Buying shares of homebuilders is becoming nothing more than...

Buying shares of homebuilders is becoming nothing more than legalized gambling. The same logic can be applied to other sectors, but the cyclical nature of housing as well as insider details makes it a standout candidate for discussion. See if you can follow my logic starting with Lennar's mothball strategy as described in Mothball Housing Strategy Doomed To Fail.' BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow Rise After Durable Goods? When are Construction Revisions Coming? Buying shares of homebuilders is becoming nothing more than legalized gambling. The same logic can be applied to other sectors, but the cyclical nature of housing as well as insider details makes it a standout candidate for discussion. Lennar plans to finish building 259 homes -- the first phase of a 1,100-unit development in Irvine -- but it has decided not to sell any of them until the constrained mortgage market and swollen housing inventory improves.'I feel the same about that strategy today as I did then: 'Sitting on homes until swollen housing inventory improves is begging for trouble.' Lennar seems to be betting that things are going to get much better. I do not see much hope here even though the National Association of Homebuilders says 'there clearly are signs of stabilization'. In addition to the decline in housing starts, which we are told is actually a positive also going for us is the good news that home builder sentiment stabilized in December. The National Association of Home Builders said yesterday its NAHB/Wells Fargo Housing Market Index was unchanged at 19 in December, the lowest level since the index began in 1985. On the bright side, the index of sales expected in the next six months rose to 26 from 24, but that's down from 49 a year earlier and from 53 in February. Meanwhile, the prospective-buyer traffic measure fell to 14 from 17, below 23 a year ago and the 2007 high of 29 set in February. 'Today’s report shows that builders’ views of housing market conditions haven’t changed in the past several months, and there clearly are signs of stabilization in the HMI,” NAHB Chief Economist David Seiders said. It's a good thing that things stabilized before the index fell to zero. But what about that prospective buyer traffic? If traffic isn't bad enough in and of itself, consider that pricing makes California one of the worst states to be building in or getting financing for. Nonetheless, Lennar is determined to keep building anyway. Pollock turned to the auction when the housing market slowed this fall and his sales turned to a trickle. Rather than pay interest on his construction loans for a year or more until the homes sold, Pollock opted for the auction. Although the homes looked especially attractive with super-low starting bids, some brokers were concerned that the homes had a higher, undisclosed 'reserve price' that was the lowest Pollock was obligated to accept. But Pollock said about 96 percent of the homes he sold went for below the reserve price. The reserve price, he said, was equal to his costs. Pollock still has another 99 homes to sell, but if he is aggressive enough he will. Don't cry for Pollock, as he made millions over the years. Furthermore, with his strategy firmly in place, I am confident Pollock will survive to build again. While Pollock opted to reduce his interest expenses and holding costs, Lennar dramatically increased theirs. Perhaps that chart explains why Lennar keeps building but Pollock is opting out. Who would want to give up the right to acquire shares for $0 and sell them for countless millions of dollars over the years? Except for paltry dividends, all the profits have gone to the insiders as share prices crash towards zero. In light of the above, why any shareholders want to own any homebuilders over the long haul other than the greater fool theory is beyond me. At this point, the prices of many homebuilders are so beat up that if you are long you are betting they survive. If you are short, you are betting they don't. Those on the sidelines waiting to make a bet on when housing will bottom may wish to consider Meanwhile, insiders are cashing out options hand over fist for as long as they can. What a racket. The whole game is nothing more than legalized gambling but sadly most of the participants don’t even realize it. The content on this site is provided as general information only and should not be taken as investment advice. 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