In Nicholas Yulico’s Homebuilders Spring Forward [TheStreet.com] , he says builders’ 2006 results are largely in the bag, because the bulk of revenue will come from the companies’ backlog of homes already sold but not yet closed upon. The real issue keeping investors nervous relates to the scenario for 2007, and orders in the all-important spring selling season will provide a crucial look at homebuilders’ prospects.
Ken Rosen, a University of California-Berkeley real estate professor and hedge fund manager, believes a 25% to 30% total drop in new-home sales is possible over the next three years, and that builders will be meaningfully hurt this time around.
Rosen says builders have been borrowing demand from the future over the last few years.
The perfect comparison of this phenomenon would be with the automakers. Last May I got a notice with 6 months left on my car lease, that I could bring in my car and the automaker would drop the lease if I would get a new car. I decided to do this but all it accomplished for the automaker was to move the timetable for my exchange back 6 months. Taking sales from the future so to speak. It didn’t induce me to buy more cars. Also, the wildly popular employee discount pricing plan for new cars stimulated a lot of sales, but it cannibalized sales from the future. This resulted in weak auto sales results in the fall.
We could see home builders get hurt in 2007 or 2008 and further consolidation of the industry as a result. Less competition could mean higher prices down the road.