Home Builders in the Woods
Home Builders in the Woods

I’d hate like hell to be a homebuilder stuck with lots of inventory right now. Unfortunately, that seems to be the position most of them are in… Toll Brothers, Ryland, Meritage, D.R. Horton, Lennar, M/I Schottenstein, and Pulte all have inventory valued higher than their equity. In other words, a writedown to inventory will destroy a large portion of shareholders equity. Some are in really miserable straits: Beazer has inventory valued at nearly nine times its equity. Standard Pacific and KB Home have more than three times their equity in inventory. NVR and MDC Holdings are much better positioned, with 0.3 and 0.5 times equity worth of inventory, respectively.

I’ve never stopped telling people to avoid banks and homebuilders. Through the rally since March, that looked like a mistake. I say screw the rally. A 50% rise in share price just makes them better short-sale opportunities. Nearly all the major homebuilders are now trading at premiums to book value, even though their equity value is about to take it on the chin. The rally has raised the prices of stocks, bonds, and other paper assets, but it hasn’t made the homebuilders’ inventory any more valuable.

T2 Partners Whitney Tilson says the apparent housing recovery is only setting us up for worse things to come. “The rebound has been stronger than we’ve anticipated,” Tilson told Yahoo! News. Yet he remains “confident this is the mother of all head fakes.”

Tilson attributes the housing upturn of the past few months to low interest rates, first-time homebuyer tax credits, falling prices and seasonality, not improving market fundamentals. He also believes there’s still supply and demand issues that will hamper the recovery. The total inventory is triple what’s actually being reported,” says Tilson, who estimates there are twice as many homes in foreclosure or near foreclosure that aren’t for sale yet.

Get ready to short the homebuilders and laugh all the way to the bank (which you should short also).

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