Let's recap yesterday and then dig in to details.
There is no doubt that homebuilding stocks provided phenomenal returns up until summer 2005 and have been falling since then. Where there is doubt is whether these stocks are bottoming in preparation for a huge rally or whether they are drawing bargain hunters into a “value trap” right before falling another 50%.

On Aug. 22, Toll Brothers released some pretty terrible results in comparison with the stellar numbers the company had been posting over the past few years. It was not really a surprise, considering that the company has repeatedly made headlines this year with profit warnings accompanying lower “guidance.” Diluted EPS in the quarter ending July 31 came in at $1.07, down 16% from last year’s record 3rd-quarter result of $1.27. But far more important than the quarterly results was Toll’s deteriorating backlog:
Toll’s order book is deteriorating much faster. It is more forward-looking and indicates the magnitude of the decline likely to befall Toll’s 2007 earnings. The key Northeast and Mid-Atlantic markets, have seen orders dry up. The result will be further contraction in backlog as Toll delivers finished goods (houses) out of its backlog faster as it replenishes the backlog with new orders:

In a statement accompanying the press release, CEO Robert Toll stated:

“The continuing malaise in the housing market, we believe, is the result of an oversupply of inventory and a decline in confidence. The speculative buyers of 2004 and 2005 are now sellers; builders that built speculative homes are trying to move them by offering large incentives and discounts ; and some anxious buyers are canceling contracts for homes already being built. This overhang in supply and the aggressive discounting of many builders is undermining consumer confidence and keeping buyers on the sidelines as they continue to worry about the direction of home prices.”

Some well-known contrarian investors with phenomenal track records have been accumulating homebuilders like Beazer, Centex, Pulte, and Ryland since spring 2006. After major declines, these four stocks are trading for an average trailing P/E ratio of 4.7. This is incredibly cheap in the current market, but trailing earnings represent the very peak of the most speculative housing market in history (in other words, 2007 earnings are likely to decline significantly, making the forward P/E ratio potentially double or triple the trailing ratio). Your macro outlook for the housing market over the next couple of years will determine whether you think these stocks are bottoming or just pausing before another round of declines.

Over the past three years, Toll aggressively doubled its land position at inflated prices -- from 41,000 home sites in October 2002 up to 83,000 in October 2005.
How many people do you know are out there trying to sell a house and it can't move and how many people are value buying a house now. It seems like a complete opposite of the market from a year ago.
The Fed has done a great job of cooling off the housing market by raising interest rates. It has even put stress on those who bought at the peak and are having trouble paying their mortgage. This will rvrntually weigh on the housing market more.
Toll now has alot of inventory which will not move. They will have larger carrying costs for that inventory.
Their sales will decline and their overhead will eat them up. They could have to write some of the inventory off, causing a loss.

There is an unpleasant fate awaiting real estate speculators in the most overheated markets. Also, those expecting a short, painless correction in housing prices after such a long and incredibly speculative run are likely to be disappointed. But as an investor, it’s important to consider all sides of the macro debate before committing capital to a trade or an investment. Housing is a long term market and the 5 year picture tells it all.
Therefore: I say wait another year or 2 to consider buying any of the above housing stocks.