Don Magruder is Ro-Mac's general manager. Don entered the lumber business in 1979. In his 30-year career in the lumber-distribution business, he has worked for both national and regional lumber distributors. He's also worked through two major construction busts... in 1979-81 and 1990-91.

Yesterday, I met Don in his office. I asked him about the homebuilding industry…

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"There's more pain to come," he said.

"We first felt the brakes late in 2005. That means the downturn is now over two years old. I think we hit the bottom in November. But I don't think the recovery will look like a 'U.' I think we'll roll along the bottom for a while..."

Don says it takes six months to permit a house in Florida. In other words, it takes six months of paperwork before you can bang in the first nail. So he knows there won't be any construction in the next six months because no one is coming into his shop today and starting the paperwork.

"I had an accounts meeting with my sales team the other day," said Don. "While there weren't any deals to speak of... people were at least kicking tires again... and tossing a couple of ideas around."

I asked Don how to make money in this market.

Don says there's going to be a massive fire sale in Florida property in the next six months. It's already starting...

"The other day I saw a house in a nice subdivision..." he said. "It sold for over $300,000 at the top of the market. Now it's in foreclosure, and the bank has it listed at $250,000. But I know they'll accept $150,000 for it... and give you the financing if you have good credit."

Don also says it's time to invest in niche homebuilders. "The big homebuilders are withdrawing," he said. "Now the little guys can get back into the market."

Don says the big homebuilders' strategy was to buy as many lots as they could in a certain area and try to corner the market.

"A senior executive at a homebuilder explained this to me at a conference a couple of years ago. He thought he could control prices. So that was their strategy. They bought as much raw land as they could. I told him this was a terrible strategy. Now we're seeing I was right. They're having to liquidate their land holdings. Prices are plummeting. And the little guys finally have a chance to get their fingers in the pie... at decent prices again."

There are three types of niche homebuilder: regional homebuilders, large market custom builders, and "golf cart" developers. Custom builders design houses to the owner's specs. Golf-cart communities are developments exclusively for people over the age of 55. In central Florida, he mentioned The Villages and Pringle as two golf-cart developers he thought would do very well.

Investors need to exercise patience here. Don thinks the best opportunities will be in physical property... and small regional homebuilders.

Good investing,