Saturday, April 09, 2005

"Pop" Goes The Bubble


Just 10 weeks ago, Standard Pacific Corp, one of the largest homebuilders in the nation, reported an excellent fourth quarter and full year 2004 to investors.

Nothing unusual there—all homebuilders, except a few laggards, have been reporting record results since well before the the Fed Funds rate reached a microscopic 1%.

But, more than crowing about the past, Standard Pacific’s CEO was quite ebullient about the future, and his forecast for 2005 at that time is worth noting:

"We are also positioned for another record year in 2005. Our positive outlook for the year is bolstered by our record backlog of over 6,300 pre-sold homes valued at $2.1 billion, which represents approximately 55% of our projected 2005 revenues. In addition to our strong backlog, the economic and housing fundamentals remain healthy in most of our larger markets.


“To support our 29% increase in projected consolidated deliveries this year, we are planning to open between 130 and 140 new communities, up approximately 40% year-over-year.

"We expect our successful expansion efforts into the Southeast to have a significant impact on our unit growth in 2005. In only our third full year in Florida, we are projecting to deliver 3,800 homes, a 62% increase over the 2004 delivery total. In addition, Florida is expected to surpass California as our single largest state based on unit volume."

That was then.

More recently, Standard Pacific’s business appears to have turned on a dime—or, rather, on the seventh Fed rake hike since the 1% days of 2004. On April 5, the company reported thusly:

“New home orders companywide for the first quarter of 2005 were down slightly from the record level achieved a year ago, consistent with our expectations for the quarter. The order levels reflect generally healthy housing market conditions in the Company's three largest markets: California, Florida, and Arizona, and flat to gradually improving housing market conditions in the Carolinas, Texas, and Colorado.

“Although new home orders were down year over year in Southern California, absorption rates in the first quarter improved over the sales rates experienced in the second half of last year…. In Northern California, new home sales were down 26% on a 27% lower active community count. The Company continues to experience healthy demand for new homes in this region.

“New home orders were down 18% on an 18% increase in active selling communities in Florida. The lower sales rate per community during the quarter reflected a conscious decision by the Company to reduce the number of new homes for sale due to strong backlog levels. This adjustment in our rate of new home releases should better align sales with our production capabilities. The Company is generally experiencing healthy housing market conditions in all of its Florida markets.”


The change in tone—from heady blue-sky cockiness, to convoluted explanations about lower home orders—is one good reason why homebuilders have such low valuations, despite years of terrific results: they live in a business that is as cyclical as a business gets.

That cyclicality—and its attendant risk—has not been apparent during the multi-year drop in interest rates.

Until, quite possibly, now.

Jeff Matthews
I Am Not Making This Up


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