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Tropical Storm Housing - Forecast: Category 5 Hurricane



September 08, 2010 – Comments (24) | RELATED TICKERS: BZH , TOL , LEN

I can only remember one time on Motley Fool CAPS where I have completely disagreed with FloridaBuilder and that was over the intermediate-term outlook for PrivateBancorp probably something short of a year ago. As I look at the state of things right now everyone is trying to be a pioneer and run out in front of the pack calling tops and bottoms. No one, and I mean no one, has more right to do so in the homebuilding sector than FB. He more than accurately predicted which builders would fail and which would live to dance on the carcasses of their fallen brethren. I am, however, extremely skeptical of his most recent call that housing has indeed bottomed. I am pretty confident that he's jumping the gun just a bit on the national economic data and focusing on a few specific areas to get his data ( though this is my theory, not hard evidence so don't get too excited that I get to look over FB's shoulder as he writes these blogs ). Do I really have any room to speak on homebuilding? Probably not as I'm not in the business and he seemingly has been for decades, but I'm going to present (or should I say regurgitate) the facts yet again as to why housing has yet to see a bottom.

A Wave of Alt-A re-sets have only now begun to hit the marketplace

I know you've heard me profess this before, but the quality of loans out there is atrocious and those currently deliquent on their mortgages is rising. As if 1,658,000 foreclosures is not enough, I would predict this number to grow as high as 2.7M-2.9M before the bleeding finally stops in 2013. Yes, I am calling for the number of foreclosures to nearly double from their current levels due largely to the wave of Alt-A (undocumented income) mortgage resets. The problem here is that the same 6-10 states that have crippled the nation with collapsing home values, high unemployment rates and severe budget deficits are the same states that will experience the highest wave of Alt-A resets (cough that means you California cough). Nearly 1 in 8 people in this country are currently deliquent by at least 30 days on their mortgage, with three states currently showing a better than 3.35% foreclosure rate.

Non-current assets have been consistently rising since 2007 & net charge-offs are up

The most recent FDIC statistics showed a moderation in overall loan deterioration, but down is still down no matter which way you turn the compass! As of Q2 2010, straight from the horses mouths' at the FDIC, the total non-current loans (inclusive of mortgages, commercial and consumer loans) were up sharply from one-year earlier, 7.3% vs. 5.6% in 2009 and net charge-offs showed a moderate tick higher of 0.1% from Q2 2009. Even though this is more of a tangent than anything, one of the most disturbing statistics is the 11.6% charge-off rate for our credit card companies. That is absolutely HORRIFIC by any measure and it is a gross deviation from even the worst recessions we've had over the past few decades. This is just further proof that consumer loan quality and commercial loan quality are still poor and though leveling are continuing to get worse each quarter. Imagine how this will be impacted by a new wave of deliquencies set in motion by the aforementioned Alt-A's? Based on the figures I have it is increasingly likely that 1 in every 3 commercial loans will be underwater by 2013.

A glut of foreclosures is constraining home sales

How you get rid of 1,658,000 foreclosed homes is beyond me. A healthy market (or should I say a functional market) should be running around 300k foreclosed homes so we are well above and beyond that mark. New homes are being built but are there really any buyers? We established that lending has nearly come to a screeching halt with the end of the Obama homebuyer incentives and new home sales crashed in double digit percentage terms the month after that incentive ended. There aren't any catalysts out there which are making the middle class buyer feel like he can afford any more than he could in 2009. Consumer spending remains weak and should continue to be weak well into 2012 while consumer confidence numbers have begun to fall again (not surprisingly coinciding with those ALT-A loan deliquency increases.... am I beating a dead horse here? You bet!). To top this off, the end of the Bush Tax cuts in 2011 could spell disaster for an already teetering middle and upper-middle class. I want to know who will be buying these houses? If you build, I don't think anyone will come... even with a baseball field in the middle of a corn field...they still won't come.

Rates are at record lows and new home sales are fallling

According to recent mortgage data, a 30-year fixed rate mortgage can be had for 4.32%, the lowest on record since records were first kept in 1971 and yet the buyers still won't come. We have no incentives in place to get them to buy a new home, and the market for second-hand/foreclosed homes is a disaster with the anticipation that a secondary glut of foreclosures will hit the market within the next two to three years. Who can take out a loan when nearly 10% of our workforce is out of a job and average hourly earnings are stagnant?

I don't mean to purposely sound like Alstry but there are very few reasons to be bullish on the housing market. Home prices look primed for another 12%-15% decline over the next 30 months on the back of more defaults and a glut of foreclosures. The underlying prospect of deflation could make things even worse and hasten a continually falling market so feel free to just keep printing more money Mr. President! I'm not saying that every housing stock is a sell, but there are a handful of buys and a grocery basket full of sells. I think you need to tread lightly within the housing sector and place your bets to the downside if anywhere.

Normally I would give out a few specific names but this blog was aimed at the entire sector, so break out the bear claws and board up your windows because tropical storm Housing just got upgraded to a category 1 hurricane and it's heading our way.


24 Comments – Post Your Own

#1) On September 08, 2010 at 3:11 AM, MGDG (33.02) wrote:

Ultra, I'm more in tune with the resell market and am still looking for a bottom in 2-4 years. Foreclosures should continue to rise with pricing falling 10-15% during that period. I would think that would continue to put pressure on builders over the next few years as they compete with a growing inventory of unsold homes.

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#2) On September 08, 2010 at 7:47 AM, PaxtorReborn (28.87) wrote:


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#3) On September 08, 2010 at 7:47 AM, PaxtorReborn (28.87) wrote:

(+1 rec)

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#4) On September 08, 2010 at 10:24 AM, outoffocus (23.06) wrote:

Wow... I'm glad someone has the guts to stand up to FB's predictions.  But then again, if anyone has the right to challenge FB it should probably be you.  I will agree with FB that housing has certainly bottomed in the hardest hit areas like FL, AZ, DC, and maybe some areas of CA.  But I can say with certainty that housing has NOT bottomed in my area. For one, its still cheaper to rent than to buy right now.  And according to what others have said on CAPS, my area isnt the only area with room left to fall. 

One thing I wont contest with FB is homebuilder valuations. Though housing as a whole may not have bottomed, homebuilder stocks may have (as the equity market is disconnected from economic fundamentals).

One thing I will add is all this government intervention may actually be delaying the bottom even further.  Once the government is all out of bullets, we can then see a real bottom and subsequent rebound based on organic supply and demand rather than government subsidies.

But thats just the humble opinion of some who watches the housing market from the outside in.

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#5) On September 08, 2010 at 11:17 AM, miteycasey (29.00) wrote:

I don't think it matters.

Some people are going to buy new no matter what. Take cars for example. Even though they lose 1/3 of their value when they roll off the lot people still by new. I think houses are the same.

Now look at building costs supply/demand. Eveything is cheaper! lumber is cheaper, labor is cheaper, and land is relatively so houses will be cheaper.  I think builders will be fine.

To go back to cars. Used cars are much more expensive because cash-for-clunkers destroyed much of the inventory. But this doesn't affect new car sales as a whole (other than moving up purchases). Yearly sales figures will be about the same.  I'd expect new home sales to do the same.

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#6) On September 08, 2010 at 11:26 AM, miteycasey (29.00) wrote:

It's sad to say, but your title would be much like 'cash for clunkers'. If a cat5 hit Florida home building would go through the roof, driving housing up and employing most of the unemployed in the construction business.

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#7) On September 08, 2010 at 11:39 AM, portefeuille (98.85) wrote:

Some people are going to buy new no matter what. Take cars for example. Even though they lose 1/3 of their value when they roll off the lot people still by new.

see this paper (see here).

George A. Akerlof, The Market for "Lemons": Quality Uncertainty and the Market Mechanism (pdf)




From time to time one hears either mention of or surprise at the large price difference between new cars and those which have just left the showroom. The usual lunch table justification for this phenomenon is the pure joy of owning a "new" car. We offer a different explanation.



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#8) On September 08, 2010 at 11:49 AM, JakilaTheHun (99.91) wrote:

Whether or not housing has bottomed is not completely relevant.  I bought into REITs in 2009 and I didn't think RE would bottom till at least 2011-12.  Stocks are more liquid than RE.  This means that market discounts equities much more quickly than illiquid physical assets like real estate.  

The question isn't whether housing has bottomed.  The question is whether or not homebuilders are underpriced based on future cash flows and whether valuations for homebuilder stocks will ever become more attractive than they are now. 

My belief is that there is a significant likelihood that the stocks will not get much more attractive than right now.  Of course, it's possible they still fall another 10% - 20% over the next 12-18 months; in which case, I'll probably just buy in some more.  If I could predict the future, I would buy in at all the bottoms and sell at all the tops --- but no one can predict the future, and those who claim they can are lying to  you. 

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#9) On September 08, 2010 at 11:58 AM, outoffocus (23.06) wrote:

Thats a good paper Port.

I know the reasons I bought new are:

1. Peace of mind of not having to worry about breaking down on a highway.

2. Factory warranties get rid of the extra cost of repairs (for at least the first couple years)

3. No uncertainty of how the previous owner took care of the car.  Carfax can only tell you so much.

4. At that time the annual cost of keeping up my used car exceeded the cost of buying new.

5. The cost of the used version of the same car was so close to the new car price that the cost savings just weren't there.

Buying used is fine if you can keep the cost of repairs down.  But as a young female, its not fun being stuck on the side of the road waiting for a tow truck.

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#10) On September 08, 2010 at 12:02 PM, ikkyu2 (98.13) wrote:

Homes are really not fungible commodities.  Have you spent much time on Zillow lately?  You can start at Home A, walk two blocks to identical Home B on an identical lot, and be paying 20% more because of the two blocks that you walked.  Home A and Home B don't compete with each other for the same buyer, even though square footage, lot size, etc are seemingly identical.  Maybe Home A backs up to a railroad track or sewage plant; or maybe Home B is in a better school district.

Floridabuilder's main point - over the last year, not just recently - is that the hurricane of writedowns threw out the baby (the really good stuff, what he calls 'improved A lots') with the bathwater (the B and C stuff, the homes where you have to commute 3 hours one way to get to your job in Tucson or Phoenix).  The homebuilders with a little cash have been acquiring these desirable lots for pennies on the dollar compared to what they'll be able to improve and sell them for.

A crappy lot, 80 miles further away from the buyer's work, stuck in a division full of empty houses, and stripped of all its copper and fixtures, is not going to "compete" with a newly planned division in a good area that is developed thoughtfully from day 1, starting in 2011.  The builders have a chance at a fresh start, and titanic forces (4.3% 30-year loan rates!) are marshaled to ensure their success.  Jobs are a 6-12 month lagging indicator and they will start coming online - and people will start buying again, that's why it's called a 'cycle'.

I guess I've just recapitulated the pitch that your blog was answering. 

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#11) On September 08, 2010 at 2:35 PM, QualityPicks (39.54) wrote:

I think fb was not calling for a bottom in home prices, but on homebuilders.

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#12) On September 08, 2010 at 3:41 PM, EnigmaDude (51.66) wrote:

Like some other commentors have noted, you seem to have missed the point that FB was trying to make.  Even the most recent issue of Barrons agrees with FB that some public homebuilder stocks appear to be attractively priced right now for long term investors:

"Housing is still in the dumps. But the leading home builders are starting to see earnings again, their balance sheets are strong, their stocks—like their products—are reasonably priced. The stocks of industry leader D.R. Horton (ticker: DHI), PulteGroup (PHM), Lennar (LEN) and luxury specialist Toll Brothers (TOL) look reasonably priced, and the companies have greatly improved their balance sheets after big losses in 2008 and 2009."

You could well be correct that the housing market has not yet reached a "bottom".  But some select publicly held homebuilders represent significant values for those investors willing to wait a year or two (or perhaps even longer) to realize substantial gains.  If I had the extra cash to speculate, I would be looking hard at picking up some shares in my RL account.

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#13) On September 08, 2010 at 8:43 PM, floridabuilder2 (98.30) wrote:

I do not disagree with your assessment.  However, my call was that homebuilders (specifically public homebuilders) have bottomed.  There are several other reasons I had for making this call, but it was late and I was tired.

I believe the title of my blog was homebuilders not housing.  Additionally, the homebuilder portion started out stating more foreclosures and further price drops.

From a valuation standpoint homebuilders will only breach the summer lows if the economy double dips and in that case all stocks are going down not just homebuilders.  If the US economy just treads water along with a stock market in a trading pattern, homebuilders will out perform

A lot of my valuation call is based on how a public builder does a pro-forma on new land acquisition.  On the pro-forma's I do now for my operation, any uptick in housing or inflation will be magnified in a very positive way from a valuation and future earnings standpoint.

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#14) On September 08, 2010 at 8:44 PM, Option1307 (30.53) wrote:

Good write up, nice to see a well thought out response advocating the other side of the trade, so to speak. I definitely agree with what you say and I do agree that RE in general is likely due for some more pain ahead (1-3 yrs.). However, I have started nibbling on a few shares of homebuilders here and there with the idea that the companies themselves are relatively undervalued.

I competely agree with what Jakila said,

The question isn't whether housing has bottomed.  The question is whether or not homebuilders are underpriced based on future cash flows and whether valuations for homebuilder stocks will ever become more attractive than they are now.  

For me that is the key and I believe they are currently undervalued.

I'm not saying to go all in, in fact far from it, but now seems like an excellent time to start accumulating shares with a long term horizon.

Home prices look primed for another 12%-15% decline over the next 30 months on the back of more defaults and a glut of foreclosures. The underlying prospect of deflation could make things even worse

One thing FB has always stated is that the price of homes doesn't really matter because the imput costs have been falling fater. Therefore even though the headline number of price is, and potentially will keep, declining that is irrelevant, margins are going up.

Again, a great post and I appreciate seeing the other side of things.

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#15) On September 08, 2010 at 9:01 PM, dragonLZ (76.20) wrote:

I'm not afraid to say that both FB and UltraLong are very wrong.

They might be right thinking that housing bottom has been reached (FB) or that is much further down from here (UL), but when it comes to FB stocks, both of them are very wrong.

HB stocks reached the bottom when the market as a whole reached the bottom in March of 2009. Period.

This is not my opinion, this is a fact. As I see it, Jakila is the only one who understands that stocks don't move hand-in-hand with the economy, their industries, etc.

Let's take a look at the facts:

BZH is up 767% up since March of 2009 (was at $.48, now is at $4.16).

SPF is up 471% (was at $.69, now $3.94), BHS is up 278% (was $1.86, now $7.03), MHO is up 112% (was $5.08, now $10.79), LEN is up 146% (was $5.88, now $14.44),...

People waiting to buy BZH below $.48, SPF below $.69, BHS below $1.86, MHO below $5.08, LEN below $5.88 will be waiting a long, long time.


FB's call reminds me of people who at DOW 11,000 say I think the market has reached the bottom, while UL's call reminds me of people who say, "Casinos haven't reach the bottom yet as unemployment is still very high" (and LVS went from $2 in March of 2009 to today's price of $32)...  

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#16) On September 08, 2010 at 9:05 PM, dragonLZ (76.20) wrote:



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#17) On September 08, 2010 at 9:10 PM, outoffocus (23.06) wrote:

#20) On August 24, 2010 at 1:26 PM, floridabuilder2 (99.52) wrote:

Housing has bottomed and I had blogged about this during the Spring... that going into this Summer we would see housing stocks take a big plunge and that the home sales were a pure illusion. 

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#18) On September 08, 2010 at 9:13 PM, TigerPack1 (33.65) wrote:


I like TOL, and that's about it right now for the homebuilders, for its land holdings (HYPERINFLATION hedge) and strong balance sheet.

Florida has demographics (baby boomer's retiring) working for it, and a massive glut of homes that is being absorbed at low relative selling prices currently.  Out of the "depressed" markets, I think this area of the nation has the most going for it the next 5-10 years. 

I suspect actual home prices will continue to underperform inflation rates for a number of years, but the "potential" for 10%-20% annual CPI (actual CPI, not the phony under-reported government number) inflation rates vs. 5%-15% home price gains annually still argues for home ownership.  If we get zero to 5% CPI, I would guess RE prices are stuck in the mud a couple of years.  I am still banking on (expecting) high rates of inflation to start in 2011.

The American public will not accept deflation for long (we have yet to see it in my opinion), and since we can print/borrow in unlimited amounts at the government level, BEN will surely get the go ahead in 3-6 months to turn the modern printing presses on the HIGH setting (if/when the stock market and real estate hit the skids TOGETHER as we enter double-dip recession)!

I like JOE (large central Florida land holdings), and a few other Florida focused businesses away from RE that I will not mention here, because I want to buy them cheaper.

The XHB Homebuilder average has a horrible chart, and may still have a good 20%-30% price dip ahead of it, before bottoming in the first half of 2011... That is my working hypothesis right now.  Granted other stocks unrelated to RE may fall 15%-20% at the same time into early 2011.

My wife and I are considering upgrading our house situation if things get really bad the next 6-12 months.


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#19) On September 09, 2010 at 12:55 AM, TMFUltraLong (99.47) wrote:

To quickly summarize 18 comments into one response...

I feel both housing and homebuilders have considerably more downside in the next 2-3 years than upside. Am i saying that Beazer homes is going back to 47 Are there values in the sector? Yes. But generally speaking, I wouldn't want to own homebuilders going into 2011-2012 and think you would make more money betting against the sector as a whole. Just in case anyone is curious, start saving for christmas should be nearly priced for perfection (or reality) by then. 


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#20) On September 09, 2010 at 2:37 PM, miteycasey (29.00) wrote:

Please enlightment on how the sales price of a house has to do with the cash flow of a home builder?

It's all supply/demand. If a house sells for 100k and costs 50k to build then the profit is 50k.

If a house sells for 250k and costs 200k to build the profit is 50k.

If a house sells for 750k and costs 700k to build the profit is 50k. 

Homebuilders from today forward will do just fine as the competition has weakened, their resources (labor, land, etc.) are now reasonablly supplied and priced,  plus the government has shown they are willing to subsized the product they are selling.

What is the down side? New home sales slow? Competition from other builders? I feel the builders that have survived till now will prosper into the future.  

If a hurricane hits Florida their stocks are going to soar. 


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#21) On September 10, 2010 at 3:13 PM, TigerPack1 (33.65) wrote:

The bummer is building a house for $500,000 and selling it for $450,000 after holding it for 6-9 months.  Spec housing is all but dead and will be for quite some time.

Having an order and downpayment and price contract up front is a different story.


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#22) On September 10, 2010 at 3:16 PM, TigerPack1 (33.65) wrote:

Where did everybody go?  Volume is pathetic and has not picked up at all since Labor Day!

It's like EVERYONE is waiting for the other shoe to drop, before buying or selling anything.  Confusion and uncertainty rein supreme.

We have BEN, the FED, Obama, Geithner and the Treasury, the CBO, and all the unsustainable economic imbalances they have created to thank for the current predicament.

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#23) On September 10, 2010 at 3:25 PM, TigerPack1 (33.65) wrote:

Short-term interest rates are now HIGHER than 52-weeks ago, and a clear rising trend is now evident!  The only way yields do not spike, is from direct FED buying of Treasuries... No wonder BEN decided to go deeper into the ponzi scheme a few weeks ago.  As foreigners flee our sovereign debt mess, and U.S savers cannot fund the $60 billion "weekly" T-Bill funding needs, no one exists to keep the scheme going and Treasury checks going out each week to Social Security, Medicare, military families, the unemployed, contractors, etc.  THE END GAME IS QUICKLY APPROACHING NOW!

Long-term Treasury bond prices have fallen 7%-8% in 2-weeks, thereby wiping out 2 years of coupon yield for those brain-dead zombies purchasing a 30-year note that can NEVER be paid back in constant 2010 dollars.

We have been boxed into quite a situation it now appears.  We can choose recession and deficit reduction (like Europe is attempting) or do nothing to change course and face the threat of skyrocketing interest rates, money printing, downgrades, defaults and depression... I cannot think of another legitimate option presently.



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#24) On September 10, 2010 at 3:30 PM, TigerPack1 (33.65) wrote:

TAKE THE MEDICINE BEFORE IT IS TOO LATE!  Raise taxes and slash government spending NOW. 

Once Humpty Dumpty falls he will NEVER be put back together again, EVER.  We are on a dangerous course right now, that can only lead to real disaster, far greater than the 2007-2009 bust.

I don't think the average Joe, our leaders in Washington, or the bozos on Wall Street compeletly appreciate the decisions we must make, and the pain we must now bear as a nation if we want America to survive and compete in the future.

The clock is striking Midnight, Cinderella is on the run!

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