The Inventory-Sales Ratio and Homebuilder Return Predictability
AbstractThe firm’s inventory-sales ratio prices exposure to the housing cycle with a predictable sign. The buyer of a new home holds a pre-construction contract at a guaranteed price with the right to cancel at any date up to delivery. The demand for contracts rises with falling user costs while lot supply is inelastic, leading to land bidding in booms. During busts sales decline and land bidding largely disappears. Delivery is from inventory at a cost of carry below that of construction. The firm’s inventory-sales ratio leads and is negatively correlated with its subsequent returns. For U.S. homebuilders over 1975 to 2009, a 1% increase in the inventory-sales ratio lowers next-quarter returns by five basis points. Copyright Springer Science+Business Media, LLC 2013
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Bibliographic InfoArticle provided by Springer in its journal The Journal of Real Estate Finance and Economics.
Volume (Year): 46 (2013)
Issue (Month): 3 (April)
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Web page: http://www.springerlink.com/link.asp?id=102945
Asset pricing; Inventories; Short-run rigidity; Homebuilder returns; G12; G14; R33;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets
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