The Homebuilders
Most of the nation’s home builders have begun to build and sell houses again. The rate of sales is slower than earlier in the decade, but at least there are customers out there who want to buy homes. Most of these home builders like KB Home are not speculating like they once did. In these new developments most home builders will only build a few spec homes, compared to a few years ago when there could have been almost twenty spec homes to buy. KB home and other builder will also have to deal with the tightening of lending standards. More documentation is required and federally insured loans require a greater insurance premium than before. The greater cost to insure a loan causes would be buyers to perhaps stay on the sidelines because the monthly expense is too much for them. Mortgage companies require insurance if the equity in the home is less than 20% of the value. Most homes sold these days have less than the required equity, so insurance is needed to obtain the loan.
Most of the publicly traded home builders will also face competition from the banks that have to sell, Other Real Estate Owned (OREO) properties, which they have taken back through foreclosure. These foreclosed properties only bring down the value of the other homes in the sub division. If there are too many OREO properties in a new development where a home builder is still trying to build there will be appraisal issues. Since the banks are selling the homes below current costs it is hurting the builder’s prices. Appraisers look at the values of the surrounding homes to determine a price for the new home. Even though the home might be new, these appraisers are still appraising it too low for the home builder to make a decent profit. They are then forced to hold the property until it can appraise to its cost plus a profit. Part of the problem is that these home builders including KB Home purchased land at an inflated price. They are trying not to take a loss, but might be forced to because of the pressure from the banks OREO inventory being sold off.
Many investors are buying these bank properties that can be only a few years old. Instead of buying the stock of home builders who paid too much for land, they can buy the land with an existing structure for much less than what KB or all the others sell it to you to. Investing in real estate might not be safer than forex trading, but it can provide a substantial profit if you have the money to hold your property for a few years. If you can collect rent from tenants to cover holding costs plus a small profit you will benefit in the long run. Eventually building costs will increase, making some people decide that buying an existing home is a better decision than a new home. Having a forex broker is not a bad idea as it provides a way for anyone to diversify their wealth. If you buy a real asset like real estate you can hedge against that by buying currencies. Investing in forex is also a much more liquid investment; you can get out of your position in less than a minute if you need cash on hand the next day. KB Home and the other companies in the home builder sector will face headwinds in the next few years. They will be able to sell homes but it will not be easy. Tighter lending standards and a large supply of bank properties will slow the growth of these companies and perhaps their stock prices.
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