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Ho...Ho ...Ho...These Homes have Got to Go

Written By Brian Hicks

Posted July 31, 2006

Throw another Yule log on the fire, grab yourself another eggnog, and call the kids down to unwrap their presents. Sure it is a little hot outside, but it's never too early to be thinking about gifts…..lots and lots of gifts.

In what is surely another sign of a stunning reversal in housing, the nation's homebuilders have suddenly gone from Grinch to giveaways as they scramble to lure a shrinking pool of buyers under their mistletoes.

Yes Virginia, there is a Santa Claus!

In fact, it is nothing less than holly and fruitcakes in the Mid-Atlantic, as one of the nation's largest builders, K.Hovnanian Homes, has actually proclaimed it to be "Christmas in July". Lucky buyers in Maryland, Virginia, Pennsylvania, Delaware and West Virginia are being urged to "Hurry In!" for savings of up to an eye-popping $100,000 on the purchase of their new homes.

You're reading that correctly… $100,000!

Is it just me or does Santa seem a little desperate?

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But the Hovnanian Santa is not alone. Not to be out done, one nationwide builder has gone even further. In fact, Lennar Corp. recently placed a two-page ad in the Florida Sentinel that would qualify it as the most charitable Santa of them all.

Amazingly its ad announced that it would be giving away a home to one lucky buyer who visits its community this month.

"Turn the key, and the home is free" the ad read.

For one lucky visitor Christmas really will come early. 110 visitors will turn their keys on August 5th for the ultimate gift of them all.

These two builders, however, are the rule rather than the exception. The fact is that homebuilders across the nation have all begun to turn to discounts and promotions.

Free upgrades, free appliances, free finished basements have all become part of the mix as builders have had to become more creative to lure buyers in the face building inventories, a surge in cancellations, and a drop in demand.

Not to be left out, financing too has seen its share giveaways. In an effort generate more business builders now going so far as to put cash on the table to bring in the deals. In fact, numerous companies offer true no money down programs and closing cost help to the tune of $20,000 or more.

Lennar has even gone so far as to offer to pay a buyers mortgage for six months!

Amazingly they were outdone in Florida by Prestige Building Partners who raised the ante. Prestige is promising their buyers that their entire first year's mortgage is on them.

These tactics, of course, represent a stunning reversal of fortune for the nation's builders. Only last summer, these same builders were still raising prices at will. Discounts were unheard of and flat out giveaways were nonexistent. Pricing power still reigned supreme as the bubble in housing made its final leap.

But what a difference a year makes. Suddenly it's "Christmas in July" and Old Saint Nick is camped out in every sales center in the country with a bag full of goodies. Clearly some profound change has begun to take root in the market.

After all, homebuilders just don't slash their prices for no reason. They are just not that generous. Like any other business their goal is to make money… and lots of it.

But when they do cut prices, however, it cannot go ignored.

Homebuilders after all are at the very frontlines of the housing market. Like no other portion of the market these giants have the pulse of the buyer like no other. As such the very health of the homebuilders is a look into the window of the state of the housing market itself.

And when the builders begin to stumble it bodes ill for the rest of us and is a dangerous sign of things to come.

And stumble they have.

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Take a look at the stock charts of these four major builders:


The similarity of these charts is simply amazing. Notice how the stock of every one of these builders began to breakout to new highs in June of 2003.

Fed watchers, of course, will recognize this date as the moment that the fed funds rate went to the all time low of 1%. With that event the bubble was pushed into high gear.

From those June 2003 levels every one of these stocks either double or tripled as the bubble grew and grew.

Clearly these were the days to own these stocks.

They represent the apogee of the bubble itself.

Conversely, notice how each of these charts begins to nose dive from the beginning of this year all the way until the present time.

As you can see the share price of all of them has tumbled well off of their highs. In fact, these builders are all down nearly 50% from their 2 year highs.

Oversupply, rising rates and sagging demand will likely drive them down further as slashed home prices and rising costs eat into their bottom lines.

Sadly, all of this is a sign of things to come in the housing market. Falling builder share price and deep builder discounts are just the beginning of the coming deflation in housing prices.

Believe me, when builders begin pricing their McMansions like so many value meals the apocalypse in housing has begun.

Some of you might think that the sound on the roof is Santa himself. But the truth is it's that other guy- the Grinch.

Cindy Lou had better hide the roast beast