Novice Investing - Housing Trouble Hits Lennar

Date: Monday 01st 2008f December 2008 04:00:21 PM

Housing Trouble Hits Lennar - 03/27/2007

By: Novice Investing Staff

Housing had been booming for the first part of the decade due to the liquidity help stemming from the Federal Reserve's 1% fed fund rate. As the fed raised interest rate due to looming inflation threat, housing demand had slowed. Further, as we have elaborated, the trouble with subprime lenders will create opportunities to pick up solid financial companies.

How about home builders themselves? As housing slows, the demand for their product wane and profit expectation had been reduced. This morning, it is Lennar Corp.'s (LEN) turn to report disappointing earnings. For the first quarter ending on Feb 28th 2007, Lennar reported net profit of 43 cents per share, way below $ 1.58 per share it earned last year. Revenue plunged 14% to $ 2.79 Billion. Management added that Lennar cannot meet its goal for 2007 as it waited for housing prices to stabilize.

Other house builders had reported similar trouble in the industry and many are trading near the low of their 52 week range. Examples are: Pulte Homes Inc. (PHM), Centex Corp. (CTX), KB Home (KBH) etc. Will there be any more sell off for these companies? We think that this is just the beginning.

This is all begin with an interest rate rise. As rate rises, less people can afford a house, which will weaken demand for the foreseeable future. In addition, as subprime woes are becoming apparent, banks will have tougher standards going forward. This will depress housing demand further. And finally, as demand for housing softens, those so called real estate flippers would leave the market and chase other hot investment vehicles for a quick gain. This will nail the coffin on housing demand slump going forward. Until these three reasons are fully known, the house builders may not hit a bottom yet.

Overall, while some of the home builders spot a low P/E, please remember to account for their long term debt in your valuation. Most of these home builders have high debt load (as compared with cash on hand). While during good times, it will propel their shares higher, during difficult time, high debt level will limit the company's flexibility on giving the best return for shareholders.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding eBay Inc. (EBAY) or any other securities.

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