No. of Recommendations: 0
Hey Mike,

-- have heard a lot of good investors recommending housing stocks recently

I have to say that I don't understand housing stocks. I guess I need to watch them over a few cycles. In Feb. 2000 I started looking at a few of them -- Centex, Beazer, Hovnanian in particular. The housing market was going gangbusters and had been for years, and I figured they must be profiting.

I wish I could say I'd been smart enough to buy any of them, but I wasn't. The reason: At the time, they were all getting killed. I didn't understand it. Housing was booming, mortgage rates were falling, and these stocks were at 5-year lows.

I couldn't understand why. I guessed that investors were concerned about real estate prices and inventory. These companies have to plan a few years out, of course, and they were building at a rapid pace. They could end up getting stuck with lots of inventory if the economy slowed. That would make ROEs look pretty shabby.

So I passed. Now, when I think that the situation is much more tenuous, they're all booming. Neff, as you say, backed Beazer in Barron's at the start of 2001, and it's up like 200% since then. In July, Ronald Muhlenkamp, who is one of the best fund managers in the country IMO, also backed Beazer, noting that the housing sector has held up well.

Would appreciate any comments on whether the supposed bubble is more than priced into the homebuilding sector in general.

I don't know what to think. It doesn't seem to me that it's priced in at all, but it's clear that I misread the situation last year, so I'm hesitant to think I'm reading it right now. I'll note, though, there has been a big run-up in the stocks recently -- and I mean a BIG run-up -- and this is a cyclical industry. It could be that low mortgage rates will keep it going longer and that will keep housing stocks rising, but it seems difficult to say that they are screaming values now.

Again, though, I don't understand the industry. Let's hope someone who does posts on the issue.

Fool on!
BrianZ
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