Get A House On the Cheap

By Dr. Duru written for One-Twenty

By Dr. Duru

January 17, 2006

Just when I am ready to concede that housing stocks are ready to resume their bullish ways, I get evidence that appears to confirm the general bearish outlook on the housing boom. TraderMike got me hip to a blog posting at Mish's Global Economic Trend Analysis that points to two incredible "firesales" being thrown by Centex. Apparently, Centex has just completed a sale in Atlanta, Georgia promising up to $60,000 off a new home. They are also offering up to an incredible $40,000 to $100,000 off a new home in certain markets in the greater San Francisco Bay Area on January 21, 2006 only. These kinds of deep discounts are usually the mark of desperation to prop up sales. When GM came up with yet another sales gimmick to try to push vehicles in North America on the cheap, we had a clarion call for the steep decline in GM's financials and stock that soon followed.

Will the same disaster soon descend upon Centex and other homebuilders as the one GM is suffering? I am certainly putting CTX and other homebuilding stocks on 24-hour suicide watch. I cannot jump back on the housing bear bandwagon 100% because Centex's sales have certain conditions tied to them that suggest the scope of these firesales is quite limited. For example, buyers must get their loans through a preferred lender. These lenders may charge high interest rates to compensate for the low up-front sales price. In fact, the Atlanta sale specifically identified the preferred lender as CTX Mortgage. Assuming this company is a part of the larger Centex Corporation, Centex can easily make up for low sales prices. The notices also say that actual savings vary by home. This kind of disclaimer means that these sales could simply be bait and switch programs where a few homes are offered at steep discounts to get customers in the door to consider other more expensive homes. Finally, the homebuilders have been offering various deals for quite some time. For example, it has been common in the Atlanta market for at least the past two years to include all major appliances, blinds, and other bonuses for "free." The value of these additions could easily exceed $10K. If these firesale homes come bare, without options or bonuses, then, again, the sale does not look as deep and juicy as it does on the surface.

Let us also not forget the ruckus that surrounded the price drops Pulte Homes implemented in the Las Vegas market. Many bears quickly jumped on this event as heralding the end of the housing bubble. Pulte's stock not only recovered from the trigger-happy selling, but October, 2004 marked another one of those climactic lows that opened up an excellent buying opportunity. In fact, Pulte went on to continue reporting great financials and the stock has not even come close to those lows since.

I am of course speculating when it comes to the structure of these firesales, so I trust that those interested will do their own research. However, I did do a quick scan on the sales prices of Centex homes in Northern California. I found plenty of homes still selling for the astronomical premiums that are characteristic of that market. Many of these homes are in the same markets that will be on sale for 12 hours. We should keep an eye on what happens to prices after this event. Anyone who bought a home in these areas recently should be more than a little nervous as they may find themselves in the red in a gut-curdling instant.

Finally, I attended the second Atlanta Traders Gathering. It was a lot of fun, and it was great to finally get a chance to talk "shop" to like-minded folks! I mention this because one of the attendees reminded me that inflation could yet support prices in the housing market. We already know that last year's Hurricanes sent the prices of many construction materials upward and vigorous rebuilding efforts will put more pressure on materials prices. Inflation in the materials that go into homes forces the homes themslves to sell at higher prices. Also, if gold is correct in forecasting further devaluation in the dollar, hard assets will become even more valuable. Yep, this includes homes and especially the land they sit on. The unfortunate part of the story is that wages will continue to lag these rising housing prices. So, while housing prices may still spiral upward, wages and real buying power will continue to loom as the brick walls for the raging housing boom.

As always, be careful out there!

DrDuru, 2006