"Bloodbath" Economy Predicted

From Bloomberg comes this telling article:

"The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported."

"New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group".

They go so far as to describe the coming financial problems as a bloodbath. Yikes! The bears are coming home to roost. And this coming from the NAR means it's one of the rosier outlooks. I think Standard Pacific Corp (SPF) is the most susceptible of the public homebuilders. A Credit Suisse analysis from March 2007 (PowerPoint required, download viewer), reveals that Standard Pacific is the percentage leader in terms of revenue coming from subprime customers. Furthermore, they only receive 51 percent of their revenue from prime borrowers. If fifty percent of your potential client base can no longer get a loan because of rising interest rates or tightened lending standards, your company is in serious trouble. A look at quarterly earnings reports from KB Homes, Lennar, and DR Horton reveal income declines, but at least those companies are still profitable. Standard Pacific's quarterly report shows a company that lost forty million dollars in the first quarter of 2007. Standard Pacific holds $3.3 billion in inventory.
I recommend selling Standard Pacific because they're positioned to file bankruptcy before the housing bust runs its course. In addition to their subprime loan exposure, they're already losing money in a market that people are just now starting to call a "bloodbath". What will their bottom line show 18 months down the road?? Standard Pacific closed trading today at $18.67.
I'm bearish on the other homebuilders also. Remember the beginning of the housing boom? I do. I remember KB Homes trading at $20 in January of '02. They closed today at $42.18. I remember DR Horton trading at $10 in January of '02. They closed today at $21.01. I remember Lennar trading at $23 in January of '02. They closed today at $40.96. Considering the long road ahead, are these companies really worth the price they're trading at today? I bet Maya Roney thinks so. She asks the question: "Is the Worst Behind Us?"

"Stronger economic fundamentals -- job growth, relatively low interest rates -- may ward off a true "housing bust" this time, though the decline in May starts may postpone any housing upturn until late 2007 or early 2008."

Leave it to the bulls to act like ostriches! So we're not going through a "true housing bust" yet? Our interest rates are "relatively low"? They're relatively high over the last six years. And job growth means nothing if wages stagnate. We could have a zero unemployment rate with everyone working for minimum wage, but that doesn't mean they'd be able to afford a home.
What we have today is upward trending interest rates, decreasing sales, decreasing prices, and rising inventories. KB Homes holds 6.2 billion dollars worth of inventory. DR Horton holds 11.2 billion dollars worth of inventory. Lennar holds 9.1 billion dollars worth of inventory. Their respective inventories will continue to decrease in value as the housing bust runs its course and prices subside. Inventory makes up 73 percent of total assets for KB Homes, 77 percent of total assets for Lennar, and 83 percent of total assets for DR Horton. As inventories decrease in value, so should the stock prices. I expect them to survive the housing bust, but they're overvalued now and I would sell all three.