Less Bad SUCKS!!!!
We have been hearing about revenues declining down, but better than expected for a few years now. Especially in the homebuilding industry. Let's take a look at what happens when revenues decline sequentially for a few years....even though the rate of decline inproves each year.
For ease of calculation we will start at 100 and assume revenues decline 50% in the first year.....we get to 50.
In the next we we see a 20% improvement in rate of decline to only 40% and now we are at 30.
Finally, as things are really looking up....revenues only decline 30%, a 25% improvement.... and now we are at 21.
Hmmmm. Revenues went from 100 to 21 but each year they were better than expected???? About an 80% loss of revenues over 3 years.....probably most of the work force fired.....and the business is probably unable to service debt and pay overhead on this low revenue stream.
If you look at many public homebuilders, you might be shocked how much their revenues have declined over the past 3 years....AND THAT IS AFTER MANY OF THEIR COMPETITORS HAVE GONE OUT OF BUSINESS.
The irony is many homebuilders are still saddled with the same or similar debt load they had a few years ago.....meaning that servicing the debt today is much harder selling fewer homes at lower margins. Some are even paying much higher interest rates.
But since homebuilders capitalize debt and don't expense it.....much of the impact is not seen in the quarterly income statement but rather capitalized and added to inventory.....why do you think homebuilders inventory keeps staying so high quarter after quarter even though they are liquidating? It is also a key reason why we are seeing "one time" writedowns now going on for three years.
Ask yourself, how can a homebuilder like Standard Pacific service almost $2 Billion dollars of debt (some at a rate in the double digits) when its revenues have contracted to less than a $1 Billion per year on tight margins? Soon you will learn that the primary reason for some companies remaining public is not because they are viable business.....but they are viable credit default swap playing machines. Much more money can be made playing credit default swaps on public companies than can ever be made building homes....especially in this environment.
The problem is not only are homebuyer/citizens the losers with crashing home values due to over supply from relative indifference to running a profitable business....but so are pension funds/municipalities/ and mutual funds for usually being on the wrong side of the trades.
Get ready for a lot of pension fund stories breaking in the news over the next few weeks....as we are still losing over 500,000 per week and practically no one is hiring.