Homebuilding Insight: Who's Right?

If you are an astute reader who dove into the features before visiting this column, you may have already spotted the divergent views on the current condition of U.S. housing markets in our coverage of the Top 25 builder rankings. If not, let me point out this debate so it will gnaw on you the way it does on me.

In our analysis of the 2006 housing year,  Wall Street housing stock analyst Ivy Zelman of Credit Suisse, who is never shy about telling the CEOs of the largest public builders how to run their companies, says those firms have to shrink to survive. The Credit Suisse analyst goes so far as to say the top builder in the Giant 400 next year will have much fewer closings than the 49,568 top dog Lennar put on the board in 2006. "It could be half," Ivy predicts, then opines, "This is all about price." She thinks prices still need to come down another 10 percent to get housing markets moving again.

San Francisco-based housing stock analyst Carl Reichardt of Wachovia Securities seems to echo that sentiment by asking, "What's the price needed to normalize the sales rate in the builder's communities? It's now clear that price is below cost, but a lot of builders have been slow to accept that fact."

Now scroll down the article and scan the comments of Florida economist Hank Fishkind, Ph.D., who recently told the Sarasota and Manatee County home builders' associations that Florida's housing cycle hit bottom in late 2006. "The single-family market is finally stabilizing," he told the Southwest Florida builders.

I attended that dinner meeting after I interviewed Zelman and Reichardt. Who's right? It vexed me all weekend, so I finally called Fishkind on Monday and relayed Zelman's adamant opinion just to see how he'd respond. Clearly, the stock analysts have a national perspective, while Fishkind specializes in Florida. But no market anywhere can be more stone cold than Florida. If Florida has already bottomed, doesn't that offer hope for builders everywhere?

"I think Ivy's right about the need for the big public builders to shrink some," Fishkind said. "They need to get their overhead down to re-establish some margin. But I don't see prices going down any more in Florida. If you look at the last three or four months of housing starts nationally, they've gone down to the point where they are in equilibrium with closings — not contracts, closings. In fact, closings are a little higher than starts, so the inventory is shrinking at current prices."

I live in Florida, so I get to watch these markets pretty closely. And Ivy sends me her reports, crunching the numbers of the public builders almost daily. Somebody will be right. Time will tell.

Stay tuned.

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