Today’s jobs report — a loss of 95,000 jobs in September in an economy that needs to create 150,000 jobs per month to keep employment steady — underscores what a mess the economy is right now. What’s in much worse shape than the overall economy, though, is the housing sector.
Here are some fun facts:
* The current build rate of 260,000-275,000 homes per year is off from a peak of 1.6 million, which is more than an 80% drop in activity.
* With 4% rates for mortgages — and less than that on ARMs for selected borrowers — rates will rarely, if ever, get lower thank they are now.
* There is no more government stimulus available to alleviate the industry’s problem.
* Based on current default rates, another 6 million to 7 million homes will go into foreclosure. Foreclosures add to inventory — already at record highs — and suppress home building and prices. And this trend will likely continue into 2013.
* Even when inventory is manageable and foreclosure rates are at historical norms, analyses show home building does not pick up in or after a recession until the unemployment rate drops to 8.6% or lower. Consensus estimates have the unemployment rate above 9% for all of next year.
I think you get my point. Some erstwhile “value investors” (people using that moniker to justify bad buying decisions) have held up the homebuilders despite their radically reduced revenues and profits, their lack of earnings power for the next few years, and their very messy balance sheets.
Eventually the Street will wake up, and when they do, the homebuilders could be hit hard. These stocks did not pop with the September rally, a sign the Street is already getting tired of the companies’ “wait until next year” mantra.
If you want to avoid doing too much digging into the individual companies, look at the homebuilder ETF, the SPDR S&P Homebuilders (NYSE: XHB). XHB put options are liquid and go pretty far out.
If you’d rather go after individual names, look at puts on those with the worst balance sheets and largest debt obligations, such as Hovnanian Enterprises, Inc. (NYSE: HOV).
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