Homebuilding Analysts Need New Building Blocks
As the president of a regional homebuilding company in the “Foreclosure Capital” of California and U.S., I am perplexed at the recent homebuilding stock recommendations by some analysts and experts. Back in May, I had a chance to meet with a UBS analyst at the Pacific Coast Building Conference in San Francisco. After listening to his very detailed and informative presentation, concluding all the public homebuilders will come out “okay”, it became clear to me, analysts were not looking at the future correctly. Simply, the analyst community has significantly underestimated the impairments required to adjust balance sheets, hence they have completely missed the “Real” Debt/Cap and liquidity ratios for most public builders. Why are the impairments underestimated? In years past, say 1991, the large public builders only controlled about 15% of any market. Now, they can easily control 50% to 80% of any significant market. If the public builders all deploy the same strategy in a down market, namely, getting liquid, the market begins a death spiral, since the public builders are thinking they can build their way out of the problem or sale land. Building spec inventory has only caused additional supply and the lowering of prices, and they are unable to sale land, because no one is buying. Now the public builders are in a proverbial “Catch 22”. The only way they can get cash is to build homes and try to sell them. But, by building homes and creating excess supply, they eventually lower prices, necessitating more impairment charges. If they stop building, they can’t produce cash, hence become insolvent. “Blood is in the Water” and some small cap builders can not survive in this environment. Q4 results will be horrible, so I don’t know how anyone can recommend a homebuilder in the foreseeable future.