Tuesday, November 15, 2005

The House of Paaaaaaain


Housing Market ShowsFurther Signs of Cooling
By JAMES R. HAGERTY and RUTH SIMON


The pace of U.S. home sales is showing further signs of slowing, amid a widening gap between sellers' asking prices and the amount skittish buyers are prepared to offer, according to an industry survey, real-estate brokerage firms and housing economists.

Rising mortgage rates, higher energy costs, widespread talk about the risk of a "bubble" in housing and a surge in the number of homes on the market are among the factors behind the apparent slowdown. They have combined to make home shoppers more cautious, economists and real-estate brokers say.

Buyers are taking their time to look for bargains, while many sellers have put unrealistically high price tags on their homes. That leads to a standoff, causing the number of sales to drop -- a classic ending to a period of unusually rapid house-price increases.

In a survey conducted last week, real-estate consulting firm Real Trends found that the number of home-purchase contracts signed last month dropped 8% from a year earlier at 48 of the nation's large real-estate brokerage firms. Those brokers responded to an email poll sent to 80 brokerage firms.

That’s the lead story in today’s WSJ, and, as usual, it arrives six months too late to help anybody stuck with a just-closed-on McMansion in Upper Bergen County.

My apologies to Jim Cramer for stealing his wonderful Mad Money “House of Pain” routine for the title of this piece, but that was all I could think of as I read through the article, with quotes like “the frenzy is over” and “newfound sense of urgency among sellers to get out.”

Today’s environment reminds me of the early 1990s, when the housing market in New England (and all across the country) flamed out after years of overbuilding marked by a condo frenzy that ended only after sucking in every last possible buyer, (including my parents).

I got so bearish I put our house on the market. We fixed things up, put in a bright new kitchen window and invited realtors in for a look. At the end of the day we had over 100 real estate agent business cards on our dining room table.

And we got precisely one bid for the house.

I grabbed the bid and never let go, even when they asked for a new roof on the garage and my attorney told me to break the deal.

Whether or not this cycle ends as badly as that last cycle remains to be seen. One could argue that very little has changed from last summer’s Time Magazine this-has-to-be-the-peak front cover everybody-in-the-pool story on housing (see this blog’s The Last, Best Hope For Prosperity about it, June 12)—if anything, the economy is stronger than anybody had reason to expect back then.

But short-term interest rates are up a bunch, and even the long end has moved up lately, yielding mortgage rates at a two-year high. And don’t think every potential buyer still out there doesn’t read the newspaper headlines that say “the frenzy is over” without re-thinking their bid on that McMansion.

If there’s any doubt about the fact that this particular housing cycle is over, even the chief economist of the National Association of Realtors told the Journal, “The air is coming out of the balloons”—and when was the last time you heard the chief economist of any association say something like that?

It is indeed looking like a house of pain.


Jeff Matthews
I Am Not Making This Up


© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

44 comments:

Its_strange said...

I'm from Upper Bergen County . I have lived here most of my 51 years of life. Upper Bergen County puts alot of money into Wallstreet . It also takes alot away from Wallstreet. This is going to be interesting. I'm going to call the many house framers i know ( I know most of the quality ones ) over the next few days and see what they have to say.

Upper Bergen County ain't vacation homes...just imagine whats happening in Hilton Head and other sexy vacation spots.

Looks like the stand Jeff made a few months ago was dead right.

credibility said...

Overstock.com
Free cash flow (negative)
3Q’05 -32,090,000
3Q’04 - 4,732,000

TTM 9/30/05 -67,589,000
TTM 9/30/04 +1,788,000

Decline of 3,880 %

credibility said...

Overstock.com

Negative Free Cash Flow
Year to Date
9 months ending 9/30/05

-$104,647,000.00

-$5.32 free cash flow per share

AllenCap said...

I'm from upper bergen county too. And yes some of the McMansion's are appalling. Ugly too. It's amazing to see developers go take down a piece of woods and then cram as many 1 or 2 million dollars home as they can on it. I can't see who in their right mind would buy that enormous house with such tiny property. Ugly.

Anyway, in related news. My friend is a mortgage broker. We talk almost daily and the kinds of things that he tells me never fail to shock me. It's is SCARY! Whoever is holding the ABS paper in the secondary market doesn't know the true nature of their investment. And should there be large scale defaults i would expect the lawyers to have a field day with the mortgage originators who did the securitizations.

Two things i got out of conversation with him:
1. A lot of people that he has worked with in the business were former day traders. That's funny, not only are they "ex-day-traders-turned-condo-flippers" but also mortgage brokers. I guess it's the personality that likes to rush head first into where ever the action is.

2. He says that last week for the first time in years he lost 2 loans becuase, "interest rates made it so that the loan just didn't make sense to do."

The party is over.

Its_strange said...

I don't get it credibility....OSTK's earnings were a disaster . The 10Q doesn't seem to jive with thier earings press release and call yet hardly anything is written about it. Nothing from Greenberg , the NY Post, the WSJ . I don't get it.

My gut tells me just as the inflation data is questionable so is the housing data...I think its worse than we realize

Its_strange said...

Allencap....I see you are a local guy. Boylan bottling company is a 100 year old company from Halden NJ ....Do yourself a favor, get your hands on the 5--6 flavors and try it. Tell me what you think. And keep your eye on the private company. I think they are on the move in a serious way.

http://www.boylanbottling.com/

Its_strange said...

I see stamps are going up 2 cents..How silly.

credibility said...

jeff,

I understand that you might delete these ostk entries.
Since I posted those stories last week under your gomainasai blog ALMOST ALL THE AUCTIONEERS who vented their complaints in those posts have all been BANNED from ever doing auctions on OSTK.
SEE LINK below:

http://www.powersellersunite.com/post-29125.html#29125

I cut and pasted this url because they will probably delete the url(a pattern of ostk).
All the posters including SOUTHIE have set up another site to discuss their frustrations.
I wonder if any will contact the BEARS?


tuckerbunny2
Green Star
Posted: Thu Nov 10, 2005 7:32 pm Post subject: Re: Holly eliminated Unproductive Sellers #26

LurkeyLou wrote (View Post):
If you're not willing to speak half truths, then it might be better to keep it business - strictly business.

Or make a decision to move on. There's something to be said for association. If its not a profitable association & calls for doubletalk whats the point?

jmho O was not a normal shut up & sell situation. O asked sellers to invest their time, experience & money building the site. Sellers were asked for opinion. Often. They asked for help and received it. Without charge, I might add. A few sellers there should have received hefty consulting fees. Folks found themselves personally involved, concerned about the outcome. Which I don't think will happen again.

O asked for personal involvement. They got it & all the fallout that goes with it.

grannysuze
Yellow Shooting Star
Posted: Thu Nov 10, 2005 8:24 pm Post subject:
Interesting and heartfelt comments ... shut up and sell may well be the best way to approach it ... but I've so enjoyed my association with the PEOPLE ... It mad it so much more fun, if not rewarding. darn !!!

Tucker's right, though ... "O" asked for the emotional and personal involvement ... and when people invested their emotional equity into the site, that made things a whole lot different.
Interesting.
I still have a lot to mull over.
I'm not listing anything anywhere, but I need to do something fast for a particular reason ... will post in another thread ... looking for some quick advice.
www.GrannySuze.com

LurkeyLou
Yellow Shooting Star
Posted: Thu Nov 10, 2005 9:03 pm Post subject: Re: Holly eliminated Unproductive Sellers #28
And that's the rub, TBunny & grannysuze. O did ask, and members did invest, emotionally and financially.
Personally, I've done it time and again - WagglePop, LunarBid, BidChaser, eDibz and Overstock - to name a few - this year.
*Most* of these venues are taking advantage of sellers.
What else can we call venues simply pulling the plug? Leaving a venue to languish or just plain banishing some of the strongest supporters because they said something(s) that put a venue in a less than angelic light?
We're lining up for it. We have nothing but the best intentions. We are deeply interested in seeing the monopoly broken. We work especially hard when a venue professes to have the seller's interest at heart.
Time and again, it's proven to be a con job. Using the implication that the marketplace and sellers will benefit, these venues save thousands of dollars on focus groups, consultants, customer care, design help...the list goes on.
These are not our businesses. We're investing ourselves to grow the business of another entity. And we need to, on some level. But how many hundreds of hours have some individuals invested? And for those who've been dismissed, who, exactly, continues to benefit from the investment?
Overstock may not have started out with a shut up and list attitude, it may have evolved. Regardless, it's evident when you take a look at high volume sellers and the way that some of the most devoted memebers/ex members have been treated.
Enjoying people "off site" may be the best self defense...I've personally invited several O members to join PSU and other forums. That would make it easier to keep it "just business" at the venue where we're working. Besides, the venue can not censor and force only one party line.

G'luck, grannysuze...I hope that things work out very quickly for you.

goodstuff4you
Purple Star
Posted: Mon Nov 14, 2005 4:39 pm Post subject: Re: Holly eliminated Unproductive Sellers #29
Well it seems like BB is still on his high horse power kick.

southie
Yellow Shooting Star
Posted: Mon Nov 14, 2005 5:05 pm Post subject: Re: Holly eliminated Unproductive Sellers #30 You said it!
Kinda sad & pathetic!

That's not a company - that's a Power Trip / people who have
a deep setted need for Power & Control ...

Maybe this would be a good time to say the BIBLE warned of
such behavior in the last days????? Because of THOSE
people ~ they just acknowledged and confirmed the prophecy
of GOD made thousands and thousands of years ago ...

grannysuze
Yellow Shooting Star
Posted: Mon Nov 14, 2005 5:38 pm Post subject: Re: Holly eliminated Unproductive Sellers #31
Well, now my feelings are hurt.

I was banned from Overstock today. I had always thought I did pretty well staying just inside the bounds when I spoke out on controversial subjects ... but I guess I went too far in the following two topics which are the examples that the moderator used to finally get me.
I think the examples are pretty lame, compared to things that have been said in the past .... and compared to things being said in other current threads that do not result in banning ....
but anyway ... I offer it up for review by anyone interested ....

http://forums.auctions.overstock.com/viewtopic.php?p=148128&highlight=&sid=56d8dc236e250b8ad148c9275c41e620#148128

http://forums.auctions.overstock.com/viewtopic.php?p=148042&highlight=&sid=56d8dc236e250b8ad148c9275c41e620#148042

I feel like I was one of the last two unlicensed dogs running free without a collar and without being paper trained.

There are sections of the "O" boards no doubt rejoicing tonight to be rid of me. At least I made someone happy today.

This does not make me happy ... but I will live on.

goodstuff4you
Purple Star
Posted: Mon Nov 14, 2005 7:28 pm Post subject: Re: Holly eliminated Unproductive Sellers #32
buglebully
Posted: Mon Nov 14, 2005 8:36 pm Post subject: Re: Holly eliminated Unproductive Sellers #33
Amazing, grannysuze. Just amazing.
Cold comfort: those groups that may be rejoicing tonight are running out of fresh prey and will eventually turn on one another.

I firmly believe that O-Auctions, as they are today, will be a cyber memory this time next year.

Only 12% of the traffic to Overstock accesses the auctions. I'd lay odds that a significant amount of that traffic sellers.

In certain catetgories, there are more bids at Yahoo than Overstock. That doesn't bode well, considering that O advertises.

Overstock held itself up to me, in my last telephone conversation with CS, as the second largest auction venue.

Overstock is not the second largest venue. Overstock is the fourth and often fifth venue, trailing behind 'bay, bidville, ioffer and often yahoo.

Big Daddy's gonna' waltz in there and squash that sh!t. The way that it's going, once the bean counters give Sr the year end figures, it will take one slick and quick sales job to justify the coninued cost. be impossible to

Grannysuze, I wouldn't be surprised if you view this as having done you a favor. The first ones out are the first ones back on their feet.

I'm sorry your feelings were hurt. You deserve better treatment.


tuckerbunny2
Green Star
Posted: Mon Nov 14, 2005 8:59 pm Post subject: Re: Holly eliminated Unproductive Sellers #34
((Welcome Granny)) Proud to have you among the banned.

I'm kind of disappointed though. I read the headline & thought...mmm, this is going to be some good reading. Made some popcorn, got a pepsi.... Barely got the steam out of the bag & thread was over. Thats IT?

I doubt anyone will be rejoicing over your sudden abrupt departure or Tim's.
I suspect y'all spoke for aLOT more folks than you realize. It's their loss in every way.

southie
Yellow Shooting Star
Posted: Mon Nov 14, 2005 10:29 pm Post subject: Re: Holly eliminated Unproductive Sellers #35
Welcome Granny - Glad to have you in the Land of the Banned!

SimplySinfulSoyCandles
Red Star
Posted: Tue Nov 15, 2005 7:23 am Post subject: Re: Holly eliminated Unproductive Sellers #36
-it's ok Granny, we love you no matter WHAT the O says about you!
_________________
www.AuntieDisDelites.com
www.blujay.com/simplysinfulsoycandles
www.stores.ebay.com/auntiedisdelites

JC Ernharth said...

Hiltong Head? (or pick your coastal hotspot of choice) Other areas have problems, but Hilton Head's real estate never drops.

I've heard that countless times from people I chatted with over the past four years who have "invested" in vacation homes up and down the East Coast, from the Cape to Florida.

I guess they're all winners!

Sam S. Park said...

Here's the predicament Mr. Bernanke has to deal with when he begins to move his chess pieces. He's an inflation targeting proponent. So I would like to know how he will go about dealing with both the inflationary (oil, commodities, etc.) and the disinflationary (the upcoming fall in real estate and cheap Chinese imports) pressures. Which will he weigh more? He has a tough job up ahead. Will he face similar market effects as did his predecessors when they first stepped into office?

AllenCap said...

It's Strange....
Are you referring to the same boylan that makes boylan's red root beer?

If so...they make some of the best soda and the absolute best root beer i have ever had. I didn't know they were from haledon. I'm surprised that it's a private company, sometimes it is better that way though.
Small world...small section of your grocer's isle.

Its_strange said...

Allencap, thats them !! check out thier website

http://www.boylanbottling.com

great history and they seem to be on the move. ..

The stuff is just great, really

Its_strange said...

Seeems Gradient filed a motion in court to have the ostk case booted out...If and when someone finds a link to the motion please post it, thanks

DaleW said...

Looks like the stand Jeff made a few months ago was dead right.

Annual volatility in the average stock is around 40%. Almost all of these stocks are within that range and the more diversified builders are quite near the 6/10 closing price. RYL is within 2 points, CTX is within $1.75, LEN is about $3.75 below, and PHM is about flat. How is that right as far as the equities go?

Its_strange said...

i don't recall him mentioning anything about stock prices

credibility said...

November 1, 2005

Overstock v. Gradient Analytics

SEC Initiates Formal Investigation; TheStreet.com Responds
The SEC has initiated a formal investigation into allegations by three former employees of Scottsdale, Ariz.-based stock research firm Gradient Analytics of improper conduct by the firm in the preparation and dissemination of research reports on companies favored by short-biased hedge funds. The allegations, contained in affidavits filed in support of a lawsuit filed last month by Overstock.com against Gradient and one of its clients, Rocker Partners, were detailed in our story “Overstock Affidavits Paint Research Firm as Hired Gun for Shorts,” (TPR Oct. 1, 2005.)

http://www.dealflowmedia.com/issues/pipesreport/3_19/pipeline/655-1.html

DaleW said...

i don't recall him mentioning anything about stock prices

Given Jeff discusses equities for the most part, please forgive my assumption. It's inferred.

HoosierBuff said...

so, my question is what is the next bubble? what are the day traders turned mortgage brokers going to do now?

I want to get in early for the next one. . .

Aaron Koral said...

A couple of points:

A) In the 11/12/2005 issue of the Chicago Tribune, two developers, Centex (CTX) and Lennar (LEN) both have slashed prices on homes selling in the Northwestern suburbs of IL. The price reductions range somewhere between 15% to 25%. That's not to say the homes aren't selling but they're selling at lower prices than originated.

If the price drops in my neck of the woods are any indication of what's going on in the rest of the country, then one could make the inference that inflation is headed down (ex energy and food) and long bond holders may be in for a mother of a rally once interest rates stop rising (I could be wrong, though...)

B) One quick question to Sam Park's excellent post is this: Can Bernanke target something which, in essence, is not "targetable" (i.e., inflation)? That, I think, is the real question he, along with others at the Fed, should be asking themselves. Markets, via supply and demand, dictate inflationary pressures - how is the Fed going to have any power in controlling what a market will bear in terms of pricing for goods and/or services?

orlandoguy said...

First time poster here, really enjoy the site. Anyways, a friend of mine told me about the following site. If this isn't a sign of a real estate bubble, I just don't know what is.

www.condoflip.com

AllenCap said...

Orlandoguy:

My favorite quote from the site you mentioned: "Buy and Sell Condos Online and Anytime!" If everything else in the world didn't signal a market top...than a tour through that website certainly does. That is a funny website!

My humourous prediction for the next overheated place for the quick-buck,get rich types, willing to risk their shirts....FOREX.

Think about it:
Online Stock trades? You can only borrow 50% on margin

Commodities? You have to post a burdensome 10% of the purchase.

Forex? - 99% leveraged. That's right. You only need 1,000 to control 100,000.

And it trades all around the world - 5.5 days a week for 20 hours a day. The action never has to end!!! Trade when you get home from your day job. I mean you wouldn't want to quit your job and day trade like you did in the 1990's, or spend all day looking for condo's to flip right?

And you can start a mini account that trades in lots of 10k where leverage gets even more ridiculous. The gearing can actually approach 400:1 instead of the 100:1 for the grannys of the world.

Hey George Soros made 1 Billion dollars in one day by shorting the pound, why couldn't you do that?

- Just hope that no fast market conditions ever happen (forex, that's not volatile...is it?)and the currency doesn't gap straight through your stop...leaving you owing the broker more than your account has in it.

-Oh and hope that you set your account up with a reputbale dealer, not Refco Capital Markets or any of the other unregulated divisions of larger companies. I mean if a Refco division is unsafe, i can't really see many others being more reputable...pre-blow-up.

- A friend showed me some of these places. Shows some potenital to be the next big thing to separate a fool and his money.

Its_strange said...

I'm Boo-yah on Boylan's

Emigrant Capital funded Boylan's expansion in 2004

I sent 3 cases over to Jim Cramer at Thestreet.com . I think its smart to keep a eye on this company

http://www.boylandbottling.com/

Hey Reuters. Gradient files a motion to dismiss the OSTK suit and all you give the readers is " Overstock seeks to deliver the clear message-to Gradient and all others-that criticism of Overstock will not go unpunished" ...You have a copy of the motion and thats all you give us ? You stink at what you do

orlandoguy said...

AllenCap:

Yes, that site is unreal - perfect for a blog titled "I'm not making this up." People have made a ton of money here in Florida flipping condos like pancakes. However, it will not be pretty for those caught with the hot potato in their hands when the market cools off. Consider this factoid from the fdic website regarding the Miami market:

"Spurred on by seemingly insatiable demand for housing, record–setting homebuilding has continued in Florida as permit issuance through first quarter 2005 was up over 15 percent from a year earlier. A rapid pace of condo construction persists in many areas as well, including the City of Miami where over 60,000 units are in various stages of development—remarkable, given the fact that just 7,000 units were built in the past 10 years."

http://www.fdic.gov/bank/analytical/stateprofile/2005_summer/Atlanta/Fl/fl.xml.html


Meanwhile, I'll be watching for www.forexfordummies.com....

orlandoguy said...

sorry, the link for that report is:

www.fdic.gov/bank/analytical/
stateprofile/2005_summer/Atlanta/Fl/fl.xml.html

Jeff Matthews said...

"DaleW": To set the record straight--and it is there for all to read--I never discussed equities in my August 5th call that this housing cycle was over, whatever you think was "inferred" by my writings.

What I actually wrote was this:

I guess--like the old-time money managers in 1999-2000 who either closed up shop or got with the New Economy--I'd better either jump on the real estate bandwagon or stop barking at the tires.

Nope. I'll put a stake in the ground right here, and say what so many others have been saying for so long that they've shut up already: the housing cycle is over. The high-water mark has been reached, today, August 5, 2005, when the 2 year yield hit 4.10%.


That's what I wrote. When it appeared that some readers needed further clarification, I added the following:

Let me rephrase to make myself really clear: anybody buying a house today that they don't need to live in because they agree with the consensus view that real estate only goes up is in my view a moron.

DaleW said...

"DaleW": To set the record straight--and it is there for all to read--I never discussed equities in my August 5th call that this housing cycle was over, whatever you think was "inferred" by my writings.

Jeff,
You don't need to put my name or the word "inferred" in quotation marks. The first is my name and the second word is real and is used properly. If it's incorrect, that's fine. Given a very high percentage of the content here has to do with equities, I inferred your meaning. I know what you wrote and I think I have replied on home builders a couple times when this topic has come up. Sorry to go freestyle here, but as an equity guy perhaps I have a one-track mind.

I really do disagree with your whole treatment of the housing market, though. You could have been talking about Denver, Buffalo, Bakersfield, Saddle River, or Dallas and the outcome of speculative real estate buying over a given time horizon will probably have been very different. Real estate is highly local. You could have said, "Don't buy equities" in 1973 and you would been very right overall for nine years, but you would have been completely wrong had you said "don't buy small cap equities."

So, sorry to assume there is any correspondance here between what you say and the investability of what you say. I will keep away from all assumptions and inferences in the future and confine my interpretation of the content here to the strictest level of literal reading.

DaleW said...

So, sorry to assume there is any correspondance here

Sorry, I should say "capital markets correspondance." By the way, Shiller's futures will start to trade soon in Chicago, so this will be directly investable coming up.

russell120 said...

New here.

About Forex as the next bubble.

The immediate zero sum nature of commodities future contracts seems to have kept there bubble aspects somewhat in check...of course there was that tulip thing...so maybe not.

Sam S. Park said...

Heated debates are always fun to read and usually bring out the best points. The debate between Jeff and Dale is probably due to some honest misunderstanding. I think Jeff was directly referring to the high-end (or second) homes in hot markets that will likely experience some price corrections.

Dale also made some great points from the equity perspective. Going by "efficient market hypothesis," the equity prices wouldn't reflect a precipitous fall in the general housing markets.

Housing prices are definitely local, and many of these housing companies have diversified themselves across various markets. So, I would guess that corrections in hot markets wouldn't have a dramatic impact on the diversified plays. Those that specialize on the high-end houses in hot markets, however, will feel the blow.

Dale, regarding Shiller's futures, are you referring to using the futures index (on housing) to hedge your home purchase? If so, this is all good for the wealthy, but I think those first home buyers who've used IO financing wouldn't be able to afford to benefit from Shiller's futures.

Sam S. Park said...

Hey Aaron,

Regarding your question... well the whole "inflation targeting" thing will (in my opinion) have some material effects. On paper, things look as if not much will change... but it really depends on how serious and disciplined the Fed will be on maintaining with and following through with this new policy. Sure the Fed can use the core CPI, PCE or some weighted average, but following that policy will have some fallbacks - like manuverability. There's more to this story than meets the eye.

In my opinion, I liked Mr. Greenspan because he "kept it real"... But Mr. Bernanke seems strictly academic who may change things. I love numbers and all but, I don't know if a strict policy will be a good thing.

DaleW said...

Going by "efficient market hypothesis," the equity prices wouldn't reflect a precipitous fall in the general housing markets.

I argue the opposite -- the efficient (read, competitive) market has already priced in declining home prices across the industry. I believe they have more than priced this in at 5.5x 2006 earnings estimates.

Dale, regarding Shiller's futures, are you referring to using the futures index (on housing) to hedge your home purchase?

No, I wouldn't do that because I don't buy homes on a speculative basis. For a speculator, it might help, however, and for the equities, this market could be helpful in transmitting price signals to managements. For those with a short outlook on home prices, this could also present an alternative channel for their capital, taking pressure off the equities. I doubt this market would help a couple buying a $180,000 in Indianapolis.

Its_strange said...

I believe many sub-prime lenders have been lending to people who have been lying and lying some more. I believe many sub-prime lenders have known this but looked the other way. When i see this become front page stuff i will believe the housing stocks have priced in the bad news. ..

Let me be clear. I am no pro at this stuff but i look, i think. I think our culture is all about the lie. I believe our politicans are about lying. I beleive TV makes the lie work for years and years but i belive the "blog" will change the power and relationship betweeen the lie and TV.

DaleW said...

By the way, I never said "Jeff, you're wrong!" I just posed the question, "how is this right as far as the equities go?" Just throwing out the question -- we don't have to discuss it if we don't want, but please don't feel too persecuted if I wanted to direct the conversation toward equities.

Sam S. Park said...

Dale,
By precipitous decline, I meant a huge drop as some are predicting. The equities seem to be pricing a slight fall, not a huge one. That's what I meant by the whole EMH thing.

I don't know about Jeff, but I actually like how you diverted this thread towards equities. Good stuff.

DaleW said...

Sam,
Depending on cost of capital and the long-run economics of these companies, I think the market is pricing a high probability of high single digit price decline with no growth after that or a smaller probability of a huge decline with no growth after. The equities appear to discount no probability of regular growth in the future. All of this is what is attractive if one is constructive on the strategic characteristics of the industry's better companies.

Aaron Koral said...

Hey Sam - I liked Greenspan also (I will be one of the few who is sad to see him go) but I don't think the other Fed governors are going to be too keen in targeting something which, in my opinion, is not exactly "targetable". I do, however, think that Bernanke will be more focused on the deflationary aspects of the US economy (i.e., declining prices in oil, lower prices for technology goods and services, et. al.) due to Greenspan's legacy once he leaves the Fed for good (I could be wrong, but again, I must compliment you on yet another good post!)

dalew:

You're right - real estate, like politics, is local. What is happening in one area of the country (i.e., Bannockburn, IL) may not be a harbinger of what's to come in another part of the country (i.e., Denver, CO) due to factors such as local economies, population trends and even state/local taxes!

I also agree with you that the equity market has already priced in a decline in operating margins from revenues related to housing stocks. What, in my opinion, people seem to forget about home builders are that they own the land their properties are built upon.

When you think about the housing stocks from a resource conversion standpoint, they're cheap (on an asset value basis) if you buy and hold them for the (very) long term, once the price is right. Whether today's prices are "right" to start buying home builders, however, is a post for another day and time (and as always, I could be wrong, though).

Its_strange said...

I framed houses in Bergen County for better than 20 years before my joints gave out. At the time i knew most of the local builders . Well you guys recall the book " Looking out for number one" by Robert Ringer ( i think that was his name ) ? He said in the book " Builders need to build, they can help themselves " .....Jim Cramer likes to say how smart the TOL guys are ..well i say be careful. I worked with many for better than 20 years

Its_strange said...

i should have said " they can't help themselves " ....

i'm thinking back to around 1986..I was working the bench or ground ( that means cutting the headers , liners , rafters etc ) and some silly wallstreet type dude drove up in a Ferrari and asked if the builder was around. I said no so he gave me his card and said " tell him i want two "....i never saw the guy again ...lol..Yep , i see alot of Ferraris driving around in Saddle River . .....

Its_strange said...

i almost forgot ( i'm losing it, yes ) my pal who owns one of the local Saddle River real estates offices told me people are using the attorney review period to demand lower prices.....yep. Using the attorney review period to demend lower prices.

DaleW said...

What, in my opinion, people seem to forget about home builders are that they own the land their properties are built upon.

They own about half the dirt outright and half through options. Raw lawn is about 13% of COGS and since they own half that outright, they hold about 6% of their COGS at any one time in raw land. The rest, 95% of it, is built on order and not on spec, so the COGS structure is highly variable with no shutdown costs. Given all the business models in the world and all the potential valuation ranges one sees over the course of an investing career and all the choices one might make in a securities portfolio, I'll take that.

Sam S. Park said...

Dale that's a nice analysis of the COGS structure. You seem to be the expert in this area, so maybe you could fill me in with some details. When you look at a company like CTX, much of the cash outflow goes towards their inventory build up. What makes up the largest portion of inventory, given that raw land makes only a small portion of COGS? How long does it take for these homebuilder guys to translate this into revenues? And what happens if the orders start to freeze up. Are they left with these current assests, and what other ways can the company liquidate them?

I'm not trying to give you a hard time. It's just that you've made some excellent points lately as far as equities go. I'm just curious about CTX's negative free cash flow, and I'd like to learn more about the homebuilders' business model.

Also, I'm not much of a chartist, but if you follow fractals or other technicals, it appears that CTX's stock tends to drop off every 5 years or so. If charts have any validity, it appears that CXT is bound for a bit of a drop. I like the run up this stock has shown over the past decade, but I probably wouldn't long the stock until 2007 or so.

DaleW said...

Sam,

I agree with you -- charts are a convenient and condensed way to view the market's sumnation of the fundamentals. I like looking at charts, but not getting too deep into it.

COGS structure for homebuilders, roughly, is as follows:

1/3 land. Of that, half is raw land and half is capitalized development costs, capitalized interest, and where applicable, any capitalized entitlement.

1/3 is labor.

1/3 is bricks, sticks, fixtures, and appliances.

There is a lead-time on about 93% of this of one year or less and the rest stretches from six months to seven years. Cash conversion cycle is pretty low for capital goods.

What happens to cash flow if these guys stop buying land? Same thing you would see at Wal-Mart or retailers -- cash flow shoots throug the roof. Cash flow becomes roughly equivalent to earnings if they replace the land. Most of these guys can liquidate their balance sheet in three years if they don't replace the land. At a 40% debt/capital gearing, margins can fall in half and these guys can still pay off all their debt in pretty short order.

BoxedMerlot said...

Three points: first, just as it is "market of stocks," and not a Stock Market, the real estate market is actually different in different places. New York and Frisco are very unlike Iowa, just as PNC and BPOP are not BAC or C.

Second, how many homes need to be built to replace the damage down south? There is 2 billion dollar worth of fallen wood there (see GP calls lately?) Do you see the Fed rising rates in light of that particular national crisis?

Third, I just read that most American's are basically strapped, with 30k or more in debt. Do you see the government raising rates so banks and lenders can take back all the houses that are 50 bucks from the REO Dept as it is?

If so, how would you short the housing market?

Finally, don't feel bad; I watched a relative buy up gold at the tail end of it's run just before Volker stepped in to fix things in the early 80s, when it reached 700 per ounce.

Sam S. Park said...

Dale,
You da Man!!! Finally, we're getting some really good stuff. It's good having some of that financial statement analyses to get the whole story. Like you, I'm a big fundamentals fan who thinks that financials tell much of the story... well, regarding specific companies.