KB Home (KBH) reported disappointing earnings last week. The company attributed much of the blame to buyers struggling to get mortgages. While I do think KBH is actually one of the more reasonably priced home builder’s, I don’t think that this industry is the best way to play the rebound in housing. The reason for this is that there are so many fundamentals that are making existing homes so cheap and attractive, due to the large percentage of distressed sales which can reduce prices in a whole neighborhood. I think the worst thing that could happen would be for home builders to put a ton of supply on the market before we cut deeper into the “shadow inventory” held by the banks and the Government Sponsored Entities.
If the home-builders were trading below book value, which most of them aren’t, I might be more interested but it seems like prices of these stocks in some cases have run too far, too fast. If home prices rise, particularly existing homes, the financials will be among the biggest beneficiaries because they are a leveraged play on real estate. Also once interest rates do rise the banks and insurance companies will benefit from greater net interest margins which can be great for profits.
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