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alstry (35.28)

A Halloween Homebuilding Update

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October 22, 2008 – Comments (3)

Now that our favorite primate housing analyst is off to WalMart to look for a new costume....there is little doubt he will return as a new character before Halloween....so in the meantime here is a quick HB update.

The analysis is simple and direct.  IT SUCKS FOR HBs out there and it will likely suck for a number of years.  Anyone thinking of investing in a HB right now or getting into the business in the foreseeable future should have their head examined.

RYL and PHM reported tonight and both were as bad as the other.  Both are liquidating inventory in a mad scramble to raise cash but doing little to pay down debt.  It will catch up to them soon as they will likely have miserable sales in the next two quarters only digging a deep hole even deeper.

As I have been stating for many many many months......it will only get worse until home prices come into balance with incomes and inventory comes into balance with demand.....my estimation is we are about 5 to 10 years away before any such balance is reached........and during that period you might expect 80-90% of public HBs to go bankrupt as most have way too much debt on their books supporting too many unprofitable communities.

Our favorite housing analyst babe "I don't drink kool-aid" Ivy Zelman gave a presentation at the Fall Construction Conference today.  In keeping with the Halloween spirt, Ms. Zelman gave the following quote:

When it came to sales in the new-home market, she said, "Current trends are pretty frightening."

http://www.bigbuilderonline.com/industry-news.asp?sectionID=363&articleID=797270

"September trumped July and August, which we didn't think was possible," Zelman said. "And then we saw October."

But even in this era of going asset light--essentially reducing land exposure--Zelman pointed out that some public builders were facing a "big conundrum" vis à vis a diminishing supply of finished lots.

"At some point they have to put a shovel in the ground," Zelman said, "or invest cash in new options."

It is when the HBs have to put the shovels in the ground when the cash will start to bleed....and at that point there will be few donors to replace the lost pints.....and it looks like we are at that point for many right now. 

Again.....if current conditions persist......you can comfortably expect 80-90% of public HBs to go BK or be near BK within the next few years......especially if those executives keep paying themselves enormous salaries for losing shareholder money.

 

 

 

3 Comments – Post Your Own

#1) On October 22, 2008 at 11:03 PM, schlottman (< 20) wrote:

Alstry,

Where do you see HOV, LEN right now.  My take on things is HOV is facing immenent disaster with LEN right behind them.  Any others you would enter into this ranking aside from Orleans and MHI?

 

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#2) On October 22, 2008 at 11:26 PM, alstry (35.28) wrote:

Schlott,

At this point, it is simply a question of who runs out of cash first.  Those that you identified are definitely on the short list.

 

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#3) On October 23, 2008 at 2:26 PM, steve24216 (72.55) wrote:

Alstry---Very good post. The vast majority of builders are totally screwed. Adding to the problems for the builders with cash is that the seller's of distressed lots (i.e the banks) are also screwed, because they don't have enough capital to absorb the loss they would need to take. This is one of those unintended consequencses of the government's bailout, now all the banks are waiting to either try and sell their construction loans to the FEDs through the TARP, or they're waiting to get capital from the FEDs so they can afford to write down their lots to a price where they can sell them. The problem for the builders is that they're running out of finished lots that they've impaired.Once that happens they won't be able to monetize any land, because the cost to develop their "paper" lots would be more than those lots are worth. So if they can't buy finished lots from banks and other distrssed sellers at a discount then they're screwed and they can't build houses. If they don't build houses they're going to have a really hard time coming up with the cash to make debt payments. It takes at least 6 months to start pulling cash back into the company when you buy a new project and start builing house, so if the builders don't start getting discounted finished lot deals within the next 6-12 months, then they're not going to have any cash coming into the till in the later half of 2009 and into 2010. If you look at all the builders debt most start coming due in 2010.

 

My bankruptcy predictions for the large public builders are as follows:

Beazer Homes

Brookfield Homes

K Hovnanian Homes

and Shea Homes....they're the largest private builder in the country.

Furthermore, we'll start to see that the builders currently in Chapter 11 (Kimball Hill Homes, Woodside Homes etc) will not emerge, instead he Chapter 11s will convert to Chapter 7's and the companies assets will be liquidated.

 

If I can start thinking of things to blog about on a consistent basis I might make a feable attempt to fill in for Floridabuilder until he comes back out of retirement. I'm not claiming I will be anywhere near as good a blogger as he is, but it seems as though everyone is interested in the homebuilding industry

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