An Interesting Take...

From Brett Arends of The Street.com comes this rosy outlook of the housing market, homebuilders in particular: Homebuilders Finally Nearing the Bottom:

"Maybe I'm looking too hard for contrarian signs that the end of the slump is near. This could be a pause before another slide."

"But at times like these it is hard to keep in mind the obvious point that the shares on Wall Street are, obviously, a lot closer to the bottom than they are to the top."

What an astute observation! "The shares on Wall Street are...a lot closer to the bottom than they are to the top." Considering that there's a limit at the bottom (stocks can't be priced at $-1.00) and no limit at the top, it makes no sense to invest money based on literal numbers; rather, investments should be based on percentages.

The importance of this becomes obvious after examining one of the homebuilder stocks. DR Horton (DHI) peaked in July of 2005 at $42.82. Since then, the stock has lost 65.4 percent of its value, closing trading on September 5th, 2007 at $14.81. DR Horton is $28.01 away from the peak in 2005 and only $14.81 away from the ultimate bottom; it's true that "homebuilders [are] finally nearing the bottom". But suppose that someone invested in DR Horton at $14.81, only to see the stock fall to $7.00? Sure, it may have only been a loss $7.81 per share, but the percentage loss of 53 percent would rival the percentage loss seen from the summer of 2005 to this past week.

The example of DR Horton is representative of all of the publicly traded homebuilders. When comparing the charts seen here, courtesy of investertech.com, it becomes apparent that the homebuilder stock charts mirror each other in terms of percentage gains and losses.

Upon revisiting this topic next year, it will be interesting to see if Mr. Arends premonition becomes true, and perhaps it will, but a savvy investor would definitely stay away from homebuilder stocks in the upcoming months.