006) | Change |
| Hovnanian Enterprises Inc | HOV | $60.15 | $36.39 | -39.50% |
| Toll Brothers Inc | TOL | $48.05 | $30.16 | -37.23% |
| St Joe Co | JOE | $75.21 | $51.50 | -31.52% |
| DR Horton Inc | DHI | $36.92 | $29.44 | -20.26% |
| KB Home | KBH | $74.20 | $59.50 | -19.81% |
| Consolidated-Tomoka Land Co | CTO | $75.00 | $61.82 | -17.57% |
| Meritage Homes | MTH | $78.29 | $64.77 | -17.27% |
| Pulte Homes Inc* | PHM | $42.89 | $35.75 | -16.65% |
| Lennar Corp | LEN | $62.10 | $53.24 | -14.27% |
| Ryland Group | RYL | $72.36 | $62.09 | -14.19% |
| Beazer Homes | BZH | $62.44 | $56.88 | -8.90% |
| Avatar Holdings Inc | AVTR | $53.74 | $61.98 | 15.33% |
*Pulte Homes Price adjusted for split on September 2, 2005
The big question is whether it is too late to go short some of these stocks or buy put options.
Voluntary Disclosure: I do not own any positions in any of the stocks mentioned in this blog entry.
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