Rocky Bottom

Home builder Lennar reported good quarterly earnings today. CEO characterized the current housing market as moving along a "rocky bottom."

Major headwind is high unemployment and foreclosures.

Expiration of tax credit does not seem to be a major factor going forward. Buyers are more focused on affordability and the opportunity to own a decent home at a decent location to take advantage of low mortgage rates.

Incentive is down. Average sale price is up. A major factor is in California where certain markets have turned warm. Gross margin is up. Expect profitability in 2010.

A subtantial amount of cash is being put to work. More opportunities in distressed properties are expected. Lennar is in a unique position to work with FDIC and banks and other investors to opportunistically invest and/or co-invest in distress loans.

We get the sense that the housing market is going to be very uneven. Certain home builders who has the flexibility and the ability will be able to take advantage of local conditions better than others.

We like the type that are both aggressive and cautious.