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alstry (35.03)

Will Most HBs go BK in 2008?

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April 26, 2008 – Comments (14)

FloridaBuilder and I have a couple of side bets running.  One formally one informally.  The former is whether SPF or WCI will go BK first.  The latter whether most public HBs go BK or near BK in 2008?

This blog deals with the second issue and the likelihood of builder BKs in 2008.  First, let's make one point clear....FB is one of the most informed and best bloggers on CAPs.  Plain and simple.  Second, I have little desire to aspire to his level of popularity, although the comments back and forth with a number you has been enjoyable, informative, and fun.

As ususal, FB thinks I am cracked about most public HBs going bankrupt in 2008.  For that to happen we need ten to leave the pen.  At this point I think 10 is in the bag. 

Up until now, HB executives and analysts have been lying to shareholders about the book value.  Many HBs are leveraged over 40% debt to equity.  Some much more.  Most of the value of HBs equity is land and land is bascially worthless or near worthless.

Up until now, banks have been easy on builders because banks loans and balance sheets have been tied to those assets.  And we are talking about a very large amount of dollars and a very big percentage of bank assets and loans.  So it was in the banks, and their analysts interest to lie to you.  Now the world is changing because regulators are forcing banks to mark their real estate assets to fair value and dump the portfolios.

The writing has been on the wall for about nine months.  Banks are NOW willing to liquidate their junk holdings and take their lumps. 

Here is a little snipit from BigBuilderOnline:

As we speak, banks are packaging up their real estate loan portfolios and trying to create a trade value for them. Word is, one bank deal that occurred in the Phoenix market in the past few weeks priced a bank's real estate loan package at about 25 cents on the dollar; afterwards, many observers familiar with the terms felt that 25 cents was too high a price to pay.

These bank packages, ranging from $500 million to $700 million, will proliferate during the next several months, each one of them being "marked to market" and sold.  This is part of the wave of pain that will tell home builders a lot about what their holdings are now worth--and what they owe for them.

This will cause banks to be less indulgent with dilinquent builders forcing builders to liquidate and mark their assets to fair value.  Once that happens, many builders will have a negative net worth with little chance of profits for the foreseeable future. 

With builders shrinking their operations to a fraction of its former size, many of the liabilities and expenses remain.  With shrinking revenues and expanding expenses, you have a recipie for disaster....all over the place.

As banks are now willing to to lift up their dresses, builders will be forced to lift up their mini skirts.  The problem is that hot babe you have been dating for the past few years may not be a babe after all once you see what's underneath in the daylight.

Why do you think RYL's CEO is dumping shares faster than a dime store hooker.  Check out his recent sale a few days ago for 80,000 more shares.  RYL has little cash and a growing backlog that will not generate cash for a number of months and susceptible to canceling.  RYL will likley need to raise cash very soon....can't wait to hear what Chadepoo says....maybe he could give back a few bucks from the millions in profits he just made selling company shares.

10 public HBs bankrupt or near BK by the end of the year?  Looks like a two foot putt to me.

14 Comments – Post Your Own

#1) On April 26, 2008 at 10:15 AM, alstry (35.03) wrote:

BANKS BETWEEN A ROCK AND A HARD PLACE

Bank anaysts have been telling investors that homebuilder assets are worth X, but banks will soon be liquidating homebuilding assets for a fraction of X.

So now the banks will have to decide whether their analysts have been lying to shareholders about the value of HBs or are the banks hurting their own shareholders for liquidating assets for pennies of what their analysts say they are worth?

Pretty crazy problem....ain't it?

Henry Blodget, we miss you!!!!!!!!!!!!!!  At least you were using metrixes no one ever heard of before.

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#2) On April 26, 2008 at 11:22 AM, dwot (97.03) wrote:

That's one bet I'm going to enjoy watching.  I'm also going to enjoy watching the difference you guys have in your theory about timing.

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#3) On April 26, 2008 at 11:48 AM, alstry (35.03) wrote:

For what it worth, about 2 and a half years ago I developed a theory I call Concentric Contraction.  The process has taken about a year longer to unfold than I originally anticpated and has cost me millions personally.  So much for being to the party early.

I posted like a maniac on SPF because it was an easy business to demonstrate how the board, management, and analysts lied to investors simultaneously and for a long long period of time.  It was sort of therapy for me to document and vent my frustrations about the deception.  I just never dreamed it could persist for soooo long and nobody say a word.  Simply amazing.

However, over the past few weeks, facts have started to unfold consistent with my perspective and dynanic behind the theory.  My belief is that by the time we reach the Presidential election, the economic conditions in our country will be so bad that more Republicans will vote for Obama than McCain.  How is that for a prediction?

Not only that, by Obama's election, the furthest thing from FloridaBuilder's mind will be wanting to develop land and sell houses.  He is truly one of a kind and I look forward to having drinks with him one day.

The horses are about to cross the finish line.

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#4) On April 26, 2008 at 2:05 PM, cabuilderboy (91.36) wrote:

While I commend you on your courage to always berate those deserving builders (i.e SPF), I can not yet subscribe to your theory about the rest of the year. At the end of 2007, I knew things would get worse in the first half of 2008, but I am also confident economic stimulus, liquidity and the financial markets will improve later in the year. Foreclosures will be a lingering problem, but the opportunists will quickly gobble up the distressed homes, provided there is economic sense (rental value) behind the purchase.

Here in the foreclosure capital, resales have incresed from 269 units in Sept. 07 to 1,177 this past March. While about 80% of that figure is foreclosures, short sells, etc., it shows the lengths at which people will go to buy a distressed property when the numbers make sense. If the FIFO theory (First In First Out) prevails, the market here could see better than anticipated stableization this year.

While your BK theory makes financial sense from a balance sheet standpoint, the capital markets will be looking at the indicators I suggested, hence giving the builders a better chance. This is why builder stocks have been so resilient this year.

All the builders will shrink tremendously and be a shell of their former selves, that is for sure. You won't see anyone on CNBC bragging about being the first 100K unit builder. Also,a couple more bks' will probably occur, but the big publics will get the benefit of the doubt for a while, and if economic stimulus gives even a hint of success, builders will stay around, even if they are techinically insolvent.

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#5) On April 26, 2008 at 3:18 PM, alstry (35.03) wrote:

You will subscribe....and my guess is within 3 to 6 months.  Probably sooner than 3 months but definitely not longer than six months.  

Frankly it is amazing that we have made it this far.

It is mathematically impossible to leverage up 2/3 of the consumers 100%, many of the businesses, and 100% of the municipalities, and not have catastrophic consequences once credit becomes difficult to obtain.

We are just seeing the tip of the iceberg, and I hear otherwise intelligent people, fantasize that somehow we are approaching the bottom.

You have CEO's of some of the largest financial institutions tell the American public that the credit crisis is almost over and the same day, or a few days later, issue high interest offerings raising billions on terms no bank that I am aware of operates on that kind of margin?

We are being peddled load of nonsense simply to defer the inevitable and not panic the nation. 

Which is it, the credit crisis is almost over or the bank is in such terrible shape that it is forced to borrow money at 8 plus percent?

Do you think you are a better credit risk than JP Morgan, or Merrill Lynch?

America has just started a deleveraging process that took about seventy years to create.  The last seven years has been nothing short of a borrowing frenzy stimulating the world's growth.  This is not only an American problem....the world will likely be impacted from the process.

Our President tells us that $160 billion in rebates is going to stimulate the economy?  Yeah right!!!!  In 2005, about a trillion dollars was extracted from home equity and spent. Few are taking out HELOCs today.  I can come up with another trillion of stimulating borrowing that is not available today. 

So let's think about this for a second, $2 trillion of borrowing gone but $160 million of rebates going to make up the difference?

If you believe that, finance principals must be different in CA than the rest of the world.

From this perspective, the downward spiral is just beginning.  Month after month it will pick up speed as more and more defaults kick in.  4 airlines shut down a few weeks ago.  5 major developers/HBs defaulted or shut down this week.  We will hit bottom at some time...but it is likely a ways off and much much further down....and in the end we will be better off with less leverage.

We are a resillient nation.  Hardship only builds character and makes us stronger.  Our generation needs to toughen up....and based on what I see...we will be a very tough nation in the end.....again.

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#6) On April 26, 2008 at 3:32 PM, alstry (35.03) wrote:

Addressing your comment about sales increasing from last fall to Spring.  First, sales should naturally increase in the Spring.  Second, you admitted that most of the sales were distressed. 

The problem is that more distressed inventory is coming to market than being abosorbed even with the higher sales figures.  Hence prices are being driven down.

This is a natural part of any deleveraging process.  It is simply, America as a nation has never had to go through anything remotely close to the current situation in over two generations.  Most of the living can't relate and rely on their financial advisors thirty year graphs which don't apply.

As more and more inventory comes to market, and we return to a slower selling season, prices will be driven down further as inventory could exceed over two to three years of supply on the market for sale. 

Right now we are approaching sale prices equal to construction cost in a number of areas.  Pretty soon, that will likely migrate to higher and higher priced communities as sale prices will likely fall to levels far below construction cost such as in Ohio or Michigan.

A couple years ago, sitting around the table drinking beers, I forecasted homes would drop in price at least 50%.  New homes have dropped 50% in a number of areas.....if my theory is correct....we have another 50% to go before this mess bottoms out.

For your sake I hope I am wrong....but as the facts are currently presenting, I doubt it.

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#7) On April 26, 2008 at 8:39 PM, klemenv (99.76) wrote:

"Bank anaysts have been telling investors that homebuilder assets are worth X, but banks will soon be liquidating homebuilding assets for a fraction of X."

Oh, that is an easy one:

"Look we all know it is worth X, but as we speak, it is available at fraction of X. It is really a bargain and a great buying opportunity."

:) 

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#8) On April 27, 2008 at 1:07 AM, bobbyj0708 (< 20) wrote:

So I find it very interesting that regulators are making banks fess up about their homebuilder loans. I hadn't seen that. Do you have a link? I have to admit I've been licking my chops just waiting for this to happen. 

I'd also like to hear why cabuilderboy thinks that the credit markets will improve and the economic stimulus will work. The stimulus to me seems like a drop in the bucket and the banks are still lying about their losses. As home values continue to decline, the banks' problems will get worse and worse. There will be no recovery until home sales increase on a year over year basis and we're not even close to turning that corner. I'm not impressed that knife catchers are buying distressed homes right now. I bet they'll be right back on the market at lower prices in no time flat.

Not only will builders go BK, but the investment banks will as well when their Level 3 assets finally get marked to market. Now that the Chinese and Middle Easterns have quit throwing good money after bad, the IB's are in a pickle. How many more times can Merrill and Lehman recapitalize (mere days after insisting they don't need extra capital!!!!) before the hedge funds and J6P wise up too?

To say that the credit crunch is over is a lie.

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#9) On April 27, 2008 at 10:14 AM, alstry (35.03) wrote:

To date, I have not heard a credible argument why business will improve anytime soon.

How someone could think a $160 Billion dollar stimulous against a $2 Trillion dollar contraction has a net positive effect escapes me.

Until we figure out a way to replace $2 Trillion of credit creation or deleverage much of our debt......we still have long long ways to go.

I have been doing some back of the napkin calculations, and if we simply proceed on the current trajectory of inventory rising and slowing sales, we will likely exceed three years of housing inventory for sale in many markets by the end of the summer.

In select areas, we are already there. 

My guess is that we will start to see builder/developer defaults skyrocket over the next few weeks and months.  This will trigger more defaults and likely some bank failures.

All of this has been very foreseeable, it is just seems few want to tell.

 

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#10) On April 27, 2008 at 11:22 AM, cabuilderboy (91.36) wrote:

bobbyj0708  The current stimulus, (i.e. the fed lowering interest rates and accepting other forms of collateral at the discount window, tax rebates, the liquidity crisis in the financial markets getting a little better than worse every day, and talk of more congressional help to come) will have an impact. In 2001 and 2002, after months of Fed stimulus, people were saying it was a jobless recovery which would mean nothing, we then went on a job creation and economic boom of historical significance (bubbles not withstanding). My point is simply the stimulus will have an effect (we could all argue to what detriment), but you asked why I thought it work, and history indicates it will to some extent. I am not proclaiming the next economic boom, just enough of an upswing to improve consumer and market psychology. At the moment, this would be enough.

I listen to everyone proclaim Armageddon, but people have forgotten, we entered this economic downturn with businesses having the strongest balance sheets in history. How else could so many builders, financial institutions and others stay around during this crisis? In years past, this type of downturn would have buried many more players by this time. I live and breath Real Estate and most everyone I know does the same thing. It is enough to take may degrees and licenses and do something else. But, then I look deeper and see, excluding homebuilders and Financials, earning are still up high single digits for the S&P. The guys at Qualcomm don't sell real estate and things are not that bad. My point, we like to always point out the negative, but the economy has many moving parts.

As I said earlier, I have seen sales jump 337% since Sept. Is that all just Spring buyers? No, it is the market bottom feeders saying they see value now. A couple of years from now, I think we will look back and say the latter half of 2008 may have been the great time to have made a purchase.  

 

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#11) On April 27, 2008 at 1:57 PM, alstry (35.03) wrote:

"I listen to everyone proclaim Armageddon, but people have forgotten, we entered this economic downturn with businesses having the strongest balance sheets in history."

That is a sham that I keep hearing over and over.  Only a number of nonfinancial business had strong balance sheets.  Financials had highly leveraged balance sheets.  40% of S&P earnings are finanicials.  Now those earnings are wiped out.  Wiped OUT!!!!.... with little chance of returning. 

Just wait until the Wall Street Firms start lowering their forward guidance on second half earnings next week and see what happens as the summer progresses.

Balance sheets were strong because banks could lend.  Now that banks can't lend, just watch how fast balance sheets can deteriorate.  It will be nothing short of shocking.

A person with $3 million in the bank and $5 million in debt can watch his cash evaporate very quickly if he has to pay back that $5 million.

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#12) On April 27, 2008 at 2:35 PM, thisthatother47 (90.12) wrote:

Oil up about $30/barrel since stimulus announced.  Something tells me the "stimulus" has already more than been nullified.

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#13) On April 27, 2008 at 3:52 PM, alstry (35.03) wrote:

"I listen to everyone proclaim Armageddon, but people have forgotten, we entered this economic downturn with businesses having the strongest balance sheets in history."

That is a sham that I keep hearing over and over.  Only a number of nonfinancial business had strong balance sheets.  Financials had highly leveraged balance sheets.  40% of S&P earnings are finanicials.  Now those earnings are wiped out.  Wiped OUT!!!!.... with little chance of returning. 

Just wait until the Wall Street Firms start lowering their forward guidance on second half earnings next week and see what happens as the summer progresses.

Balance sheets were strong because banks could lend.  Now that banks can't lend, just watch how fast balance sheets can deteriorate.  It will be nothing short of shocking.

A person with $3 million in the bank and $5 million in debt can watch his cash evaporate very quickly if he has to pay back that $5 million.

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#14) On April 27, 2008 at 5:11 PM, TDRH (99.76) wrote:

Banks cannot extend the convenants indefinitely.   WCI is good till June per BAC and others.   Will be interesting to see if the bite the bullet this time around. 

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