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New Home Sales, Look Out Below?

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June 23, 2010 – Comments (20)

Another good post by Jake at Econompic. New home sales, which had a spike due to the tax credit have fallen off, which was expected. But they fell off so much that they set an new low for the decade ... that was not so expected.

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New Homes Sales.... Looooookkkkkk Ouuuuttttt Beeeeellllooooowwwwww
by Jake, Wednesday, June 23, 2010

http://econompicdata.blogspot.com/2010/06/new-homes-sales-looooookkkkkk.html

When EconomPic posted last month's new home sales data, we titled the post New Home Sales Jump... Test Comes Next Month. So how'd we do?

Not so good... a 32.7% drop to a new record low.



ENLARGE

Smoothed over Six Months



ENLARGE

20 Comments – Post Your Own

#1) On June 23, 2010 at 5:33 PM, obsoleteaccount (< 20) wrote:

i dont know about you but its giving me some hope for a bull market....if the markets rally for 2 weeks and then finish slightly down 2 days, and on the third day not only do we get this info but the fed says theyre more cautious now than they were last time they spoke, and the dow still finishes up 5 points, what is it gonna take to plunge the market? id say any good news sends the market flying, so i loaded up

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#2) On June 23, 2010 at 6:11 PM, binve (< 20) wrote:

Valyoo ,

Hey man

>>i dont know about you but its giving me some hope for a bull market..

Fair enough, but I disagree and am on the other side of the trade. Everybody looks at the data differently :) Thanks!..

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#3) On June 23, 2010 at 6:19 PM, Griffin416 (99.98) wrote:

Valyoo has a good point (for the immediate term) about bad news - good price action. It does say the market wants to go higher. But that is not why I am chiming in.

When we had that cash for clunkers program, it did stimulate car sales. People were terrified that sales would plummet after the program was over...guess what...it did, by exactly the same amount as the real estate data fell, by 1/3%. Afterwards, car sales continued to climb after that one horrible abberation. Just a thought.

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#4) On June 23, 2010 at 6:21 PM, binve (< 20) wrote:

Griffin416 ,

Very good point! I would argue though, the cars are a significantly smaller 'investment' and that the supply of houses (existing) is much greater. But your point is well taken..

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#5) On June 23, 2010 at 7:06 PM, obsoleteaccount (< 20) wrote:

Binve ,

While it is true that cars are a smaller investment, there are usually other modes of transportation that can be used, especially since the economy was worse off during that time frame (i think)

However some people would be looking to scoop up cheap homes as an investment, where as cars are a terrible investment.

Not saying I disagree, just something to keep in mind.

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#6) On June 23, 2010 at 7:08 PM, binve (< 20) wrote:

Valyoo ,

>>However some people would be looking to scoop up cheap homes as an investment, where as cars are a terrible investment.

I was being sarcastic, hence my quotes around 'investment'..

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#7) On June 23, 2010 at 9:47 PM, obsoleteaccount (< 20) wrote:

oh I wasnt referring to what you said when i was talking about investments.  I was merely pointing out that homes serve not only an important function but are also used as an investment where cars serve only a function but no investment purpose

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#8) On June 24, 2010 at 10:36 AM, floridabuilder2 (99.34) wrote:

I expected new home sales to be far worse :-)

The public homebuilders are well off their internal forecasts, Lennar's chatter this morning is nothing more than window dressing.  Things are far worse.  I expect new housing to produce terrible numbers through the Summer, only the gov't with a bigger package of goodies can stop the bleeding.

I also believe this is the final bottom of housing/new homebuilding and the reason why I started building now.

Homebuilding leads the nation into and out of recessions....  I don't think you will see substantial (more than 10%) price drops, but instead you will see substantial drops in activity/transactions.  This effects asset valuations far greater than pricing.  It will be interesting to see if the public builders finally come clean with all their zero value assets they still have on their books.

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#9) On June 24, 2010 at 11:52 AM, leohaas (31.55) wrote:

With all the homes available through short sales and foreclosures, why would anyone want to buy a new home today? I mean, only people who want to over pay for something new, would even consider new construction today. There is plenty of supply out there and in all but the very best markets at prices for which builders cannot build. Not even if they got the land for free!

Count on homebuilding to be in the drains until the glut of foreclosed homes is resolved...

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#10) On June 24, 2010 at 12:26 PM, binve (< 20) wrote:

floridabuilder2,

Hey FB!

>>I expected new home sales to be far worse :-)

Gotcha. And per our last discussion, I have been focused on new home sales vs. existing home sales, although CalcuatedRisk has a nice post on the gap: http://www.calculatedriskblog.com/2010/06/home-sales-distressing-gap.html.

>>I also believe this is the final bottom of housing/new homebuilding and the reason why I started building now.

That definitely makes sense and I think you are right. HBs are very beaten down and everybody is bearish, so you are building at the bottom. But this is another reason why I am bearish on the economy. Because even if you are building at the bottom and your downside is limited, it will still be awhile before we have a lot of growth in homebuilding. Everybody is talking about the recovery like it has already happened and that growth in all sectors is now a given, and I don't think that is even remotely true.

>>Homebuilding leads the nation into and out of recessions....  I don't think you will see substantial (more than 10%) price drops, but instead you will see substantial drops in activity/transactions.  This effects asset valuations far greater than pricing.  It will be interesting to see if the public builders finally come clean with all their zero value assets they still have on their books.

Great comment! I will definitely stay tuned in to see how that issue plays out. Thanks man!

leohaas ,

Very fair points..

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#11) On June 24, 2010 at 1:59 PM, MLGtrader (97.79) wrote:

Hey FB,

I really appreciate all of your commentary.

How much lower do you think builder stocks will go?  Is there more negative news that will drive them lower or are they bottoming now?  Would it be wise to be short at these level?

Thanks a bunch!

Collin

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#12) On June 24, 2010 at 2:19 PM, RootnToot (30.47) wrote:

#9 With all the homes available through short sales and foreclosures, why would anyone want to buy a new home today?

I have to agree. My wife is a realtor and the vast majority of the action she sees is exactly as you stated. Furthermore, many of the offers that she receives or writes for foreclosed properties are invariably low balls. Good luck to anyone who is currently trying to sell a house that is not in foreclosure unless it is undeniably unique in style or location.

Binve, as usual, a great point of discussion that does not involve name calling, mud slinging, body slamming, nose twisting, or eye gouging!! Thanks

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#13) On June 24, 2010 at 2:25 PM, binve (< 20) wrote:

RootnToot,

>>Binve, as usual, a great point of discussion that does not involve name calling, mud slinging, body slamming, nose twisting, or eye gouging!! Thanks

No problem man! Thanks!..

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#14) On June 24, 2010 at 2:52 PM, Tastylunch (29.48) wrote:

Yeah hard to see housing really improving when gov't takes away the free juice and no one has a job.

don't know how many guys in the mortgage biz were warning about this. But it was a lot at least to me ancedotally

A non-surprise "surprise".

Dunno if FB is right the final bottom is almost in, but it's definitely pretty late in the game.

the wild card remains Fannie and Freddie if you ask me. If they keep status quo indefinitely then yeah maybe this is the real bottom. But what if they implode? I don't think anyone knows what would happen then...

One thing we are missing this time too, is a source of financial catalyst like we had in the early 90's. So many REITS went public it helped give a major cash injection to builders and ended the housing downturn there a little early....

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#15) On June 24, 2010 at 3:00 PM, binve (< 20) wrote:

Tastylunch ,

Hey man! Great comments

>>One thing we are missing this time too, is a source of financial catalyst like we had in the early 90's. So many REITS went public it helped give a major cash injection to builders and ended the housing downturn there a little early..

Exactly. This is another reason for my comment #10 above. Even if the downside in HBs is limited, the realizable upside is years aways. I think the best case scenario for HBs is sideways basing as the market carves out out bottom / maybe slightly downtrending. I don't see a high growth situation here anytime soon, for for the rest of the economy where margins will be decreasing across the board (my post earlier this weeks), the spells bad news for the growth story...

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#16) On June 24, 2010 at 7:46 PM, floridabuilder2 (99.34) wrote:

leohaas,

have you tried to buy a foreclosure or short sale....  the govt and banks make it such a ridiculous process that people give up and buy new.   I have heard enough people in the industry state that people are buying new because they got tired of being screwed trying to buy foreclosure, etc...

bineve,

public homebuilders cannot pro-forma new land buys at current paces.  Even with all the propping the federal govt did, the national average was 2/month in sales which is 50% below what one would consider a good pro-forma number of 4/month.

small guys like me with virtually no overhead in A rated markets can make plenty of money building 1 home a month at a site.  until I see actual recovery in housing, our economy goes nowhere... as I told my partner, I am happy that this is taking so long because there are virtually no bidders on land assets today.  so for now we / builders head lower and I think when they hit 52 week lows then it is time to start biting on some builder stocks for those who only play equities.

mlgtrader,

 I posted several months ago to short builders look at my ITB pick that was the exact date.  The article that Motley Fool wrote in which I said short Meritage was the reason why I had to shut down my blogging.  That was/is my top pick for the past year so when I am bearish on the 3rd best stock in this sector that means everybody below is eating crow too.

So the time to short was when I blogged that shorting builders was a sure thing.  We have seen about 50%-70% of the stock downside so there is limited opportunities now especially with the govt having the ability to prop up the market in one day (e.g. new program)....  It would be much wiser to wait for more and more bad news to pile on and then go long on one of the builder stocks trading under $5.  If you buy one of them under $5 this summer you'll get 50% to  100% return in 6 months because of their volatility and short positions.  None of the builders are in jeopardy of going bankrupt the next 18 months so that downside risk is eliminated.  HOV will be the next one to go under if a builder does go under.

Tasty,

there are only two trades in homebuilding... buy a stock under $5 this summer and do what I say above... or buy a top builder and hold for 5 years....  Any other play won't maximize your return or take advantage of capital gains rates.  I'm going to do both plays.... 

I'm hoping that foreclosures start pressuring home prices down (although I stand by the downside is limited nationally to around 10%) because that will put a lot of panic in the overall market and create buying opportunities.

On a side note, one of the reasons why I feel homebuilders have bottomed is because you can get construction loans today and that was not possible in 2009 and the first quarter of 2010.  So the small regional banks with no prior exposure to RE have created a floor.  The ability to raise equity and debt is one of the things that moves the market  that people aren't aware of....

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#17) On June 24, 2010 at 11:24 PM, Tastylunch (29.48) wrote:

floridabuilder2

I like you HB stock strategy, makes sense to me. A tradeable short covering pop makes sense if the industry hits an extended malaise period. 

Buy pessmism sell optimism, has always treated me well...

>>On a side note, one of the reasons why I feel homebuilders have bottomed is because you can get construction loans today and that was not possible in 2009 and the first quarter of 2010.  So the small regional banks with no prior exposure to RE have created a floor.  The ability to raise equity and debt is one of the things that moves the market  that people aren't aware of....

Yeah I'm very aware of this. Which is why Fannie and Freddie still concern me. While I doubt our gov't has the stones to actually restructure them, if they were to do that, those loans and financing options could be gone again for awhile...

Still there is no signs they plan to do that anytime soon. I doubt Obama will risk the chaos that would cause. Especially given how much BP is going to continue to rock everything from pension funds to gasoline prices all over the country for the rest of the year. I'm sure the fed will kick the can as long as they can.

You are right of course, It is really hard to do business without access to credit!

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#18) On June 25, 2010 at 9:54 AM, MLGtrader (97.79) wrote:

Thanks fb!  I actually bought puts back when you said to short and was wondering when I should close them.  I am closing them out today.  I'll be waiting for more panic to buy some cheap builders.

 Thanks and keep up the good work!

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#19) On June 25, 2010 at 9:58 AM, floridabuilder2 (99.34) wrote:

Tasty,

I haven't read the financial bill that came out this morning, but I would guess that it contains costs for banks that will have them cut consumer credit loans and charge higher rates to mitigate regulation.  I think this is good in the sense that too many losers can get a credit card and run up 50-100k in debt paying the minimum balance.  Although it hurts the economy over the next several years, the US consumer has to reign in revolver debt and buy what they can afford.

The funny thing is I am taking the Democrat position, but for different reasons (cutting easy consumer credit vs. the Democrat outcome of punishing banks to improve their political fortunes.).  I'm not sure why I can see why this legislation isn't going to work the way they think it is and the politicians don't

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#20) On July 01, 2010 at 9:49 AM, MLGtrader (97.79) wrote:

What price are you looking for to start buying up some of the builders?  I noticed that you green thumbed PHM, so is the reversal in builders coming soon?

As always thanks for your amazing insight.

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