A short post on Seeking Alpha, “A Play on Subprime Woes and Homebuilders: TOL vs. KBH” that summarizes a Barron’s story on how the subprime saga is developing. It is consistent with what we’ve said in other posts, namely, by itself, the subprime problem isn’t big enough to damage the economy seriously. But the subprime mess is revealing other problems, first, that the housing market is in much worse shape than people have wanted to admit (independent of subprime fallout) and second, investors have funded all kinds of risky, lousy credits and like subprimes, a lot of them are likely to go sour. The first item is likely to produce a fall in consumer and business confidence that will reduce spending. Items first and second together will lead investors and lenders to become more stringent, and less debt capital also means lower growth.
From Seeking Alpha:
Even though subprime loans are a small percentage of all mortgages, credit-tightening standards that are being initiated in the wake of subprime fallout is still likely to affect home demand and prices. StreetTRACKS SPDR Homebuilders ETF (XHB) is down 10% since early February, and may not have hit bottom yet: Goldman Sachs recently lowered its odds for a ‘better-than-expected’ spring selling season from 20% to 10%….Michael Benhamou of Louis Capital says that credit tightening will be particularly harsh on the lower-end of the borrowing spectrum, so luxury homebuilders like Toll Brothers Inc. (TOL) [average home price $690,000] should fare better than bargain builders like KB Home (KBH) [$277,000] — he reckons Toll will outperform KB Homes by 15% over the next three months….
