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EScroogeJr (< 20)

Ficticious losses of homebuilders

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August 16, 2007 – Comments (5)

This quarter, all homebuilders reported losses due to imparements. As a result, everybody panicked and some fools even began to sell their stocks below book value.

Imparements are just the kind the kind of losses that I love to see, because they are paper losses. The intrinsic value of the land inventory is still the same as it was a year ago, and the intrinsic value of the housing inventory is also the same because houses take longer to sell but are not getting any cheaper. This means that when the houses do get sold, the companies will get back every penny of these "losses". A year from now we'll be reading news reports like this: "XYZ reported record income today, surprising the analysts who were predicting results in line with the previous year. John Smith from Goldman Sachs rated XYZ a buy, citing the hidden value of its land inventory carried on the boks at below-the-market cost".

5 Comments – Post Your Own

#1) On August 16, 2007 at 9:04 PM, FourthAxis (< 20) wrote:

"the intrinsic value of the housing inventory is also the same because houses take longer to sell but are not getting any cheaper."

What?? 

In a year the homes will NOT be worth as much as they are being appraised at now.   The inventory glut is yet to take effect.  The homes (when sold) will be sold at a loss compared to the appraised value of today.  Many of these home builders that you see as a deal will be gone in a year or two.  Simple.

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#2) On August 16, 2007 at 9:47 PM, retailsails (94.06) wrote:

Um, yeah and they are BORROWING the $$ to finance all of their acquisitions/development...the longer they don't sell the inventory which IS declining in value, the smaller their return on investment, or larger the loss.  They can't give these things away right now.  At least one of these puppies will be gone within the year...

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#3) On August 16, 2007 at 9:54 PM, EScroogeJr (< 20) wrote:

There is a very simple formula that let you predict the current and future house prices. Add up all your assets. Don't forget your old carpet, furniture, and teacups. Then figure out the largerst mortgage loan you can afford, assuming you're going to survive on water and hamburgers. Then figure how much you can lie on your application to get past that amount. Add everything up. You're almost there. Take all your pocket change and add to the amount. Now, you've arrived to the final price. This is what the house is going to cost you today. Fast forward ten years. Index your salary for inflation. Index your real assets (real estate and stocks), applying the rate of inflation plus two percentage points. Repeat the above procedure. Add the inflation-indexed pocket change. This is how much the house is going to cost in ten years. Things have never been and will never be otherwise.

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#4) On August 16, 2007 at 10:40 PM, leohaas (31.76) wrote:

There is a reason the author of this blog is at -1,000: his picks are probably of the same quality as his writing...

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#5) On August 16, 2007 at 10:50 PM, EScroogeJr (< 20) wrote:

I agree. Both are a little underappreciated at the moment ;)

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