Thursday, November 17, 2005

Homebuilders and the Bubble

[N.B. I have declared the housing bubble over as of Oct 6, 2005]

I can think of three industry factors that each are interesting and together tell a story. First go to and look up any/all the big builders Toll, KB, Lenar, etc. Their execs are bailing big time. On the plus side as a business not as a stock play they've learned some expensive lessons. Price depreciation and falling demand is not the disaster it used to be. They can cut 10% by accepting lower profits in exchange for continued sales volume. They can cut 10% even 20% by reducing the fluff they build into their homes, ugrades. They can tighten supply these days with far less exposure to sitting on unsold inventory. No quite build to order but a lot closer than in 1990. The builders have also gone vertical meaning they won't get as squeezed by lenders/financiers or undercut by realtors looking for the next sale.

For all the doom and gloom however remember anyone who bought a home for the purpose of living there anytime more than 2 years ago is still going to be looking at handsome short term appreciation even if prices fall 20%. People who didn't buy for the traditional purposes of living there and participating in the community are called "investors/speculators" and have every expectation of the possiblity of losses. "They bought their airplane tickets, they knew what they were getting into, I say let 'em crash."

1 comment:

Nina Smith said...

Your comments are well said. Agree with you... although I think there is a big difference between real estate investing and real estate speculation. The key is that the former usually produces passive income from the start and doesn't rely on quick appreciation from the latter.

Thanks for stopping by Sitting Pretty