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  • mrmom5050 mrmom5050 Aug 23, 2012 6:02 PM Flag

    Supply of new homes fell.

    It is now down 2% Y/Y. While demand is up yet again. We are now moving into those months where these numbers should move lower yet the number of permits continues to rise. As has been stated here KB should be the turn around story of the year among H.B.ers. I guess for me and everything I've read anything less than a blow out Q3 and Q4 would be a hugh disappointment. Will this provide the catalyst for what should be a sustained move up. Who knows. I see how the pimps are treating PHM and if we catch some of that a double from here can't be ruled out by years end. I do know I will be here to find out.

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    • Dublin isn't in the sticks. It is right on the BART subway. You can ride a bike down the hill, get on the subway, and read your magazine or work on wi-fi on your lap top as you roll through the CA hills on your way to the Bay Area. Then it's left, right or under the bay to SF. Anywhere in the bay area is a $6.00 ticket and a 50 minute train ride from Dublin. It's always warm there (no fog); it has fantastic schools; and beautiful vistas. Most homes there cost $700K.

    • Then ASPs will rise, won't they? SF Bay Area real estate has doubled every decade for 60 years. Facebook, Zynga, Linked-in and all the social media IPOs have made home buyers' lives miserable out here.

      Here's data on the monthly foot traffic for KB's communities:

      Here's locations of their current, active CA community count (26 communities):

      Their land spend during the "cheap" years? The company stated it is likely to spend about $550 million on land and development this year (2012). It expended $553 million in 2011 and $478 million in 2010. That's a total of $1.5 BL in land purchases at the bottom of the real estate cycle.

      You imply that they were buying garbage land, or have garbage on their books? Where? They said they scrubbed the remainder of them in Q1. The only land they have now is stuff they want to keep.

    • KB spent a fortune on coastal ca land in 2009 and 2010. Very few land deals in coastal ca in 2011 and 2012 for every builder. Certainly not enough deals done to meet 2013 and 2014 growth projections.

      By the way , the NY definition of coastal Ca includes the inland empire and Dublin.

      No one is questioning the there is demand. The lot pipeline should scare you bulls. There's not enough out there to sustain significant growth.

    • I guess this is installment part 2 of what I'd like to say to you. The writers and builders of this article say it better than I ever could.

      KBH has spent a FORTUNE on CA coastal property/developed lots in the last 5 quarters - supposedly those quarters where management proved how stupid they were to blow through $650ML in cash on lots at 1/2 to 1/3 what they would cost TODAY, knowing that it would take 1-3 years just to get those communities through the permit process.

      Well, a big hello to you shorts - demand is going to be very high for new residential construction in 2013. Houses that's built in CA today are worth $40,000 to $120,000 per decade in property taxes. Strapped city governments are going to be falling over themselves to approve KBH, LEN, TOL, and SPF's projects this year and next.


      For you shorts, the next big disaster in housing is always around the corner (and for 6 years you were right); you think you see it coming in 2013 "when no one else does" and you agree with each other about its imminent arrival. So where has the bearishness gotten you in 2012? A homebuilder index that leads the SPX, the Dow at multi-year highs, and huge profits being made while you guys huddle in the corner and kibbitz over armegeddon.

      The Homebuilders in 2012 are just like tech after the dotcom bust. Shorting the home builders this year is like shorting Amazon at the bottom of the tech bust.We are in a multi-year cycle for homebuilding that is going to astonish, even amaze with its strength. There has not been such a skew between population demographics and a dearth of new construction since WW II. Throw in 3.5% mortgage rates and sky-high rents. and it's the most affordable market in nearly 50 years.

      You want to short that? GO RIGHT AHEAD.

      I'll stick to the same message I've hammered away at for a month. The next two Qs for KBH are going to show a DRAMATIC turnaround in every data point that analysts follow, and they will go from dog to darling. I just hope they spent more cash this Q to buy more land in Coastal CA instead of reserving it on the balance sheet. As one builder said in the article, he estimates ZERO availability of developed lots in CA for desirable areas by summer, 2013.

    • See:

      They've got 45,000 developed lots and counting. If they keep buying land the way they've been doing it over the last 12 months, there aren't going to be many dogs left in their kennel for you to complain about. Also, in the last CC they said that all 32 of their submarkets were doing fine. Per what management has said, most of those new lots were in coastal CA and TX.

      Also, if they have "B" and "C" lots in outlying urban areas that are not keepers, there is a whole new industry of subprime builders trying to snatch renters into buying new low cost housing in such areas. KB can simply sell them.

      My beef with you is you're a wise guy at the bottom of the real estate cycle with 6 years of extremely negative news in your rear view mirror to back you up. I read the conference calls; I check the real estate stats; I look up bonds on Fitch to see if there's any discounts to par. All the stuff you say sounds really meaningful and really purposeful, but I don't see any pros in the industry buying it. KBH has been the strongest performing home builder of the last 3 months. You're saying the market has got that all wrong. I say the shorts have not gotten any of THAT right.

    • If a sub contractor's action causes damage, their insurance company must pay for the repair. Then if their limitations on coverage does not cover the cost, then the builder's liability insurance will kick in. Now, the repair usually requires a contractor to coordinate all the repairs and the fees for his services. I would submit an estimate for the repair to the insurance company and if they accept it, I would get a check from them. The insurance company isn't going to pay each sub and supplier separately. Furthermore, most insurance companies do not have a licensed contractor on their staff to perform the work required.

      If the owner gets a judgement for repair against a builder and their subs, and if they don't use the builder for those repairs, the owner will go to another contractor to perform the repair. In that case, the repairing contractor will get a full profit.

      If the builder does not want to submit an insurance claim, then they will, along with the sub contractors perform the work for nothing and pay for the materials themselves. That is a case where they don't want to see their insurance rates go up. But if the sub contractor is at fault, the builder will perform the repair and get paid for their services by the sub or their insurance company.

      In the case of the Chinese drywall, the contractor pulling the permits for the repair will get paid for their services by the insurance companies covering the suppliers, sub contractors and their own general liability insurance. If the builder does not want to put a claim against their insurance company, they will cover their cost by eliminating their profit and over head. In any case, the builder's exposure is limited.

      And yes, cash is the most valuable asset for a builder. Just go to a bank and see how much they will lend you on raw land or lots. If you can find a bank that will, they will lend you 60% of appraised value. For a builder, when you acquire a lot for $40,000, the builder cannot sell the lot for much more and after sales commissions, the builder will take a loss. It is only after the builder builds a house on it does the builder get a 15% return on the lot cost. Bottom line, land does not give builders much of a cash flow and that is why land is not listed as cash or near cash on their balance sheet.

      Just keeping LOL

    • "Warranty issues are really not a problem because most states require general liability insurance from the builders as well as the sub contractors and suppliers . . . And if KBH is the contractor who does the repair, they will make a margin off the job that will cover their cost or even make a small profit off the claim."

      HA HA HA HA HA HA! I really do appreciate your sense of humour.

      Look up CA Bill SB 800 (similar to other states' laws). Why would an insurance company insure a project whose builder will profit from construction defect?

      "The real value of a builder is in their cash position." No, it's in their land position. look at the builders during the peak, their cash position was extremely low, which was good, because land is scarce and more valuable than cash. If it truly is the bottom of the market, I'd want a builder that i'd invested in be able to deploy as much capital in land today.

      KB doesn't have that option since it's equity is depleted, its over leveraged and it inventory can't be deployed because it hasn't been impaired. Their only option to raise capital is issue more stock.

    • Warranty issues are really not a problem because most states require general liability insurance from the builders as well as the sub contractors and suppliers. So the Chinese drywall claims are going against everyone, not just the builders. And if KBH is the contractor who does the repair, they will make a margin off the job that will cover their cost or even make a small profit off the claim. Same applies to other problems. Furthermore, those 10 year warranties have standards that are so far out of perfect that most problems are not covered. Those insurance programs are totally worthless.

      Now I agree with you on the impairment charges. Some companies took the maximum write downs during the down years to clear the books and capture tax advantages. While others did not in order to keep their losses at a minimum and support their stock prices. What ever path they took, their current stock price reflects their value today.

      The real value of a builder is in their cash position. Take away all the non cash write downs or gains, it is all about the gains in cash each quarter. KBH appears to turning the corner now with housing picking up in certain areas. It is early, but I think they have the resources to pull out of this downturn.

    • Yes, supply is rising, but demand is rising faster which lowers the month's supply of homes. This is a good thing as it points to a true recovery as builders see future demand.

      Now for PHM vs KBH, the difference in performance has nothing to do with pimping.

      KBH PHM
      Cash $314 million $1.3 billion

      Total Equity $369 million $1.975 billion

      Debt to Asset 66% 44.5%

      Last quarter EPS -.31 .11

      Now I am not saying that KBH will not perform as the recovery continues, they will, but not as much as some, but more than other builders.

      • 1 Reply to w999surf
      • Yes, there is a big difference. Point being one has to give the Wall Street pimps a reason to do their thing. It isn't necessarily tied to those points you raise. If we can show that we are indeed a true turn around story they (Pimps) will run with it! I believe this will be the case. The differences between Q1 and Q3 as far as execution will/should be drastic. and we should then be able to show gains in share price that are not directly connected to sector moves. G.L.

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