Beazer May Get Knocked Back to 2000

Yikes! When I commented Tuesday that I'd write a column on the homebuilders, I didn't think I'd be have the opportunity to write about a homebuilder being investigated for potential fraud. Well, I'm still not going to write about it.

This type of news story is really sexy and garners a lot of attention, but it almost takes away from the real story, which is that the new-home market has some structural defects. But I will say this: When you find one cockroach, you can bet you'll find a few more if you keep looking.

New-home building isn't yet at the point that it's safe to say things can't get any worse. When the business is that bad, it'll be time to buy 'em. Now is not that time. As I see it, even if demand for new housing were high enough right now to level out sales prices, it would be almost undetectable for quite a while. With inventories so high, builders are reluctant to start new homes until they're sure that the new homes will be replacing inventory rather than adding to it. Close of escrow is now the critical milestone, not just getting homebuyers under contract.

The building business is complex and has a lot of moving parts, but let's talk in general terms about the average new home. What is the usual time period from contract to close of escrow, or COE? The standard period is 45 days; that's about how long it takes for a house to finally be sold so the builder can start another. Four to five months later, that second new house is built and ready to close escrow, assuming there's a waiting buyer under contract. So it takes about six months for today's sale to ripple through the pipeline and be replaced by another home.

I believe the builders are most relevant when we consider the impact of housing on jobs. The real estate industry keeps a lot of people employed. Another rarely acknowledged fact: Builders also pay for significant infrastructure in their communities such as roads, schools and utility stations.

---

As originally published, this column contained an error. Please see Corrections and Clarifications.

At the time of publication, Fitzpatrick had no positions in any of the stocks mentioned in this column, though positions may change at any time.

Dan Fitzpatrick is the publisher of StockMarketMentor.com, an advisory newsletter and educational forum dedicated to teaching effective risk management and trading methodologies to aspiring traders and investors. He is a former hedge fund manager and a member of the Market Technicians Association, and he now trades from his home in San Diego, Calif. While Fitzpatrick holds various securities licenses, he does not give recommendations to buy or sell stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback; click here to send him an email.