Many have been eager to call a bottom only to get bitten by fear.
It won't be easy to call the bottom in homebuilders until we see insolvency in a few homebuilders first. The reason being is homebuilders are not cash-rich companies. They load up on short-term debt to buy land and materials to construct homes, and pay back the debt once they sell the property.
The problem is homebuilders bought too much land and built too many houses. If you can't make money selling houses, you can't pay back the debt you borrowed to build the houses. Some companies highly leveraged themselves in the hottest markets like Florida and California, now markets experiencing the fastest depreciation rates.
The cash flow situation for homebuilders is becoming where cash outflows from financing costs exceeds cash inflows from operating income ( http://stocks.us.reuters.com/stocks/cashFlowStatement.asp?sym... ). It's like I make $500 a month mopping halls, but I have a $600 mortgage payment. It just won't do. I might be okay for now until my rainy day fund is gone.
With the housing market appearing unlikely to make a complete 180 next week, the danger of seeing a default notice increases each day. And you know what happens when a company starts to default on making its interest payments on debts.
$18.45 (03/16/08)
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