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Is It Time To Short The Home Builders?
Submitted by Ramsey Su via Acting-Man.com,
Something has Changed
Last month, I posed the question “Is it time to short the home builders?” My conclusion at the time was pretty much a “wait and see”. Circumstances have changed. I believe the builders are now short candidates.
Beware of politicians trying to fix the housing market (the Johnson-Crapo GSE reform bill actually failed last year)
Cartoon by Glenn Foden
Upside Risk
There is only one upside risk to shorting the builders – the government. In almost two years, Yellen has demonstrated that she is the timid little old lady who lacks the delusions of grandeur that possessed Bernanke. The White House and Capitol Hill are going to be too busy with the elections to do anything radical. Therefore, while the builders may once again be bailed out, it will likely happen in the future and after short positions are already covered.
Abrupt Ending
The real estate market typically moves slowly, by a few percent a year. Once in a while, it may come to an abrupt stop. Volcker did it in 1981 with his rate hikes. The S&L crisis did it in 1989. More recently, the sub-prime bubble shut down the market in 2007. It may happen again now. Unless one is positioned already, there may be little time to initiate positions.
Tapped-out Buyers
Excellent tell-tale signs are in this report by Diana Olick of CNBC. Here is the best part, a quote from an interview with the CEO of Chase Mortgage:
“FHA requirements are down to a 520 FICO (credit score) and you only have to put 3.5 percent down; that’s sub-prime lending, and we’re not in the sub-prime lending business,” said Kevin Watters, CEO of Chase Mortgage Banking.”
The evolution of affordable housing, endpoint.
Carto(o)n by John S. Pritchett
It is not just the FHA, the other agencies are not that different. I have long opined that the government is evil, and that it owns the mortgage business. Instead of forcing loans upon those who cannot afford them, the agencies should be tearing up their loan applications, advise them to practice austerity, save up some money, and clean up their household balance sheets, rather than think about buying a house on margin. Do you have any idea how many payments you have to skip to “earn” a 520 FICO score?
Existing Home Sales
Another tell-tale sign is the recent NAR existing home sales data. The numbers are meaningless. What we see is that the market is starting to stall. It has happened before – no buyers, no sellers. The profit model of the builders is counting on more sales at higher prices. A stalling market is not an option for builder profitability. New home sales are bound to follow existing home sales. Builders’ margins should soon be under severe pressure.
Existing home sales – turning down in August – click to enlarge.
Lennar
Lennar reported its earnings on Monday. Lennar has the most opportunistic style of management and for that, I personally do not include LEN as a short candidate. While they have beat estimates handily, the underlying reasons were all unrelated to home building. The industry has enjoyed a year of easy comps, expanding sales and price appreciation. LEN seems to be indicating that the easy money is about to end.
Lennar (LEN), daily – unique management style – click to enlarge.
Dovish Federal Reserve
The FOMC did not raise rates, even though it would have been just symbolic, or a show of blind faith in this so called recovery. Any form of QE4 would only serve as a confirmation of the dire condition that not only the US, but the global economy is in.
Small Payday
At the moment, the market is optimistic about the builders and is rewarding them with a price premium. If this optimism reverses to pessimism, then the sector will trade at a discount. This would be the smallest expected reward, assuming no change in fundamentals.
Big Payday
Home building is a miserable business. First you borrow to buy land, then borrow some more to develop land, then more to build, while paying out exorbitant executive compensation all along. Years later, you finally sell the finished product, maybe for a profit, maybe at a loss. Builders have been buying more land at much higher prices in hope for a continuation of optimal conditions. Lucrative margins can turn into large losses, much like 2006-07. That is the payday that I am hoping for.
In conclusion, the risk/reward ratio appears to highly favor shorting the builders. Unless the Yellen Fed comes up with a big surprise, I think shorting rallies will be the way to go. As for particular stocks, I am not sure if it really matters, just short a basket. Finally, as a reminder, these rants are for the purpose of organizing my own thoughts and should not be confused with investment advice.
XHB home builders ETF, weekly – click to enlarge.
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Ok people. It's Sept 23. Where is this Shemitah apocalypse everyone has been raving about?
Banning cash and imposing significantly negative rates or the E dollar could cause housing to go into a super bubble we can't imagine now, granted that's far from a sure thing. Eventually it would still crash, just from a higher level.
http://fredgassit.tripod.com/fred018.gif
I've got my "reigh of fire" umbrella and every thing.
If you still can't see all the events that are happening and converging at this very moment, then you truely can't be helped. Go turn on the boob tube and enjoy your blissful ingornance until your destruction - which is going to be soon.
What homebuilder is the #1 financier in the development of Super Termites?
No, you have the date wrong.
Thanks for playing.
Maybe next year!
Don't worry, our beloved leader will find a way to fill newly built houses with his Muslim jihadist compatriots flooding this country.
How's USG working out for Uncle Warren???
Kind of depends on whether they've run out of Chinese 'investors' yet.......
Bankrupt builders will be bought by banks.
Houses will be kept off market in order to keep prices high.
Long demolition companies.
Houses will continually be built and demolished.
Companies are "worth" whatever "Asset" column says they are worth.
Must not allow real estate prices to decrease.
"Asset" column must not be allowed to tell the truth.
House prices will NOT crash until peasants are hungry and houses are Dr Zhivago-ed.
The real money is in landfills and recycling. Dig a pit, sell the rock and dirt, line it, fill it. A friend was making $6 mil in CASH/yr just on his C&D landfill.
add
FED still buying MBS
Builders front load loans and pull profits before shovel hits the ground.
The only way this fucker ends when private market has to buy mark to market MBS.
I don't think they'll pay to demolish the houses, just board them up. Then the private prison industry can get in on the action when poor folks break in.
How to invest like Arnold Schwarzenegger http://www.decisiveinvesting.com/blog/emotional-control/how-to-trade-or-invest-like-arnold-schwarzenegger/
I tried shorting them in 2006 and lost. Too big of a lobby. They will always and forever be a protected class.
Hey guys. I just woke up from a coma. So, did Bernanke and Obama save the world? I just know the world must be a great place by now.
Regarding existing home sales "stalling" - I don't see evidence of a "stall" in that chart. It looks like an upward multi-year trend, with some ups and downs. I'm not necessarily disagreeing with the meat of this article, but to say that things have stalled seems like a stretch.
The author has no clue about home building.
That McMansion you paid 750k for the builder walked away with 250-300k for his 6 mo of work.
Aluminum windows are not "premium" windows. LOL
How much labour to build a house? Depending on house, 600 to 2000 man-hours.
How much labour to pay for a house?
Depending on ..., 25 to 40 years.
(Okay, depending on interest rate, 28 - 50+% of that labour pays for interest, not the house.)
You are delusional if you think that homebuilders have that kind of net profit margin. It is a highly fragmented business and therefore highly competitive.
Depends on the area. Texas has a very fragmented home building landscape, but they also generate huge volume. But some markets are not fragmented at all like Vegas or Phoenix. Very consolidated with a couple big players.
Dallas County and Collin County.
Been there done that.
The most profitable were tear downs in old neighborhoods. It basically came down to which builder was able to buy the old house and tear it down. Those idiot buyers loved anything that looked like a castle.
Except during a bubble, builders rarely make more than 14%
When Expenditure exceeds Income, live off borrowings.
When Liabilities exceeds Assets, can no longer borrow.
If bank likes you then Assets will be greater than Liabilities.
If bank does not like you then Assets will be transferred to whom the bank likes.
The Aristocracy never disappeared. It hid.
Which companies have no Debt?
it's all condos... and ball bearings... these days.
My apartment building is pretty much Chinese and Indian H1Bs. True in Boston, and it wasn't too different in Seattle.
Can't say a bad thing about them, but what the fuck - really, State Street, you can't find Americans with the requisite level of education and training in the Greater Boston area, but Indian coders are so good you'll fly them over and subsidize they shit?
fuck you - something else is a foot.
But anyway - lots of construction all over the inner suburbs - just about all condos.
I always thought someone would make a killing buying up blocks at a time in Worcester, MA near the commuter rail and just building a massive group of shitty 1 br condos.... of course, someone's probably already doing it.
that will work for a greencard and rice...NOPE.
According to NAR in their weekly "home sales update", "The housing market has never been stronger."
We will now hear a report on the chicken situation from the Fox.
"I am pleased to report there are more chickens in the hen house then ever before."
Thank you Fox. Now the Bull will give his weekly report on bovine excrement. Over to you bull.
Millenials, are another reason to short this pig, of a housing market. They do not have the obsession of home-buying, the greedy Boomer generation does.
They are too busy worshiping satan, spending thier pathetic little disposable income on trendy food fads, burning american flags, bowing down to the NWO and being broke retards to bother buying a house. Millenials Worst generation ever. Signed - a gen x'er
You and the boomers brought them up. You had a 20 year head start on them. If they fuck up then it is your fault for not teaching them.
Perhaps either you or the wife should have stayed home and taught the brats a little thing or two about life.
Boomers: If two of them worked then the house got paid off in 7 years or less.
X-ers: If two of them worked then the house got paid off in 25 years or so. How's that working out for yas?
I have no kids because I realize that Millenials will be the future, a sobering thought. I don't own a home, moron. Teaching them, lol. They have thier beloved technology for that.
So you will be competing with the Millenials for rentals? Or do you enjoy sleeping under the stars?
Yeah, I have no kids, but I didn't have to wait for the Millenials to decide I didn't want any. Okay, Let's replace "You" with "X-ers who did have kids." Satisfied?
Technology for teaching? May as well recommend the local newsagent, magazine stand or idiot box ...
I've got a plan that invloves land and no rent. Millenials can have all the rental units they desire. Long trendy mustache products.
?
Dapper Dan?
(Or was that for hair?)
Yeah, just keep on blaming the kiddies. They're so lazy and stupid that they don't deserve a house! Things will be soooo much better when your kids have to rent the shacks that are all owned by Jamie Dimon, Jon Corzine and Lloyd Blankfeins' kids.
Fuck! The kids really did inherit their stupidity from their parents!
Fight, Peasants! Pay no attention to the Oligarchs behind the curtain!
P.S. The young dummies have no problems with borrowed money. They'll borrow to pay rent, drive the prices up ... but I guess you've already paid off your house. Or are you a Landlord?
I will blame the kids because they will fall for aything and have no morals. They hate God and Americana culture. Idiots who will starve in the city when this pops off.
They learnt what they were taught. Who taught them?
I learned from the same teachers? What's thier excuse again? I'll wait.
Oh, sorry, my bad. The little brats just learnt off of each other and the X-ers and the Boomers had absolutely nothing to do with it! If only everyone had sterilized themselves back in 1980 then things would be soooo much better now!
All I'm saying is I'm 37 and was taught by the same teachers and I came to know the truth. I'm not even that smart like 110-120 IQ. Surely these smart mustache wearing foodies can break the chains.
Good for you. You're one in a hundred.
Jesus is my savior and he led me to the truth.
You aren't going to last long in the next paradigm with this rhetoric. Maybe you'll be smart enough to figure that out before you say the wrong smart ass comment to a stupid kid your size with twice the desire for your shit.
Very poor choice of words.
Re "... greedy Boomer ..." : Yeah, they deliberately had fewer kids so that they could become the largest demographic and hog all the voting power for themselves, that's it:
"I'm gonna have ten kids, just like my parents did."
"You fool! You'll fuck up the demographics and they'll vote away our pensions!"
"Gosh! You're right! I'd better have no children! Thank goodness you warned me in time."
"Make sure you have one or two - we still need labourers and taxpayers to build and pay for our stuff!"
...
"It's not my fault that I am bigger and stronger than you. I was born that way. Do you know that I don't even work out?"
...
Re "They do not have this obsession of home-buying " ... no, when the cheapest fixer-upper takes 100% of their income then I guess they don't. Obsession??? "Oh yes, it's not a necessity. It's just a silly obsession that they have! Why don't they just sleep on the ground? If they weren't so materialistic then they wouldn't need a house to put things in. Why don't they just all work for free? Oh yes, of course they have to be neat and tidy and wear nice clothes when they come to work. I couldn't possibly hire them if they hurt my eyes! ..."
"If only they didn't have this obsession with eating food ..."
Baby boomers f##ked this country by their greedy, short sighted actions and their failures to act on real issues. There has never been a such a generation of self-important, entitlement minded #ick heads who don't even know who they are by age 70 and believe that everyone else should give a #hit about their latest notions.
hahaha Bravo. I tried to explain to a boomer earlier how his mother in law was justified in her frantic call to his wife last night to pull their money out of the bank. The dude is in total denial, like the reality we're living in is incompatible with his therefore he's right. I even made it easy on him sending an infograph on the LIBOR scandal, not a word in response.
People are so mentally unprepared for this it's incredible.
in socal the new housing market is crazy running way ahead of existing. high density and even small developments are popular, which are usually less profitable than large ones. the income spread is low end high end, with not much in the middle. it may be homebuilders are not doing well but homebuilding still seems pretty robust
When is cali going to fall into the ocean?
Chicago just enacted the largest increase in property tax ever....GoodLuck young liberals
https://www.youtube.com/watch?v=CLryFsTgVQw
KBH reports tomorrow am. I own puts on them. LEN just reported on Monday and went down 5% after a "blowout" eps. They have peaked and only down from here, imo. Probably DHI, KBH, RYL, PHM are your best shorts.
Deregulation of the home building industry would annihilate the builders, banks, bonds, rents and be the biggest jobs and productivity and living standard boost in the history of the world, deregulating energy even more so, we could leave the EU Russia, and Asia all in the dust simultaneously but Zionist control freaks would eat shit on rents and bad mortgage debt, so we don't.
Better to eat shit and let the world buy "us " then vice versa.