Homebuilder confidence at 15-year low

The Financial Times has a front page headline about homebuilders confidence. As a contrarian, this is excellent opportunity. The home building industry is cyclical and influenced by interest rates. The sentiments on the industry are at extreme level and now the builders themselves are bearish. A possible bottom in the stocks is near. Remember home builders are not dot com. 50 year down the line , there will still be need for new houses. Value investors love these kind of mis priced opportunities.

US homebuilder confidence sank to its lowest level in 15 years in early June, an industry survey revealed on Monday, raising the prospect of further cuts in residential investment later this year.

The National Association of Home Builders/Wells Fargo index, which was expected to remain flat, fell two points to 28 points, a level last reached in February 1991.

With the recent sharp rise in mortgage rates now adding to the strain on the market from high inventory and a crisis in subprime lending that has dented buyer confidence, homebuilders do not expect any recovery in their sector until 2008.

The last time homebuilder confidence was so weak, the US economy was in the grip of recession. The current pessimism is all the more striking because it takes place against a backdrop of moderate growth and growing confidence in the overall state of the US economy.

The most worrying signal from Monday’s report was the continued drop in the “traffic of prospective buyers” during the crucial spring selling season, which ended in May.

Traffic had picked up at the start of the year, and led large builders such as DR Horton to pin hopes on “pent-up demand” driving a recovery. However, the NAHB/Wells Fargo survey suggested buyers were shying away from even considering a purchase until pricing and supply conditions became clearer.

The index fell in three of the four reporting regions, with only the buoyancy of the New York market pushing the north-east into positive territory.

The NAHB cited tightening lending standards in the subprime market and the rising cost of prime-quality home loans as it predicted home sales would “erode somewhat in the coming months”, with housing starts likely to remain subdued until early next year.

Builders have already cut production and increased discounts and other incentives to shift a backlog of unsold single-family homes.

Most builders have already abandoned earnings targets for the year because of the uncertain outlook, which has seen a slide in new building and a surge in write-offs for land and options.