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cabuilderboy (91.26)

Homebuilding Analysts Need New Building Blocks

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October 10, 2007 – Comments (8)

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.

8 Comments – Post Your Own

#1) On October 10, 2007 at 1:35 PM, floridabuilder2 (99.35) wrote:

back in 2005 how many homes were you doing nationally? ball park is ok....

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#2) On October 10, 2007 at 4:49 PM, cabuilderboy (91.26) wrote:

I started with the company last year. The company did about 450 homes in the Central Valley of California that year, but has been in the Valley for 25 years.

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#3) On October 10, 2007 at 5:34 PM, floridabuilder2 (99.35) wrote:

I used to live in Visalia

 My guess is that if your only in the Central Valley based on those sales numbers your with either Granville, Tim Lewis communities, JTS communities, JMC Homes, Ennis Homes... those are the only builders that have enough communities to deliver that amount of homes....

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#4) On October 10, 2007 at 11:02 PM, d1david (29.46) wrote:

hope to see some caps picks.. great blog

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#5) On October 11, 2007 at 11:56 AM, leohaas (35.49) wrote:

Can anyone confirm this story? The author has no profile, no active picks, and this is his first blog. I am a sceptic, even when it comes to believing stories that support my view of the world!

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#6) On October 11, 2007 at 9:43 PM, floridabuilder2 (99.35) wrote:

his view is correct... the fact that he didn't reply to my comment #3... makes me think that I came to close for his comfort...  I could easily track him down since i have connections in the central valley (if he is for real), but it is irrelevant... so no point leohaas

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#7) On October 15, 2007 at 1:21 PM, cabuilderboy (91.26) wrote:

Sorry, I have been in Southern California since last Thursday. No discomfort, I have been live on CNBC's "Squawk Box" and on other CNBC segments talking about the industry. I am with Florsheim Homes, a 25 year builder in the Central Valley.

I came aboard over a year ago, after working for the Country's largest private builder.

I just thought it was time, someone who actually works in the industry, and is not with a public company should comment on what is really going on.

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#8) On October 19, 2007 at 12:22 AM, Landwonk (< 20) wrote:

Wow,

A real life homebuilder. I am impressed. The real deal. I noticed your comments on the floridabuilder blog. Having a California perspective will be very useful. You are at ground zero as it relates to the housing market. With the excess investory in the Central Valley, I have to believe a recovery is at least 3-5 years away.

You are a brave man.

 

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