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cubanstockpicker (75.85) Submitted: 5/16/08 2:22 PM

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Marko, I have to disagree with you opinion why we might have hit bottom on housing prices. Specifically on the margins argument. Margins in your scale showed improvement because builders figured they can keep raising prices in the big homebuilding boom.

They picked this trend up from "flippers" that sold their contracts way above the preconstruction prices. The average preconstruction home in 2002 went through a couple of hands before finally being built and then closed. Banks were only more than happy top offer loans. Builders caught on and raised prices building anything and everything they could to take advantage of the boom.

Now, that prices have deflated, the builders have to drop margins in order to move inventory. They also have to "pay closing costs" or down payment assistance programs to move their escalating inventory.

Now they have another competitor, the ever expanding foreclosure market, where anyone in the "hot zones" can pick up recently built homes at at 60% of value.

The builders also have another reason to be worried.
STINGY BANKS

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mdjuranovic (< 20) Submitted: 5/19/08 12:43 PM

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I think you missed my main point -- margins have already deflated to the level at which the builders are hardly making a profit. The market is most certainly pricing in a much larger drop in prices and negative earnings in the future, which just won't happen. Builders don't have to stay in business b/c they actually have few fixed costs. What that means is that they'll just sit out this market until the inventory clears and then return to their profitable ways. They may not return to 2005 levels in terms of total revenues, but they'll certainly preserve most of their margins once the rebound (which is actually already underway) is completed.

As for the foreclosure market, that's a different beast. Foreclosures used to be fairly random but nowadays they're often clumped together in places where few people want to live. This is actually good for builders; it means that if you want to buy a foreclosure property in a neighborhood with 40 other foreclosures you can certainly do so at a huge discount.... but who wants to live there. The actual "deal" that most consumers think they can get -- a gorgeous house in a great neighborhood at a serious discount to its actual value (however one determines that) is still a tough find. In any case, that's a problem that can't go on indefinitely either and when this inventory clears you'll see another sharp uptick in the market.

To make money betting on homebuilders they don't need to approach anything near the 2005 levels -- they merely need to return to profitability and I have no doubt that this will happen as long as people want to live in houses.

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cubanstockpicker (75.85) Submitted: 5/20/08 3:07 PM

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I see what you mean, and the consensus is the prices are baked in. But I think you are wrong.
I am on the front line of the mortgage crisis and the foreclosed homes are not where you are saying they are. The homes going into foreclosure are from every type of loan on properties that shot up 200% . Take a case in point where whole development communities that were built at most 3-5 years ago. The original owners that had deposits would sell the contract under the assignable rule, and this would happen 4-5 times on one property, with everyone taking a slice. The people who finally got the homes got them with very relaxed mortgage conditions and under speculation they would live there for a while and sell off later. Their hot potato scenario, including adjustable loans payments which shot up and their inability to refinance since they are negative.
These are not bad neighborhood homes,as a matter of fact these are homes that are in the very nice neighborhoods with pricetags well above 300 and 400k.

The homebuilders who have had projects lined up for 5 years down the line are seeing pricing competition on their newly completed homes from their previously developed community a block away, To the foreclosure market. Not in the low income communities you describe.
This is from miami-dadeclerk.com
Mortgage Foreclosure Filing Statistics

2002    14,567
2003    

11,605
2004    9,606
2005    7,829
2006    9,814
2007    26,391
2008
January    3,544
February    3,984
March    4,240
April    4,478
Basic math using the miami-dade average home price calculation would put the losses for the lenders in alot more than even calculated by the stock price.
Also these losses mean the tightest credit market will not allow for easy lending practices, not even normal ones. In addition that the average person can't put enough money away on deposit because the cost of living has risen dramatically.
To follow up, here is another link on the same page you can view where exactly these foreclosed homes. I can guarantee you they are in great areas of miami-dade. As a matter of fact, give me an email and I will send you actual mls listing of bank owned properties that are absolutely beautiful. 4-3's in quiet neighborhoods and great schools.

Maybe I am only looking at Miami-dade and broward and palm beach as my viewpoint, but if the homebuilder had a heavy concentration of properties and they already have promises and money laid out to keep building including permits taken out, they will have to lower prices to sell and create liquidity.
"Builders don't have to stay in business b/c they actually have few fixed costs. What that means is that they'll just sit out this market until the inventory clears and then return to their profitable ways"
The margins you speak of will get tighter, the prices for building materials iare getting more expensive. Roofing materials uses alot of crude oil for their production. Copper is expensive too. Sheetrock, concrete and even wood is getting more expensive because oil is at 129 a barrel.
http://www.miami-dadeclerk.com/MortgageForeclosures/ForeclosureSales.aspx

"To make money betting on homebuilders they don't need to approach anything near the 2005 levels -- they merely need to return to profitability and I have no doubt that this will happen as long as people want to live in houses."
Homebuilders will need to keep prices very low to sell and with the constant influx of very nice properties at 70% of the "market value" at best means homebuilders stand no chance until inventories come down. The inventories are piling up even higher as the trend shows.

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