Builders Acknowledge A Housing Slump

Finally, after lots of bogus reports about a soft landing and their being no real estate bubble, several builders have acknowledged [or should I say confessed] that their may be a stronger than expected decline in housing demand.

“It would be difficult to characterize the position of home builders as other than in a hard landing,” says Robert Toll, chief executive of luxury home builder Toll Brothers Inc., which reported yesterday that net income fell 19% in the third quarter ended July 31. “I’ve never seen a downturn in housing without a downturn in employment or… some macroeconomic nasty condition that took housing down along with other elements of the economy,” he says. “This time, you’ve got low unemployment, you’ve got job creation, you’ve got a stable stock market and relatively low interest rates.”

Last year, Toll Brothers reported that its quarterly profit had doubled, Mr. Toll boasted: “We’ve got the supply, and the market has got the demand. So it’s a match made in heaven.” Since then, Toll has cuts its guidance four times on the number of homes it expects to close on, and its share price has fallen by nearly 50%.

Even DR Horton is now bearish. The CEO, Donald Tomnitz said “Every time we’ve gone into a downturn in the home-building industry, they’ve always been longer and deeper than we’ve all imagined. So we’re preparing for the worst, and we think this one will be longer and deeper than just the last six months.”

I should’ve shorted these stock last year, just like I was thinking, but I never got around to it! But I did buy puts for WCI last week with expirations in January 07 and March 07. WCI is a Florida based builder that specializes in luxury high-rise condominium towers. Hopefully with all the negative sentiment we won’t see a short-term spike in their stock prices.

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