Friday, November 12, 2004

Pulte's Prices Plummet


Fri Nov 12, 2:13 PM ET

By Lawrence Meyers

See Jane and John want to buy a house. See Jane and John rush to close on a house before the market gets even more out of control. See Jane and John standing proudly in front of their new Pulte (NYSE: PHM - News) house in Nevada, which they paid $500,000 for.


See Pulte Homes slash the price of that same type of house in the same development to $350,000 the next week. See Jane and John scream bloody murder at Pulte Homes. See Pulte Homes shrug their shoulders and say, "Supply and demand. Market forces."

It's an unfortunate situation for Jane and John, but such is life in the current housing market. If Economics 101 (read: supply and demand) ever applied to a sector, that sector would be housing. A month ago, Pulte Homes cut prices on homes in 18 of its 23 Nevada developments, sparking an investor sell-off that took the company's stock down 23%. Pulte said that consumer resistance to its price increases caused the price cuts but that this was an isolated incident specifically related to the Las Vegas market. The company also lowered its third-quarter earnings outlook by about 3% as a result.

Three weeks later, however, Pulte reported stellar earnings and raised guidance for 2005. What's an investor to think? Was Las Vegas just a blip on the radar or a sign of trouble to come?

Investors have done well in homebuilders over the past several years, thanks to low mortgage rates and demand outstripping supply. But eventually the market will rebalance itself, and when it does, you don't want to be caught holding a homebuilder stock the way Jane and John got caught holding an overpriced home.

The key here is not to flip out over one incident in one market but to keep an eye on trends. If you see other homebuilders such as Centex Corporation (NYSE: CTX - News), KB Homes (NYSE: KBH - News), and Lennar Corporation (NYSE: LEN - News) cutting prices in multiple markets and over multiple quarters, it may be time for you, Jane, John, and even Spot to sell homebuilding stocks. Just remember that by the time you spot a trend, everyone else will have also, and you may find yourself the last one squeezing through the patio door.

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