The InventorySales Ratio and Homebuilder Return P

Authors: Peter Chinloy Zhonghua Wu

Publish Date: 2011/09/01

Volume: 46, Issue: 3, Pages: 397-423

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Abstract

The firm’s inventorysales ratio prices exposure to the housing cycle with a predictable sign The buyer of a new home holds a preconstruction 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 inventorysales ratio leads and is negatively correlated with its subsequent returns For US homebuilders over 1975 to 2009 a 1 increase in the inventorysales ratio lowers nextquarter returns by five basis pointsWe are grateful to William Hardin III Ravi Jagannathan Xiaoquan Jiang Selale Tuzel Joe Williams and a referee for helpful comments and discussions Participants at the University of Southern California and University of CaliforniaLos Angeles provided discussions Asset pricing factors were obtained from Kenneth French’s data library

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