Homebuilders Still Rotting Despite Fed Cuts

A temporary tax credit "will provide an immediate shot in the arm," says NAHB President Sandy Dunn, a homebuilder from Point Pleasant, W. Va. "It will get consumers off the fence, stimulate home buying and reduce excess supply in housing markets. The home buyer tax credit worked in the 1970s when the economy was in recession. We need it now."

There is no doubt that the public homebuilders need some sort of shot in the arm. The Fed cuts haven't helped. Just look at the sharp new-order declines recently reported by Pulte Homes PHM, Ryland RYL and Centex CTX.

After Wednesday's close, Centex reported a loss from continuing operations of $908 million for its quarter ending in March. This amounted to $7.34 a share, much worse than the $2.43 a share analysts expected, according to Thomson Financial.

Earlier this week, the S&P Case-Shiller Index reported that national home prices fell 12.7% year-over-year in February.

One analyst, who remains bearish on housing, says the stock market is pricing in negative news to homebuilder stocks, but he feels people do not understand the magnitude of the problems.

It's like saying, "I know this person has cancer, but I don't believe they are going to die," the source says.

While land impairment charges have clearly ravaged the industry, it's important to look at how homebuilders are now reporting operating losses, even if you add back the impairment charges.

For example, Centex reported an $853.4 million operating loss in its homebuilder division in the first quarter. If you add back the $362 million of impairment charges and the $395 million loss on a land sale, then Centex still booked a $96 million operating loss.

Pulte Homes recently reported a $705 million homebuilding operating loss on $663 million of impairments, which again shows a builder losing money even adding back the impairments.

Trading the Homebuilder Stocks Around the Fed Rate Cuts Has Not Proven That Profitable
	Fed Funds		XHB
2008	Decrease (bps)	New Rate	Close Prior Day	Close on Rate Cut Day	% Gain
30-Apr	25	2.00%	23.00	22.12	(3.8%)
18-Mar	75	2.25%	19.44	21.05	8.3%
30-Jan	50	3.00%	21.50	20.35	(5.3%)
22-Jan	75	3.50%	17.20	18.55	7.8%
2007
11-Dec	25	4.25%	21.30	19.75	(7.3%)
31-Oct	25	4.50%	22.90	22.17	(3.2%)
18-Sep	50	4.75%	23.63	24.85	5.2%
				Average	0.2%