Credit where it’s due

Wall Street analysts rarely tell investors to sell. Rarer still are those that sound an alarm like this:

The slowdown in housing looks increasingly hazardous to the overall economy….
Without such a strong underlying economy, the current malaise in housing could turn into a deeper, longer downturn….Arguably, the current episode may…be one of the worst housing downturns we have ever seen, given the amount of excess supply coupled with extremely low levels of affordability and the deflation of what could be described as a speculative investment mania.

Not that bold a call you say? Not today it wouldn’t be. But analysts Rick Murray and Paul Puryear of FL-based investment bank Raymond James published those words in 2006. Sure there were those warning of a housing slowdown, but “one of the worst housing downturns” ever seen? The report is full of such wisdom, made at a time when many analysts were telling investors to jump back into homebuilder stocks.

Wall Street analysts take plenty of heat for being spineless. Most are, so they should. Those who make bold calls against the crowd deserve credit.

Here’s where some homebuilder stocks were when the report was published:

Centex…..$51.79
Lennar…..45.16
Standard Pacific….$24.29
Pulte…….$30.95

Where are they now?

Centex…..$18.83
Lennar…..$16.88
Standard Pacific…..$3.17
Pulte…..$12.23

Here are two other lengthy but juicy quotes from the report:

Despite the meaningful decline, we believe the current risk/reward proposition of investing in homebuilder shares remains unfavorable for investors…as the predictability of earnings evaporates and investors begin to question the value of land on the books….

Since then, homebuilders have written off billions of dollars for “impaired” land.

The current slowdown is likely to persist for a period of several years versus several quarters as some pundits have suggested. This is because there appears to be roughly 1.5-2.0 years of EXCESS inventory in the market, which implies that if all new construction ceased today, this is how long it would take for the market to return to supply-demand equilibrium. However, the reality is that new construction levels will not fall to zero, and that this process will likely require several years to complete.

During the last two major residential real estate downturns, new home sales dropped roughly 54% from peak to trough levels over a period of approximately 48 months on average. Inventory levels continued to rise on average for 26 months following the peak in sales. Based on history, and the fact that the most recent up-cycle was of unprecedented duration and magnitude, we suspect it may be some time before we find the bottom of this down cycle.

Here we are, nearly two years later, and inventories are still climbing, suggesting the “bottom” is still a ways off.

Posted in Wall Street, housing |