My son attends the academy so I feel like I should tell you the way it is. We could actually go into a depression right here and now. The deriviative explosion is getting bigger by the minute. Do not buy any home builders. You might wait until the mutual fund userx goes to 11 and buy it. Thi sis serious stuff. The only way to try and save the economy is to drop rates,add liquidity and crash the dollar. R.E> still will not come back. Just some advice froma Falcon parent.
Forget the daily swings up and down. Try to get your hands on research papers that are covering fundamentals of what is going on with home ownership, inventories, defaults, mortgages etc. Ignore the daily moves or temporary sentiments.
I read 20 of these papers in the last couple of weeks. Things that are happening are truly remarkable. Here are some of the things i got out of my reading (there are many things i could talk about but I want to be brief)
1. From '04 till '06 we were in a housing bubble that inflated home prices by 20% above their historical "fair" value. (if you just draw a trend line for how housing was behaving from 1950 till 2003 on inflation adjusted basis you obtain this 20%) 2. During recent years the number of non-prime borrowers increased from 10% in early 90s to 40% in '06. 3. Vast majority of these non prime borrowers that were qualifying for mortgages in 04-06 WILL NOT BE ABLE TO OBTAIN A MORTGAGE IN THE FUTURE. Companies that used to give them loans are all out of business. 4. Unsold home inventory is at unprecedented levels, went up 5 times in a very short period of time. This was driven by MASSIVE overbuilding during the the bubble days. 5. Mortgage foreclosures will peak in '08-'09 ('06 and '07 vintages are by far the worst, and it takes 2 years for the foreclosure to max out from the mortgage issuance date) 6. Right now home values are declining.
Now please, don't take my word for any of the things I'm stating. Do your own homework. Find the research papers and look at the numbers yourself.
Now my analysis of these facts:
Where is the job gonna come from for all these homebuilders? Why would there be a need to build more homes? The market is flooded with unsold homes, and the unsold home inventory increase is not going to reverse until '08 - '09 when the foreclosures peak. So you're looking for an extreme multi year environment where there is NO WORK for homebuilders. If you look at their balance sheets, they will burn all of their cash before the situation improves. Vast majority will go bankrupt.
Where could my analysis fail? If all of a sudden homebuyers emerge and start buying homes. How likely is this to happen? Lets see.
1. People who drove insane volumes in '04-'06 can't qualify for loans anymore - so they can't be the buyers 2. Home prices are declining in value, so people who buy to invest in real estate will stay out 3. Prime borrowers - well they already have a home.
So to anybody who believes that the home market will rebound quickly my question is: WHO ARE THESE HOME BUYERS THAT WILL EMERGE AND START BUYING at very high levels that would start reducing the inventory drastically? Also if you listened to Toll Brothers conference call, Bob Toll said that for 30 years he's been in the business he's NEVER seen such a low consumer traffic in newly built neighborhoods (again don't just take my word for granted - listen to the conference call and draw your own conclusions)
Thanks for the post. Great insight and thought put into it. I appreciate the time you spent putting it together.
I do agree with you, however just how low can these builders go? Many are already at 1X book value or below.
Granted however, this is a time like never before. Too much inventory and not enough buyers, especially now since the brakes have been put on almost all lending procedures. As of only a couple of weeks, it's harder for even "Prime" borrowers to qualify. Just think how bad it will look when those statistics start to come though the pipeline.
I've been short for awhile now....don't want to be greedy, but it's hard to see things getting better before they get even worse. Take JOE for example, although not a true homebuilder, it trades like one and is 100% exposed in the state of Florida. With the glut of unsold condos & townhomes in FL, it could get really ugly for JOE in the near future.