At least 5.25% - perhaps more
the economy appears to be overheating, with more inflation then meets the eye- which does not surprise me.

DryFly: I'd be surprised if the homebuilders suffered anything close to what the auto's did. Firstly, they don't have the same labor issues - mostly retiree healthcare. The auto's are a victim of their prior success - they made HUGE promises to workers based on a 1970's global industry dominance that simply doesn't exist now. But the unions and retirees won't let them off the hook. Builder's don't have that legacy issue, to my knowledge, and also don't have as large a union issue. As far as the builder's balance sheets, remember that much of the land they bought 5 years is now worth 2X what they paid for it. I don't think they've been allowed to "write up" that land inventory, so they are unlikely to have face a write-down if prices come in, say, 20% or so. The obvious issue they would face is that, now that the general consensus is that the best of the residential real estate boom is behind us, their future projections of cash flow are being revised downward, and with it the value of their stock. But this is a shareholder value issue, not a business continuity problem. Unlike the autos, I don't think anyone is saying the big homebuilders have a 50% chance of bankruptcy and that their very business model may not be sustainable. They will muddle along through the decline, with stock prices 50% of what they were a year ago (like TOL), for another 10-15 years or so. Until the next big residential real estate cycle.

A much bigger concern to me is the negative savings rate: Consumption (and therefore much of our economy) is being fueled by people extracting equity from their homes! When prices come in 20-30% over the next 5 years, many of those people are going to be in deep trouble. The growth engine of GDP in this country will stall out.

Few points:

1. Revisions since October have been consistently downward in every report. Recall that, when first released, October new home sales were a new reocrd of 1.424 million. Now, it stands at 1.345, below the 1.371 record set in July.
2. Median prices on the other hand have been consistently revised up.
3. Overall new home sales are 7.2% below yoy, but sales of complted homes are up 10.3% yoy. Builders are desperately pushing completed but unsold homes. Sales of homes not started or under construction are down 11.2% yoy.

Don't look at the absolute number, but the rate of change. Joseph Ellis, Goldman Sachs' retail analyst (#1 for 18 consecutive years), has a great book, Ahead of the Curve. He writes about leading indicators in predicting economic trends.

The most important is real hourly wages, which drive consumer spending, which drives production, which drives capital spending, which drives employment. Most economists make the mistake of thinking the low unemployment is a healthy economy, but they are looking at the rear view mirror. Employment tells us where the economy WAS.

Most economists make the mistake of looking at absolute numbers, or quarterly changes which provide much noise.

Look at year-over-year changes. Look at the rate of change.

We are heading into a recession, and the leading indicators are in place: housing permits down, sales down, etc. etc.

Check out Ahead of the Curve by Joseph H. Ellis

I just bought a house. I bid 25% under the asking price and they hit my bid. Anecdotal? Sure, but to me much more telling than any of these govt reports or speeches by real estate agents.

At 25% under the market I think there is value where I live (New Mexico).

Home builders will do ok. They have the ability to cut selling prices significantly without impinging on their profits (not so with the homeowner with a new maximum mortgage), they have a disposable labor force, they can negotiate reductions from suppliers, they can cut corners and still have a sellable house, they can sell partially finished houses. Dont worry about the large builders, worry about the small ones, the home owners, the laborers, and the stiffed suppliers.

But I really don't know & their balance sheets & income statements don't make it very clear - especially how their inventory is valued.

I'm no expert, but I just read that builders report the dollar value of their total land holdings in quarterly filings, but nothing is usually said about the prices paid for individual parcels. It is reasonable to expect that many of them will be facing writedowns as real estate markets continue to cool.

In fact, it's already started. Centex, one of the top national builders, just reported in their quarterly earnings report that they were taking charges against land purchases. They are the first to do so and they will be punished mercilessly by the stock market.