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Relax. Housing's Just Fine!

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February 12, 2007 – Comments (2)

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http://www.f...gs-fine.aspx

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Nothin' to worry about with the housing market, housing stocks, or, indeed, the economy. So argues Ken Fisher, here.

Trouble is, this assertion is based on one of the dumbest arguments I've ever seen.

Here's it is: "In the last six months housing stocks are up 24%, well ahead of the overall market. If housing were destined to fall apart in 2007 these stocks wouldn't be so strong now."

In other words, investor enthusiasm has to be correct. If people are bidding up Toll Brothers (NYSE: TOL), Beazer (NYSE: BZH), Pulte (NYSE: PHM), Centex (NYSE: CTX), and D.R. Horton (NYSE: DHI) from their midsummer swoons, it's because the market is always right.

Of course, by this logic, all stocks would always be properly priced, even junkheap bankruptcy bait like Northwest Airlines. Enron, hey, Enron must have been a fluke! Along with that whole year 2000 tech bubble. And the tulip trade too ...

Don't get me wrong. I think housing, and possibly our equity-bubble economy, is cruising for more bruising. The unexpected, 19% revenue drop, 33% contract flop, and increased writedowns that Toll Brothers announced last week certainly don't indicate that the pain is over.

I don't try to pretend I know for sure. One thing that makes me more convinced I'm correct, however, is money-managers grasping at straws and trying to fool you into thinking the market's always right. Hundreds of years of history have proven otherwise.

Comments? Bring them here.

At the time of publication, Seth Jayson had no positions in any company mentioned here. See his latest blog commentary here. View his stock holdings and Fool profile here. Fool rules are here

2 Comments – Post Your Own

#1) On February 12, 2007 at 6:06 PM, beachmp (96.28) wrote:

I read the article this morning and had the same mind blowing reaction. I'm glad someone is paying attention.

I would say Ken's argument is closer to reasoning that there may indeed be a bubble. Toll Brothers announced Friday that revenue fell 19% and writedowns are expected to balloon. Ken says buy Toll because they are trading at 19 times depressed earnings that are going to bounce back next year. Bounce back to where? The record breaking levels of the past 5 years?

Check out Mortgage Nanny's report on percentage of home loans that are pay-option, "stated income" and interest only http://www.f...ner=yahoomag. These are generally riskier options that can lead to increasing defaults when interest rates rise and/or home prices fall.

If you are not convinced of the dangers read the following article on sub-prime lenders http://www.b...aign_id=yhoo. As these loans default the houses that back the loans enter the market at generally depressed prices while banks that issue the loans increase their underwriting. Meaning it is more difficult (and more expensive) to get money which will decrease the number of qualified buyers at the same time increasing the supply of houses on the already troubled re-sale market -- which could lead to further downward pressure on home prices.

Decreasing revenues, increasing writedowns and a shrinking buyer pool should further the trouble of homebuilders, but what do I know I'm only a home builder and an equity investor with real estate developers.

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#2) On February 13, 2007 at 9:10 AM, TMFBent (99.82) wrote:

Wow, thanks for those comments. I've gotten a few emails from other homebuilders and contractors saying similar things, and thanking me for not falling for the "bottom is in" line, at least not uncritically.

Personally, I wouldn't mind if all those homebuilders kept pumping out houses like crazy. I may be in the market for a place soon. But folks like you, unfortunately, may have to pay a price for everyone else's shortsightedness.

'Things are different this time,' is always dangerous to believe. Maybe they are, but I wouldn't be my money that they're not. And I don't see any of the homebuilder execs buying shares these days, despite their assurances that things are turning.

Sj

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