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floridabuilder2 (99.67)

My analysis - Why you should buy a public builder this spring or summer

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February 17, 2008 – Comments (28)

I will be rolling out my first of four group valuations either Monday or Tuesday.  The first group is the 5 S&P 500 builders.  I was going to roll it out today, but there is too much information here to also pile on those individual builder analysis.  Additionally, if you don't buy into what I am saying below either from a fundamental or technical basis, then why even bother reading my builder valuations over the next 3 weeks.  The S&P 500 builders consist of CTX, PHM, LEN, KBH, and DHI. 

In each of the four builder grouping rollouts I will be linking to this blog post.  There is more information than humor here so be warned.

 

ITB – Ishares USHome ETF

I use this ETF to track builder technicals vs. tracking each individual homebuilder.  As I pointed out in a prior blog it is superior to the XHB if you truly want to track only builder stocks and not Home Depot type of crap. 

We are 15.6% lower than the ITB recent high set on 2/1/08

We are 14.2% higher than the ITB low set on 11/27/07

We are 29.7% higher than the ITB 52 week low set on 1/9/08

This past week the ITB dropped 3.4%

I feel pretty confident we will hit the technical low set on 11/27.  We need some really horrible news to hit the 52 week low so don’t get greedy.

 

Why Buy A Public Homebuilder? 

Here are the reasons why I think you should buy a public homebuilder during the next market sell off in the spring or summer.  This week should be interesting because from a technical standpoint if the market moves lower we will test at the very least Nov 2007 lows.  There is no doubt in my mind that the financials will continue to produce some shockingly bad news causing an overall market sell off.  Remember the builders took huge write offs in the 4th quarter of 2006 and everyone thought that was the end of it.  Only to be surprised with massive write offs in the 3rd and 4th quarter of 2007 a year later. 

 

If you have any questions about the points below, please feel free to ask.  Additionally, I could ramble off several dozen more points, but I wouldn’t want to put you asleep.

 

1)      Reduced supply.  Private homebuilders are going to continue going under because they are under capitalized or insolvent.    

2)      New supply.  It takes time for a new builder to ramp up operations vs. one that is large in multiple markets.  Especially operations that would produce significant volume in a local market place.

3)      Sales pricing.  Near term in 2008, we are entering another round of home prices going down, hurting poorly capitalized builders which are mainly privates.  This only pushes privates deeper in the hole.

4)      Macro demand.  With our loose immigration laws and relatively young population compared to other industrialized nations we will continue to have a need for more housing.  We are living longer and the immigrants have much higher birth rates

5)      Move resources to demand.  Publics can exit the weakest markets in the next few years and move resources to the markets with better job growth, population growth and housing that is stabilizing more quickly.  Privates are normally stuck in the markets that they are in for the most part

6)      Sales pricing.  Selling prices should firm up in markets starting in the later half of 2008.  Over time markets with job growth will firm up one by one

7)      Revenue growth.  The US will probably do 500k homes in 2008, significantly below the 30 year average of around 1 million.  In 5 years we will slowly work our way back to that long term trend creating more demand and top line sales growth for those builders who survive.  Remember, you are buying in at the absolute trough from a macro top line standpoint.

8)      Revenue growth.  Public homebuilders control around 20% of the total market share nationally.  So they do not have to cannibalize each other to get sales growth.

9)      Revenue growth.  Consolidation will cause builder stocks to have runs every now and then stretching their p/e’s for those who want to exit their homebuilder position early

10)  Cost structure.  Publics have the ability to write off land assets, lowering their cost structure, screwing the previous shareholder.  So past shareholders got screwed not new ones buying after the majority of the write-offs have occurred and the price is rock bottom.  Private homebuilders cannot write off land assets without jeopardizing their existing loans. When a private writes land off they receive no benefit plus it’s their money not shareholders.  This means that public homebuilders going forward have a lower cost structure.

11)  Equity.  Privates have little in the way of getting extra equity because vultures want to gobble them up after they go under.  In a lot of cases their assets are worth less than their debt, so even if the private wanted to sell the equity money won’t pay him what he is asking for.  Public builders with huge cash positions do not have to raise equity and I would stay away from any builder that needs to issue more shares for expansion.  Obviously if they are issuing more equity to survive you would avoid them too. 

12)  Debt.  Publics have long term debt at low rates that will be unavailable to any builder for a long time.  Privates use short term debt and will have their revolving credit lines cut if they can’t inject more equity.  It is going to be several years before builders can borrow a lot of debt

13)  Cost structure.  Materials and labor costs are significantly lower than the peak years.  Did you know that lumber prices are down 46% from the peak in August 2004?  Lumber accounts for 15-20% of sticks and bricks and 4% of COGS roughly.

14)  Cost structure.  Raw land prices are significantly lower than the peak years by 75% plus or minus in B areas, which is the bread and butter of a public builder

15)  Cash Flow.  Builders will be able to get better terms and conditions on land buys.  Instead of taking down an entire site of 200 lots, they may be able to take down lots monthly or yearly over 4 years improving cash flow.

16)  Cost structure.  Overheads will be significantly lower than the peak years and won’t ramp up as sales improve.  Many of the publics have blown out a lot of the middle management and have dissolved regional positions.  Trust me the regional positions were overpaid pieces of $hit that didn’t do anything and didn’t know what was going on.

17)  Buy in point for stock price.  Now that public builders have for the most part written off a significant portion of their land inventory, any discount to book value is a gift.  So get as deep a discount as you can on book in a market sell off.

18)  Cash Flow.  The smart public builders with a lot of cash will probably buy finished lots vs. developing their own land.  Why?  Because in 2008 and maybe even in 2009 for some markets, finished lots will be sold below cost.

19)  Revenue growth.  Those with huge cash positions will be able to move more quickly in securing the best available land in 2009 and accelerating revenue growth, while those floundering on their back like a drunk will be trying to get back on their feet. 

Again, that is a short list of why I am bullish on public builders.  Top line growth will be there and it is a matter of time before they start making money again and earnings growth will accelerate.  It is a perfect situation.  Demand in 2008 will be a record low for the past 30 years, totally through the floor.  Private competition is going to be flat on its back and there will be few avenues to raise capital.  So over the next 5 years by just getting back to normalized national sales levels and through fewer competitors a big slob like PHM or CTX can achieve 20% top line growth.    

 

What I feel will happen next 

January was a great technical buy in period, but I was reluctant to call a fundamental bottom because the financials (banks, bond insurers, investment banks, insurers, etc) haven’t capitulated yet.  When the financials capitulate they are going to take the entire market down.  I am guessing this is going to happen spring summer.  Now can the financials have trouble for years?  Yes, but we aren’t buying financials.  The financials have a lot of off balance sheet problems.  The builders don’t have exposure to these off balance sheet risks like derivatives.  If the financials capitulate, this is going to put a lot of pressure on the private builders even more so than now.  Additionally, we are seeing a relatively weak spring selling season and it will be game over for another round of private builders.  2009 will be better than 2008 for the surviving builders.  We need to strike when the iron is hot at maximum panic.  I truly believe once the financials start rolling out pre-earnings and earnings another round of massive write offs in the 1st and 2nd quarter it is going to provide us the cover to buy in at a deep discount again. 

 

Some Key Q's and A’s on my spring summer buy in prediction 

Q:  Are you sure we will get this massive sell off and I will be able to buy in lower vs. just buying in today?

A:  Yes….  If you took a bell shape curve, the chances of you not getting a lower price point in the March-August timeframe vs. today is about 3 standard deviations or more from the norm.  Look it up if you don’t know what percentage that is.   

 

Q: Will all the public builders hit a new 52 week low in your spring summer buy in?

A:  How the f**k do I know?  If I could see the future do you think I would be blogging for free on the Motley Fool?  You had your opportunity in January to get that awesome technical bounce when I told you, so don’t blame me if you didn’t catch that 52 week low… I did, I just sold too early because I’m an idiot.

 

Q:  When should I buy in this spring summer sell off?

A:  Again, how the f**k do I know?  I have no idea what kind of time bombs the financials are going to provide us or when?  They could have a bomb go off every month from March to September of this year.

 

Q:  FB, I’m scared and I need help to decide when to buy?

A:  There are no guarantees in life.  However, if you are this pathetic at reading charts or knowing when the market is so oversold that you could buy KKD and make money then do this.  When I start closing red thumbs on builder stocks and switching them to green then I think that is the time… could we slide further?  Yea, but you can only push the RSI so far below 30 before you get a huge short rally.  Look at the ITB ETF on stockcharts.com... when did the rallies happen?  When the RSI hit 30.... its not that hard people. 

 

Q: What happens if the financials or market just looks like it is getting worse? 

A:  Well if you bought in at max pain oversold, you can take profits at any time just like people who bought in January.  I am using a technical oversold condition in builders and the overall market as cover to make a fundamental buy in.  You should be able to get out when the reversal happens on builders.  The reversal will happen because of their high short position.  Remember, there are a lot of dolts out there that think all of the builders are going under when they are not!  Personally, on this buy in I want to have a long term capital gains and not short term.

 

 

 

28 Comments – Post Your Own

#1) On February 17, 2008 at 12:16 PM, ppaul07 (< 20) wrote:

Looking forward to you homebuilder valuations!

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#2) On February 17, 2008 at 1:06 PM, dwot (99.98) wrote:

From big picture on why I don't think this will pan out the way you think...

Is the Fed out of bullets?  I wonder:

 "When an asset like real estate becomes overvalued, even if you drop interest rates to zero, you can't force consumers to borrow more, because they've already borrowed too much. Nor can you force lenders to lend, because they're already puking on 'bad paper.' It's called a liquidity trap."

-Bob Campbell, San Diego Real Estate Timing
via Fleck

>
Even more proof ? Consider this article, variations of which have been in the media the past few days:  Fed Interest-Rate Cuts Fail to Lower Borrowing Costs:

"The Federal Reserve's interest-rate cuts last month have failed to lower borrowing costs for many companies and households, increasing the chance of further reductions from the central bank.

Companies are paying more to borrow now than before the Fed reduced its benchmark rate by 1.25 percentage point over nine days in January, based on data compiled by Merrill Lynch & Co. Rates on so-called jumbo mortgages, those above $417,000, have increased in the past month, making it tougher to sell properties and risking further price declines."           

Bill King noted a similar story on ABC News:

"[Monday] night, the lead story on ABC evening news (World News) was ‘though the Fed has cut interest rates sharply in recent weeks, banks and credit card companies are hiking rates on consumers.’

Chase, Bank One and Bank of American were cited. The ABC News reporter said banks are hiking consumer interest rates and fees to cover losses on their crappy paper.

Yes, it’s that blatant and transparent.

 

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#3) On February 17, 2008 at 1:06 PM, EScroogeJr (98.54) wrote:

FL, my criterion for choosing the best builder to add to my position (as you know, I loaded up in Fall 07 and am not selling anything until 2010) would be its land position. My builder should a) have the maximum supply of land (and preferably have taken the maximum write-offs) b) have the best land in the best locations, c) have the intention to hold on to this land and to buy more. Point a) is easy to verify by reading the annual report, but points b) and c) are not so obvious. Would be interested to hear your take on which builder has the best land position. So far, I like TOL a lot, but I have some doubts about NVR. NVR's land policy has worked wonderfully during the downturn, but I wonder if will they have the guts to change it now, because what worked in 2006 will be a poor strategy in 2008. Don't you think that when the market turns, it will be better to own the simple "they don't make any more of it" formula, rather than the low-inventory model of NVR and the "new-and-improved" LEN?

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#4) On February 17, 2008 at 1:39 PM, floridabuilder2 (99.67) wrote:

dwot......  we have had 2 million foreclosures in the last 2 years.... how many major regional banks in the US have went under?  In fact how many major companies have went under in the US?  At the end of the day the people who bought the bad paper are going to take huge losses (and a lot of those people are foreigners), most people who are in trouble are going to walk away from their debt and have bad credit but they won't have bad debt, many publicly traded companies will have to recapitalize causing their stock prices to go down because of dillution but do they go bankrupt in mass?

We are 11.6%  below the unemployment rate of Detroit when I was in highschool and we are 6% below the inflation rate....  I didn't think things were that bad back then at close to 17% unemployment, so I am not too worried today about what is going to happen... recession, yes...  but builders will still make money.... 

escrooge.... you are correct on a) and on b).... as far as c) I agree but I would like to see a going forward strategy of buying finished lots such as NVR..

NVR is a great stock if it plunged with the rest of them, but too many people are buying it up and it is barely off its all time highs......... it should perform as well as the S&P 500 builders, however, it will underperform the basket of 17 public builders that exist today...........  sometimes being the best builder with the best model translates into $$$s in stock appreciation and sometimes it doesn't.....  TOL will be a big winner

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#5) On February 17, 2008 at 4:19 PM, TDRH (99.98) wrote:

floridabuilder, 

        I have a couple of pages of bleeding red homebuilder shorts, you would think I would have learned my lesson, and I have as far as shorting goes.

        That being said I am still not ready to invest in the homebuilders.  Unfortunately in my estimation there is still more pain ahead for them, and the economy in general.

         The main reason I see more pain on the horizon is the tightening of lending standards, the lack of secondary markets for Alt-A loans, and the weakness in the insurance sector.   I believe we are going to see a return to the 80/20 rule forcing buyers to put skin in the game.  

          The second reason, is that the declining values in peoples home's, combined with inflationary pressures are going to put a damper on Consumer Confidence and spending.   This represents 72% of our GDP.    The decline in consumer spending will slow our economy and unemployment will increase dramatically.

           The increase in unemployment, slowing economy and tightening of credit requirements,  will cause home values to continue to slide.   This will increase foreclosures from those unable and unwilling to make their payments.   With nothing invested in their homes, and the values dropping 15-35% people are and will continue to walk away.   This puts more and more houses on the market. 

            I anticipate the values to continue to slide through this spring, through 2009, and hopefully begin to rebound in spring of 2010.   Housing values need to be in line with real incomes before there will be any hint of a turnaround.  

            It was reading your blog concerning the "book value" of these builder's holdings that made me continue to short the market, and it helped tremendously.    We noted sales for the land holdings at 40 cents on the dollar.    

             Personally, if a public homebuilder has the ability to last through the next two years, I do not see it having much of a competitive advantage over new capital.   I do not have your insight into the barriers of entry.  

              That being said, I hope I am wrong and that you prosper from your picks.  

 

 

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#6) On February 17, 2008 at 5:28 PM, kurtkalamar (< 20) wrote:

Great blog.  I'm not sure how bad things get.  If a panic occurs that drives prices down past the all-time low, you can bet your ass I'll be buying, probably ITB rather than an individual builder.  Depends how much time I have to do my own research and what advice you are giving.

If nothing pops and I miss the bottom.  Oh well.  Patience is a virtue.  I won't chase after the market.  That's an easy way to get killed. 

 

 

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#7) On February 17, 2008 at 6:58 PM, floridabuilder2 (99.67) wrote:

TDRH,

the following states listed below are below their historical average as it relates to percent of income going towards housing.  This is based on John Burns Associates data.  So a 0.0 would be the lowest percent of income towards housing in that submarkets history and 10.0 would be the highest percent of income towards housing in that submarkets history.  5.0 would be the mean.  The problem is that people keep focusing on the worst markets and stating that the whole nation is in trouble and that is not true. 

So here are the states below their historical average

Alabama, Alaska, Arkansas, Colorado, Conn., Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisianna, Maine, Michigan, Minn, Mizzou, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, N Dakota, Ohio, Oklahoma, Penn, Rhode Island, S Dakota, Tenn, Utah, Virginia, W Virginia, Wyoming

that is 32 states whose percent of income going towards housing is less than that states historical average....

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#8) On February 17, 2008 at 8:28 PM, ToKReason (88.67) wrote:

i would love to hear more from you floridabuilder! =)

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#9) On February 17, 2008 at 10:24 PM, McFroggie (< 20) wrote:

Looking forward to your analysis.  You state solid reasons supporting your marco call, I just think you're too early.  TDRH stated it pretty well.  I think there's a lot more pain to follow. You're correct that the privates are toast but resale, including bank owned property will likely be significant competition for quite some time.  I don't see the majors being profitable until 2010, at the earliest, and that's if the recession is mild.  All bets are off if the $%&@ hits the fan.  

As for the post concerning which major builders are in better shape going forward, those who have a limited land supply or those who have a long land supply.  Get real.  It's not close. You'd be much better off with a limited supply because you'll be able to buy land for a fraction of what it went for just a couple of years ago.  We're already seeing that today.  Yes, much cheaper than what builders are writing their land down to now through impairments.  When builders take an impairment they typically take a charge that results in that project operating at break even, including OH. They're not writing these things back to 20% gross margins.  In most cases, more likely less than half that amount.  And what makes you think that the builders have been eager to "clear the decks" with their impairment charges?  More likely they've hide as much as they could.  Why do you really think builders have chosen to mothball projects? More often it's not because doing so results in a higher IRR, it's to avoid taking an impairment and wiping out equity and then running into banking covenant issues.

        

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#10) On February 17, 2008 at 10:25 PM, feebuilders (< 20) wrote:

Great Job once again Florida, I agree with you assessment of our Public Friends I have had Summer circled on my Calendar for the past quarter as the time to start my buy. From a Land perspective I see the flood of opportunity begining right about the same time. Glad to see that you quote John Burns, he has been dead on in his projections of this market and to tell you the truth it was one of his speeches that motivated me to switch gears two years ago. I would highly recommennd to the bloggers out there Johns free newsletter, he just gives the facts. he is not an NAHB shill or Grizzly Bear. Good to see you back Blogging Florida, for a while there I thought it was over for a week or so I has go to the SPF board to get my fix.

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#11) On February 18, 2008 at 9:28 AM, floridabuilder2 (99.67) wrote:

mcfroggie... obviously if the $hit hits the fan then you probably would liquidate all your holdings not just public builder stocks, but i am more of a believer in buying on huge sells off and then determining whether or not to take profits at a later date....

i would also agree, i would want a limited land supply... however, i would point out that the builder i worked for wrote off raw land to zero in parts of florida.... so i don't know how you are going to get land cheaper than that...  a lot of your issues on impairments and land positions are spot on... one of my concerns though with an NVR type of strategy with no owned lots is that their stock price is still relatively high and I am looking for deep discounts.........

feebuilders........... yes john burns is spot on....  my friend/future partner and I are thinking that capitulation will happen in the summer-winter time frame....  I know there were some great deals out there through some banks, but the banks still haven't flushed 95% of their dead loans out....  once this spring selling season passes, it is pretty much over for privates....  I was reading the orlando business journal and they had quotes from a couple of private builders... one of them tony nicholson is absolutely toast...  he thinks that home prices will go up in the 2nd half and he was complaining about the publics deep discounting.....  he just doesn't get it.... the problem is that he overpaid for his land

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#12) On February 18, 2008 at 10:16 AM, saunafool (97.43) wrote:

FB,

Can you please clarify what kind of a trade it will be, a long term buy in point, or a short-term technical bounce? Will it be a true value price from which to enter a long term buy and hold position?

While, longer term, I agree on the upside for the stronger builders, I still think the next 6 months is too soon for 2 reasons: inventory and affordability.

While there will be a continued demand for housing, it doesn't have to be housing to buy per se. This is the entire argument of the rentlosers-there are plenty of great vacancies out there to rent at much lower prices than buying. So, there is a ton of existing new and used inventory, more coming onto the market every month due to foreclosures, and the sales pace has slowed considerably (not sure if that will get worse, stay low for several years, or start ticking up).

Second thing is affordability. On one hand, the builders are in a better position because they are getting their developable lots for a much better cost structure. On the other hand, people and banks are starting to re-price risk into the real estate equation. People who don't have the money are either not going to get the loan or seriously consider renting for a few years as long as it is cheaper than buying.

Finally, I think there is still a ton of bubbly psychology that needs to evaporate. 77% of Americans think their house went up or held its value last year when the S&P Case Shiller Index says national prices fell by almost 10%. Did 20% of the houses fall by 40%, dragging down the numbers for the other 77%? I think not.

So, my point is that the evidence does not give me a comfort level for a long term buy, even if the market sells off to very low levels. Therefore, I go back to my original question, are you talking about a short-term or long-term trade? 

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#13) On February 18, 2008 at 10:30 AM, GS751 (28.93) wrote:

The % of income going to housing was very interesting.  I agree with you that people are going to just walk away from their debt and that is when the holders of this debt are screwed

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#14) On February 18, 2008 at 11:11 AM, feebuilders (< 20) wrote:

Florida, I will pass on to you updates from here in Southern California as we near the selloff , I agree the end of spring will be the end for a number of the privates, we are actually seeing  that happen now, DR Horton has an Un Auction slae going on in 23 projects here in Southern California althought most are in C markets and they are advertising up to 50% off, it has already sent shock waves through our local industry. The Discounts will spread to the other large publics, push into the higher level markets and squeeze the private.

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#15) On February 18, 2008 at 11:57 AM, floridabuilder2 (99.67) wrote:

sauna, it can be either.......  there is a floor on these builders called cash that will come into play...  i think people are not getting my point that publics are 20% mkt share and basically every private builder is insolvent...  when all these privates start going under you can not replace them quickly with new builders...  people keep talking about affordability, but I just listed 32 states that if you were to take out a 30 year mortgage are at or below their norm for mtg payment / income....  people talk about affordability, but anyone who was around during the 80s can tell you all about mortgages rates over 10%....  a true bottom feeders buys when the news is the worst... and I feel for builders it will be 2008....  500k new homes nationally is incredible....  obviously, you can buy the technical and if you think this fall the overall economy is sliding real fast into significant danger you can take profits again and trade the builders.  At the end of the day I am pretty confident that the builders will not hit new 52 week lows in 2009 unless they are going under

gs751.........  25% of our economy/people are living in the bubble cities or depressed economies such as michigan (per the economist)....  everyone wants to focus on these 25%... remember, the builders can leave parts of california and move their operations to other markets.....  NVR's divisions are very small compared to a pulte yet they make a lot of money...  the publics will figure out where to go

feebuilders, as somone in the business like cabuilderboy you get it... you understand submarkets, a-b-c locations, privates vs publics, etc....  My partner and I feel pretty confident that later this year we will get the lots we want and sell homes in the low 100s with a 15% gross margin with very low overheads.........  I'm actually excited because there are going to be so much cheap land availabile the next 5 years in florida it will be the builders not the developers that make money....

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#16) On February 18, 2008 at 2:06 PM, McFroggie (< 20) wrote:

I'm not real familiar with FLA, more so with the west but I have a couple of comments pertaining to your reply about builders writing land down to zero.  One, there is plenty of land in non "A" locations that now doesn't pencil with raw land at zero. Development, fees and carry themselves exceed what you can residual a finished lot at in order to earn an acceptable return. In some cases your impairment will exceed the raw land component.  This would generally be much more likely in the west as opposed to FLA, due to finished lot costs in the west holding a much higher percentage of COS.  Two, most of the large builders don't hold much raw land on their books.  They buy land partially improved or have put in significant improvements to date.  In the rush to fill their land pipelines during the boom, builders took on a lot of land with development issues.  It penciled then, not now.  Not likely anytime soon.  

We are also just starting to see the privates throw in the towel, although many look to still be in denial.  It's game over for them but if you're going to lose everything, why roll over?  Why not hope to pull out a miracle?  It's going to get real messy with the private's lending banks.  I don't think the banks have a clue about the value of what they'll be getting back.         

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#17) On February 18, 2008 at 4:03 PM, floridabuilder2 (99.67) wrote:

mcFroggie,

C land in a lot of locations does not pencil with raw land at zero in florida.  The very definition of B land (semi suburban, retail, commercial, access to highways) is that even in a downturn it should still pencil at some point.  So I would say A and B land....  As far as C land in FL that is being written down to zero, this is in SW Florida (the properties that I am talking about).  So 5 years from now, there should be value in a Sarasota, but today in Sarasota you need to be an A piece or you are just toast.

McFroggie you would be suprised at the amount of raw lots some of the largest builders were holding in 2005 and 2006...  most of the land sales that have taken place has been more focused on raw although finished was also sold... but do not discount the amount of raw land on the books of PHM, DHI, and LEN even today.........  Now if your talking about RYL, NVR, MDC, and MTH to name a few then yes those builders are more slanted towards finished lots.. however, they run a different model vs the big 5....  you are correct that in the rush a lot of bad raw land deals were done... the top 5 builder i worked for bought land that was pure unentitled...  in fact on some of the deals you could read the headlines in the tampa or orlando news where there was a lot of fighting with the counties on impact fees, offsite improvements, etc.... again it was being a big and wanting all the profits from the development side, instead of staying asset light and making money as a builder

a number of privates have personal guarantees (the ones where the owner is the founder of the company)....  I think some of them threw money at the banks but now it gets to a point where you are so far under and no one will give you a price for your company that even comes close to your liabilities....  it is game over for them and why I keep trying to refocus people on this blog that they are wrong about public builders... that privates are going to go under in droves and those production machines cannot ramp up quickly

i have been harping since august about the banks not coming to reality that a lot of land they loaned on is worthless...  my friend/partner deals with the banks workout/special asset guys and he said that one by one they slowly are getting it... but I don't think capitulation comes until this summer and then you are going to start to see banks across the US showing huge increases in nonperforming assets related to construction and land/land development

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#18) On February 18, 2008 at 9:20 PM, cabuilderboy (34.88) wrote:

FL: I think we have pretty much been on the same page for a while. Your only item I would question may be in your Market Share argument, specifically for CA. Since many of the publics earned huge profits out of CA (SPF, DHI, LEN, CTX and KBH to name a few), while increasing market share from 14% in 1991 to about 50% to 80% in 2006 (depending on the micro-market), future sales, cash flow and profit potential, as was seen earlier in the decade, will be much harder to come by for these guys.

Other than that, I see your technical perspective as being accurate. Also, don't minimize the effect of the stimulus package. Increasing conforming and FHA loan limits will help overcome some of the stricter financing standards. In our area, I expect the FHA limit to increase above $400K. That means everyone of my plan types will be FHA eligible, and someone can buy with a low down payment and reasonable credit score. I could not say that, after last February.

Before the bears chime in, we had our best sales week of the year, here in the foreclosure capital, and traffic has been up since December. This was even after the biggest foreclosure auction in the are took place last Wednesday. I don't watch the papers or TV to see what people are doing, I watch the traffic in the models and the signed contracts to get the real perspective on how people feel.

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#19) On February 19, 2008 at 1:42 AM, Landwonk (< 20) wrote:

FB,

A couple of comments.

1. Why bother with a homebuilder model at all? Why not just buy the stock of your preferred homebuilders? 

2. Simpler still, why not just buy some of your favorite Exchange Traded Fund, ITF.

3. You can borrow the money on margin, just like the loan you will need to build your houses, you have a lot more liquidity and your ROI should be better as well.

 

 

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#20) On February 19, 2008 at 8:23 AM, alstry (99.66) wrote:

CaBuilder and FlBuilder:

What kind of sales figures have you seen for the first part of the year?  We know interest rates dipped over the last few weeks.  Last week we saw the largest weekly rise in mortgage rates in over 10 years.

If investors start shying away from long term debt in America and mortgage rates return to 7 or 8%, what kind of impact do you think this will have on sales?

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#21) On February 19, 2008 at 9:07 AM, cabuilderboy (34.88) wrote:

As of Sunday, we are at .75 sales per week and currently negotiating a few other offers. At our entry level price points, I think I could work within a 7%+ interest rate environment, because the loan buydown potential would still be fairly inexpensive. It would probably just be a trade-off for another incentive (granite counter or a 2/1 buydown?). Higher interest rates certainly will not help, but higher loan limits will help a bit.

As an aside, I attended a very large foreclosure auction in Stokcton last week, and became convinced, there are plenty of people looking and willing to buy. I will blog about it more later.

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#22) On February 19, 2008 at 10:46 AM, floridabuilder2 (99.67) wrote:

cabuilder boy... most of the contacts i talk to tell me 2-3 month in net signups, however, with discounting you breakeven over your sg&a... my 5 year outlook is more focused on what normalized profits will be 5 years from now.... as far as market share, I have seen in various publications a mkt share of 20-25% nationally....  I know in some areas like DC, Phx, etc... they have mkt share in excess of 50% while places like Kansas City they might have one public builder....  It is interesting to see where all the profits came from the nationals vs. their actual sales....  the old days of huge profits in CA and DC for example will probably be replaced somewhat by the massive writeoffs taken...

land wonk... personally I like some of the gamble builders that are on the ropes because the returns could be huge if they survive (e.g. hov, spf, bzh)....  however, if not those then it does make more sense to just buy the ITB

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#23) On February 19, 2008 at 12:46 PM, alstry (99.66) wrote:

The Forthcoming “Jingle Mail” Tsunami: 10 to 15 Million Households Likely to Walk Away from their Homes/Mortgages Leading to a Systemic Banking Crisis

 

Nouriel Roubini | Feb 19, 2008

The current housing recession, subprime meltdown and severe credit crunch in financial markets has many worrisome aspects. And while there is always a “crisis de jeur” - one day SIVs, the next day monolines, the next day TOBs or auction-rate securities - one needs to keep some perspective and consider which risks are first-order sources of stress for financial markets and which ones are of second or third-order concern.

I will argue that the most important first-order risk for financial markets derives from the likelihood that 10 million to 15 million households may walk away from their homes if – as likely - home prices fall another 10% in 2008 and further in 2009. When – in the summer of 2006 – this author argued that this would be the worst housing US recession in the last 50 years and that home prices would fall – from their peak value – by 20% such predictions were taken as being nearly lunatic. Too bad that this author ended up being too optimistic, not too pessimistic, about the severity of this housing recession. Indeed, this will end up to likely to be the worst housing recession in US history – not just in the last 50 years – and home prices may likely eventually fall by 30%, not this author’s “optimistic” 20%. By now prices declines of the order of 20% are predicted by Goldman Sachs, Robert Shiller, MarketWatch chief economist Irwin Kellner and others; while Paul Krugman has suggested even a figure of 30%; and, according to Bob Shiller, in some markets home prices may fall by 40 to 50%.

So let us consider the implications for the household sector of price declines of the order of 20 to 30%. The math is simple as I will flesh out in this note: 10 to 15 million households will end up in negative equity territory and will be likely to default on their homes and walk away from them. Then, the losses for the financial system from this massive defaults will be of the order of $1 trillion to $2 trillion, a multiple of the $200 to $400 billion of losses currently estimated for mortgage related securities.

Let us consider next some of the details of this scenario and its consequences for the financial system…

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#24) On February 19, 2008 at 1:38 PM, floridabuilder2 (99.67) wrote:

alstry...... it is just one man's opinion and he is probably wrong....  I'm sure if Roubini was around during the late 70s with his commentary the US was on its way to economic collapse and ruin......  The more I read some of his predictions the more I think he is a nut... as far as his prediction that this would be the worst housing recession, if you look at the data available at that time I think a lot of people thought this.......  at the end of the day we probably have a mild to bad recession and then it will be back to business as usual

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#25) On February 19, 2008 at 1:38 PM, alstry (99.66) wrote:

The Forthcoming “Jingle Mail” Tsunami: 10 to 15 Million Households Likely to Walk Away from their Homes/Mortgages Leading to a Systemic Banking Crisis

 

Nouriel Roubini | Feb 19, 2008

The current housing recession, subprime meltdown and severe credit crunch in financial markets has many worrisome aspects. And while there is always a “crisis de jeur” - one day SIVs, the next day monolines, the next day TOBs or auction-rate securities - one needs to keep some perspective and consider which risks are first-order sources of stress for financial markets and which ones are of second or third-order concern.

I will argue that the most important first-order risk for financial markets derives from the likelihood that 10 million to 15 million households may walk away from their homes if – as likely - home prices fall another 10% in 2008 and further in 2009. When – in the summer of 2006 – this author argued that this would be the worst housing US recession in the last 50 years and that home prices would fall – from their peak value – by 20% such predictions were taken as being nearly lunatic. Too bad that this author ended up being too optimistic, not too pessimistic, about the severity of this housing recession. Indeed, this will end up to likely to be the worst housing recession in US history – not just in the last 50 years – and home prices may likely eventually fall by 30%, not this author’s “optimistic” 20%. By now prices declines of the order of 20% are predicted by Goldman Sachs, Robert Shiller, MarketWatch chief economist Irwin Kellner and others; while Paul Krugman has suggested even a figure of 30%; and, according to Bob Shiller, in some markets home prices may fall by 40 to 50%.

So let us consider the implications for the household sector of price declines of the order of 20 to 30%. The math is simple as I will flesh out in this note: 10 to 15 million households will end up in negative equity territory and will be likely to default on their homes and walk away from them. Then, the losses for the financial system from this massive defaults will be of the order of $1 trillion to $2 trillion, a multiple of the $200 to $400 billion of losses currently estimated for mortgage related securities.

Let us consider next some of the details of this scenario and its consequences for the financial system…

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#26) On February 19, 2008 at 4:11 PM, alstry (99.66) wrote:

FB,

Sorry about the double post.  I have done it on my blog as well and I will work on being more conscious of hitting the button twice.

The issue here is the lax lending standards that never existed in your lifetime up until the last five years.  We never had nothing down 1% teaser rates ect.....  It was the lax environment that took out inventory at the margins.  Once marginal inventory is removed, you get upward pricing pressure creating an ever increasing sprial.

 Just like a public company is only worth what the last few shares traded for, a house is worth what the last three houses in the neighborhood sold for.  In other words, pricing is based on the sales at the margins.

As inventory keep coming to market, downward pricing pressure is exerted at the margins creating more and more people to fall below water on their mortgages.  Nothing close to this situation has ever happened before, especially with over $10 Trillion dollars at stake just on residential mortgages not including HELOCs.

If three people on a street send back their keys, it drives the values down for all homeowners in the neighborhood.  It is the inverse of the compound growth on the upside.  Now the price decline is affecting our municipalities and commercial properties driving down values even further.

How bad will it get.  I guess that is why some of us blog.

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#27) On February 19, 2008 at 7:52 PM, feebuilders (< 20) wrote:

Alstry,  We are not directly involved in selling homes ...thank god! but we are working with the largest home Auction firm in the Country it is ironic that there office is directly accross the street from Stan Pac. cabuilderboy is right there are plenty of qualified buyers out there, the auction company regularly has between 1000-3000 prequalified buyers at each auction. houses that are sold typically close within 30 days of the sale, most of the homes fall into the affordable range here in California but they are achieving 90% of current market value . I am most interested in the data of all of the these homebuyers and markets that they are buying in. It has been of great benefit for my business in so far it has given us the the floor for pricing each market and another measure for our valuation of the residule land values. What is most facinating in our research of the auction trend is that most of the buyers are buying the homes as their primary residence.

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#28) On February 22, 2008 at 5:22 PM, cubanstockpicker (81.31) wrote:

Florida, at least half of the states you mentioned are middle america with population concentrations that dont even count much if you get all of these in an election. Its great that the quantity of states, but you have to look at the concentrations of population in each state. Here are the rankings. 

Alabama(23), Alaska(47), Arkansas(32), Colorado(22), Conn(29)., Iowa(30), Kansas(33), Kentucky(26), Louisianna(24), Maine(40),  Minn(21),  Montana(44), Nebraska(38), New Hampshire(41),  New Mexico(36), N Dakota(48),  Oklahoma(28),  Rhode Island(43), S Dakota(46),  Utah(34),  W Virginia(37), Wyoming(50)

Its easy to make the data look great by state count, but the population density doesnt support using the state count model. 

For the few states left over only 4 hit the top 10 and New Jersey residents work in New York and make nice salaries for the most part and bring it across the border.

Virginia, Ohio, New Jersey, Mizzou, Penn, Georgia, Illinois, Indiana, Michigan, Tenn

 

I can see where the valuations you give come to play and the homebuilders qwill be getting cheap. But as soon as everyone gets over their historic run of the Boom, they will notice that the fundamentals have changed. the banks will og out of theyr way to prevent another massive buying feast of free money. the avergae american used to put away 20% to buy a home. Nowadays, the Average American doesnt have even more than $4,000 in the bank.  Click here

The lending guidelines have changed, all you need to do is read RDN's last SEC filing to know that they will not do high risk loans. What they consider high risk now, was a "good loan" two years ago. Which means borrowers will have to shell out 10% or more to buy a home. In averge home price terms, that means 28K plus. Even the Fed is tightening the screws on lending procedures with their FHA offerings.

The other point is the BACKLOG of foreclosures that havent occured because the courts are backed up for at least two years in collier county alone. Dont even count Dade county, which has a population that rivals most of the STATES on your 32 state list. www.miami-dadeclerk.com

There will be scavengers buying these homes at 50% to 60% of their loan price and the banks are happy for it because they get to dump the assets and shore up their balance sheets. 

Read IMB's latest filing on how they have increased their operating margins just to get rid of their Backlog of REO's. The banks will undercut the Homebuilders for the same reason that I can buy a beautiful home from 2005 with all warranties at 70% or less of the homebuilders "fire sale" price. So, as a homebuyer, which one would/should I buy?

Before that even happens, let me put away 10% or more. Something any American is finding very hard to do these days. 

The builders will not be able to convince the banks to give them favorable lending terms because the banks dont want the risk. Ask any Mortgage broker friend about the new pricing guidelines coming down from even the wildest thrift stores.

the parade is over, yes, you can buy a homebuilder as you can buy a home, but both of these will have very conservative growth trends once everyone realizes there wont be another party and if there is, there wont be an open bar, the band will suck and nobody will get "free punch and pie".

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