Thursday, November 17, 2005

Tomorrow’s Headline Today?



Sales of New Homes Plummet

The 40% decline for 3-month period is sharpest in 15 years.

Thus reads the headline over a front page story in yesterday’s Business Section of the Sacramento Bee, the daily chronicler of the economic and social activities in what had, up until several weeks ago, been one of the hottest real estate markets in the country.

As reported by Andrew LePage, a Bee Staff Writer:

Sales of new homes in the Sacramento region dropped 40 percent over the past three months compared with the same period last year, according to the local Building Industry Association.

It's the sharpest decline the group has seen for the August-October period since 1989-1990, when sales plunged nearly twice as much - 79 percent.


The most amusing aspect of the article, if there is one, is that, as explained in banner ads surrounding the story on the Bee website, “The Business Section is brought to you courtesy of Beazer Homes.”

Beazer Homes is one of those aggressively expanding publicly traded homebuilders benefiting from the trees-grow-to-the-skies nature of the housing market.

Beazer’s just-completed fourth quarter earnings reveal a $2.9 billion land and housing inventory, up from $2.3 billion in 2004 and a mere $630 million five years ago.

That 36% compound growth in Beazer’s inventory might be one reason Sacramento in particular suddenly appears to be awash in housing, according to the Bee article:

The 1,388 new homes sold during the past three months marks the lowest total for the August-through-October stretch since 2001, reported the North State Building Industry Association. The group tracks roughly 55 percent of the new home subdivisions in the capital region and reports net sales - the number of escrows opened each month, minus any canceled deals.

Cancellations of pending home sales have spiked in recent months because more buyers, including investors, either got cold feet, couldn't qualify for a loan or couldn't sell another property fast enough, industry sources reported. Also, some builders insist they're strictly enforcing the anti-speculator clause in their sales contracts and will cancel deals if they learn a buyer is an investor, not a primary resident.

But Sacramento's slower resale market may be the biggest reason that sales of new homes are down so much.

"One of the drivers (of cancellations) is people not being able to sell the home they have for the price they expected to get for it," said John Orr, president of the local BIA. "On the resale side ... the sellers aren't in the bargaining position they once were."


But you wouldn’t have gleaned a bit of this from Beazer’s recent (November 2) earnings call. Asked about developments in the Sacramento region, Beazer CEO Ian McCarthy told Wall Street’s Finest not to worry:

We are still seeing pricing power there. We are very focused in that market on being affordable. In fact, our whole strategy in California is making sure that we're affordable. We have not played in the very highest prices there in either Northern California and we are only in Sacramento.... I would say we're not seeing flattening, we're still seeing some price appreciation.


Mr. McCarthy ought to pick up a copy of yesterday’s Bee, or access its web site (complete with Beazer’s own banner ads) and check out the story, which goes on at some length:

Still, there's no disputing the pronounced cool-down in the new home market…. Greg Paquin, head of The Gregory Group, agreed that "it seems pricing may have gotten ahead of itself."…In addition, lenders are beginning to scrutinize loan applications more closely, meaning some marginally qualified borrowers now find it more difficult to use the most aggressive, riskiest forms of financing.

Builders have been using these increasingly lucrative incentives, such as $50,000 toward upgrades on higher-end homes, in lieu of lowering prices.

This last may explain the apparently gaping chasm between Beazer’s optimism regarding Sacramento home prices, which are not “flattening,” and the recent collapse in Sacramento home sales according to Sacramento’s own Building Industry Association: the homebuilders have yet to cut prices.

As anybody on Wall Street knows, price follows volume. And volume in Sacramento is down.


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.


20 comments:

Its_strange said...

PMI and NFI are suing each other. I'm thinking the facts of the case will tell alot.

hundredyearstorm said...

This is from last Friday's Washington Post. Another one of the "hot" markets starting to turn.

Housing Market Cooling, Data Say
In Washington, Sales Are Down, Inventory Is Up

By Kirstin Downey and Sandra Fleishman
Washington Post Staff Writers
Friday, November 11, 2005; A01

Lynn Edmonds and his wife, Sebnem, could barely wait to sign on the dotted line back in May when they committed themselves to pay $796,000 for a three-floor townhouse under construction in Alexandria's Cameron Station.

But since May, the sales prices for the development have fallen -- and units like the one the Edmonds bought are now being sold for $699,900. The Edmonds are facing the prospect of a $100,000 loss in value before they even walk through the front door.

"We blithely stepped into the contract, thinking it would hold its value -- but that's not the case," said Edmonds, 46, a program analyst and Air Force veteran. "I feel so stupid putting myself into it. It's real estate -- I knew on a theoretical basis that it might go up and it might go down, but now I know it on a practical level."

New data released yesterday show that in the past year, home sales in the Washington region have declined sharply, the inventory of unsold homes is up significantly, and prices have flattened and, in some cases, fallen.

The trend is most striking in Northern Virginia, where most of the region's growth has occurred, but it is evident almost everywhere. Statistics on home sales released by Metropolitan Regional Information Systems Inc., the regional multiple-listing service, show that:

In the two counties and three cities that make up the Northern Virginia market, more than twice as many homes were available for sale in October as in the same month one year ago -- 7,122 homes, compared with 3,254 -- and sales are off 28 percent.

In the District, listings are up 62 percent and sales are down 28 percent.

In Montgomery County, listings are up 49 percent and sales are down 8 percent.

In Prince George's County, the listings are up 45 percent. But home sales have remained fairly stable, dropping only 2.6 percent.

The last time the region had this many houses for sale was the late 1990s, the MRIS figures show .

With housing supply higher and demand lower, prices have fallen from their summertime peaks -- though prices fluctuate every month and often decline in the fall because summer is the busiest home-buying season. Nevertheless, some slides are evident almost everywhere: In the District, the median price -- the point at which half the houses cost more and half cost less -- was $425,000 in October, down from a high in August of $435,088. In Fairfax County, the peak was in July, when the median price was $503,000; in October, it was $489,450. The peak in Montgomery County was also in July, when prices hit $460,000; the median price in October was $429,000.

The notable exception in the region was Prince George's County, where October's price was an all-time high of $315,000 -- possibly because demand, spurred by prices that are still less expensive than elsewhere in the region, has remained high.

The MRIS, which is jointly owned by the 25 local associations of Realtors, has been tracking home sales since the late 1990s, compiling its monthly figures from 72 counties in four states and the District. Its data mostly reflect sales of existing homes, since builders usually sell new developments themselves, rather than through real estate agents. But new-home sales are also faltering: Within the past two weeks, two of the biggest developers in the region, Toll Brothers Inc. and NVR Inc., have reported that their sales are slowing.

Many local real estate agents say the market is returning to normal. "We're rebounding in terms of evolving to something close to a balanced inventory," said David Howell, a past president of the Northern Virginia Association of Realtors and executive vice president and managing broker at McEnearney Associates Inc. in McLean. He said the true aberration occurred from 2003 to early 2005, when the number of listings fell to record lows, causing what he called "unbelievable and untenable" increases in appreciation.

Howell and others point out that the Washington area is unlikely to experience a major decline in prices because of its continued job growth and the prevalence of government jobs, which tend to be more stable than private-sector employment. "We're the most insulated of any market in the country" from extreme price volatility, Howell said.

The slower market "is so much healthier, it really is," Susann H. Haskins, president of the Greater Capital Area Association of Realtors and a broker at Long & Foster Real Estate Inc. in Potomac. "It's a better balance between buyers and sellers."

Economist Gregory H. Leisch, chief executive of Delta Associates, an Alexandria-based real estate consulting firm, said consumers would benefit in the long run from the slowdown because house prices had been rising so quickly that the market was destabilized.

"The market is fatigued, and it should be taking a breather," Leisch said. "It's healthy that it takes a breather."

Housing experts say the slowdown is occurring for several reasons. In the past few months, a lot of homeowners put their places on the market speculatively, hoping to cash in, creating a surge in housing supply. Many investors, whether speculators or landlords, have done the same, either because they believe the market has peaked or because they cannot make enough money in rent to support the mortgages.

They are finding fewer buyers because the double-digit price appreciation of the past few years has priced many people out of the market. The recent rise in mortgage interest rates, which causes monthly payments to rise, adds to price pressures. And now, with fears that the market has peaked, more people are simply afraid to buy.

Meanwhile, new construction is inflating the housing supply, as condominium developers rush projects to market. According to a recent report by Delta Associates, 47,000 units in dozens of projects are hitting the local market in the next three years, which is about five times as many condo units as were sold last year.

Some real estate speculators are starting to feel burned by investments that have turned sour.

Merzad Ranjbaran, a real estate agent with Weichert Realtors in Bethesda, bought a one-bedroom condominium at 1150 K St. NW in the District a year ago at a pre-construction price, hoping to flip it quickly. But it has not sold. He said he will only break even on the sale, after taxes and other costs.

"The market is changing from a seller's market to a buyer's market," Ranjbaran said.

Real estate investor Andy Cabral has had a townhouse on the market at the Wheaton Metro station for 11 months, and though he has steadily dropped the price, it has not sold.

"It's now below the appraised value," Cabral said. "I'm really not happy."

His sister-in-law, Sandra Cabral, a real estate agent with Re/Max Pros in Kensington, puts it more succinctly: "He needs to get rid of it; it's an alligator eating all the money."

But she sees an upside to the situation, with good opportunities to make purchases cheaply in the future. "Within two or three years, there's going to be a whole lot of foreclosures, because with all of the interest-only loans, a whole lot of people don't realize that in two years their payments are going to go up."

Homeowners who want to sell, meanwhile, are drumming their fingers and waiting for buyers to knock on the door.

Violain Romans-Murray, 33, is sick of the long commutes from her four-bedroom home in Gainesville; it can take her husband three hours to get home from his job as a technical manager for General Dynamics Corp. in Fair Lakes. The couple put the house on the market last month for $589,900, hoping to buy a home closer to their jobs. But three weeks have passed, and only two buyers have even visited. When they sold their previous house in Centreville in 2002, it sold in five hours.

"Honestly, we're thinking we might pull it off the market," said Romans-Murray, a mother of three and special projects coordinator for a trade group based in Herndon. "It's scary."

But many would-be buyers have withdrawn from the real estate market, saying prices are just too high to consider making a purchase. Dan McGrath, an organizer for the Service Employees International Union, and his wife, Teresa, who works at the Environmental Protection Agency, have been married for four months, have a combined income of about $100,000 a year and would ordinarily be good candidates to become first-time homeowners. But the McGraths, who live in the District's Shaw neighborhood, have been shocked and repulsed by the prices for homes in the area, including the $400,000 price on one 800-square-foot studio they visited.

"We can't figure out who -- for the life of us -- would buy a place with two doors for $400,000," said McGrath, 28. "We want to think about a future but homeownership here is just not possible."

DaleW said...

Do you have an investment opinion on Beazer then? I thought we're talking about investing here. By the way, you might highlight the fact that this survey may miss a lot of condos, which are growing as a proportion of residential real estate in Sacramento and aren't generally included in this survey. California real estate is much more volatile than the rest of the US because buyers generally use more leverage and finance at the shorter end of the yield curve. Both of those conditions make this market like the UK, where average home prices are 3x more volatile on a YoY basis, based on monthly observations, than US home prices. So, sure, Sacramento has been extremely hot and you're going to get market adjustments. Do you know what Beazer's lot weighting is in Sacramento? Do you know how they're positioned in other markets? You can find out via their website exactly where their inventory is. These national builders have as much in inventory in markets where prices have been very cool, such as Dallas, Denver, and Indianapolis, as they do in hot markets like California. The big difference? Turns and margins. In the slower markets, turns are higher and margins are lower. In the hot markets, margins are higher and turns are much lower. You get the same ROIC if those balance and the same cash flow.

As for Beazer's product strategy, do you know what it is? It's not McMansions (which I get sick of hearing from my colleagues on Wall Street because it's so damned haughty and derisive of other people's tastes) -- their average selling price is $255K, which is 25% below the average selling price of the large builders group. They sell large luxury houses, but for the most part they're selling the American dream to people. If anything, much more weakness has been seen in the upper end of the market while starter and first move-up product has been good across the country. Thus Beazer can see pricing power while the market in general is weak.

I disagree with the almost the entire thrust of this post. Real estate is local and strategies among builders can differ. I am long and bullish on these for numerous reasons, one of the main ones being that everything you have written over the last five months on these issues is in these stock prices and more.

DaleW said...

This is from last Friday's Washington Post. Another one of the "hot" markets starting to turn.

I think we should really try to respect others' intellectual property -- posting articles wholesale just rips off others' work. I think a link to this article would be advisable.

Its_strange said...

Wow ! I just read the Gradient / Rocker / Overstock piece by Carol Remond in the WSJ ...Overstock never filed those affidavits with the Ca. court ! ....i gotta tell ya...You lawyers are absurd ! ..All of you...!..The OSTK suit is totally absurd !!!! What is Gradient / Rocker lawyers doing playing grabass with them for ? Phil and Patrick have been making it up , have been lying about all parties for so long ...why are you people allowing these silly lawyers to play dumb court games with them ...JUST SUE THE LIARS !! ..Now !!

Jeff Matthews said...

DaleW: I never said Beazer makes McMansions, nor did I imply it. The condo market in Sacramento is one of the problems there--condos supply is overwhelming demand, and there is a spillover effect on housing. (I did not include that discussion in my excerpt, but it is in the Bee article). Congratulations on being long the stocks--you are making money today.

DaleW said...

Jeff,
You used the term "McMansion" yesterday in referring to new homes and you described the sector in monochromatic tones, ergo I assumed you believe they all put up McMansions. Not that I care since I don't have a new house, but I try to identify with the consumer's experience with companies in which I invest instead of projecting from my more narrow personal viewpoint and tastes. I'm sure few who live in such houses really would like to refer to them as McMansions.

The condo market in Sacramento is one of the problems there--condos supply is overwhelming demand, and there is a spillover effect on housing. (I did not include that discussion in my excerpt, but it is in the Bee article).

Maybe I have a reading comprehension problem, but my takeaway from that article was totally different from yours. It makes no such mention of over-supply -- it says condos make up seven more percentage points of share last year and that many condo builders are not members of the builders association that compiles the market statistics. That builders association says this under-reporting of condo sales plus growth in market share may overstate the decline in the market.

DaleW said...

Congratulations on being long the stocks--you are making money today.

Thank you, by the way. Given my investment time horizon is 3-5 years, however, I am nearly indifferent on what happened today. As I would like to buy more and I have cash, I would prefer prices to go down. I think lower prices and more articles like the Bee's will actually push managements to buy back stock rather than dirt. The latter is my preferred use of capital at this point.

Counter Trey said...

"...As anybody on Wall Street knows, price follows volume. And volume in Sacramento is down..."


C'mon, Jeff. You know better than to use this throwaway.

In residential development, NIMBY regulations can also have a big impact on volume, but their impact on prices are the opposite of what you suggest here. NIMBY regs do nothing to quell demand, just supply, and that is a big reason for the price increases we've seen in the housing market.

Aaron Koral said...

Hi dalew - While I understand your viewpoint about the "value" imbedded in the prices of homebuilder’s common stocks, I think you might be missing Jeff's point about management credibility

(Jeff, if I'm wrong in my interpretation of your comments, just let me know!)

The point I took away from Jeff's comment is that, while the sales of new homes has declined in Sacramento from the article, you would not have gotten that impression from Beazer's management team on that 11/02/2005 conference call.

Management credibility is, in my opinion, an important, if not the most important, factor in deciding whether to invest in common stock (outside of price, of course) of a publicly traded company.

If the management of a publicly traded company is telling you one thing, and yet, when you look around in your own neck of the woods, or do some of your own "research" to validate management's claims, their claims come up short, naturally, one would tend to ask why is the management of a publicly traded company "talkin' out the side of their neck" - in short, what is their motive as a constituency against other investors - raise their share price, anybody?

(My apologies to all in using the title of a not-so-bad Cameo song when talking about management credibility - and, as always, I could be wrong in my opinion.)

DaleW said...

The point I took away from Jeff's comment is that, while the sales of new homes has declined in Sacramento from the article, you would not have gotten that impression from Beazer's management team on that 11/02/2005 conference call.

Well, perhaps Jeff is right and perhaps he is wrong. Beazer can be correct in saying they are seeing pricing power in their market segment while pricing overall is down. You could say today equities haven't been all that great over the last couple years and get a nod of agreement from the large cap investor and disagreement from the small- and midcap investor. It's not the same in every market and every subsegment of every market across the country. This really is a market by market business. So I think we should be careful about levying charges of duplicity against managements until we understand very well the dynamics we purport to understand.

Its_strange said...

Has anyone ever read what Gradient had to say about OSTK ? I'm surprised it hasn't made its way to the internet .

I recall David Rocker asking Patrick how he knows they were short on a conference call some time ago. Now when i read those affadavits weren't filed with the Ca. court i'm starting to think those ex-Gradient people might have been talking with Patrick long ago. They might have told Patrick. This is beyond goofy and the whole system should be ashamed.

The short case is OSTK's income statement and balance sheet . Rocker and Gredient were handed the suit on a silver plater with Patricks and Bob's behavior and the street knows it . They were figuring on a counter suit with serious documentation. They got nothing. Gradiant and Rocker look weak.

But did OSTK really want to sue Gradient and Rocker ? Hmmmm

Its_strange said...

Isn't this largely a self regulated business ? Why don't the serious / legit short funds chip in and get to the bottom of this naked shorting stuff ? They certainly are fooling themselves if the think NCANS wants to . Chip in a few dollars and get the job done . Patrick and NCANS are about self promotion , let the real shorts stomp out the naked stuff

And please if you are a lawyer would you warn me first so i can just skip over your comments

henrymurfey said...

The spirited quality of the observations and opinions regarding real estate make me infer that, for some, there is a conundrum in the real estate market to go along with the one in the bond and note markets.

Could U.S. real estate have gone international on the demand side of the equation? Is U.S. real estate increasingly being used as a hedge rather than as an investment for the buyers' physical shelter usage?

If the nature of the market forces has shifted, becoming a part of international financial strategy, could not the softness be merely "the bull flicking away flies with its tail" (shades of the mid 1900's!)

Its_strange said...

The stock market is at high . Wallstreet is giving big Xmas bonus money . Job market seems very good for those with the right skills and education . Yet only the high end of the housing market is getting hurt ? I don't buy it.

Gradient..why don't you guys just go right to discovery and do it live on CNBC...Do it right now. Its time to show these stock squeezers the value of the truth

Its_strange said...

Dow Jones said the affidavits were NOT filed with the OSTK suit but the Salt Lake paper says they were . What is it ?

http://www.sltrib.com/business/ci_3231158

Its_strange said...

Rocker's lawyer issued a press release in response to Patricks nonsense but the release didn't go anywhere . Its not on yahoo or any other place that i can find. A message board poster had to post it. What can i tell ya ?

I have had enough. I'm headed to the Market Basket in Franklin Lakes NJ for a Pastrmi on rye and a Boylan's rootbeer . Have a good weekend

Its_strange said...

I see Bottle King has Boylan's for $2.99 a 4 pack. Thats the best price i have found. Not bad .

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