Wednesday, July 8, 2009

The home sales gap, and why I'm short the home builders.

CR had yet another post on the large (and increasing) gap in home sales activity. From what I can tell over the last quarter, folks read about rebounding sales in the subprime sector and rushed in to buy up home builder stocks for the coming rebound.

There are two problems I see with this. One is that a rebound in sales in subprime is not a rebound in sales in the market as a whole. The more expensive the grouping of homes you look at, the more dire the situation. Inventory levels are still very, very high. Once you get to homes selling above the conforming loan limit (the homes that would require a jumbo mortgage) the inventories get frightening. We're talking years and years of inventory. I've even seen this in my local market, which has been fairly resilient. The homes above $1 million are looking at 4-5 years of inventory.

The second problem is that these home sales you do see are only for existing homes. If I remember my stats correctly, nearly 50% of the homes being sold in California are distressed sales. There also appears to be a very large shadow inventory of homes people would like to sell but are not listing in this market. This tells you to things: one, prices will stay depressed for a long time, and any future rebound in sales will not be met with a rebound in prices (sales usually rebound long before prices). And two, there will be little to no demand for what the homebuilders make (brand new homes at the cost it takes to build a new home) for a very long time.

CR's post is about how the New York Times is recognizing the gap, but they are failling to realize how many of the existing sales are distressed sales.

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