Friday, April 20, 2007

What Happens in Vegas Eventually Gets Around

I really don't know. I think really more than anything out there, it's just most, there's several Markets in California which are still good but the northern part of California up in the Sacramento area and the San Diego area is just that we're struggling to find qualified buyers given the mortgage instruments that are available in the marketplace.

—Don Tomnitz, CEO D. R. Horton

Practitioners of the “What happens in Vegas stays in Vegas” school of economics, which holds that, like a husband's infidelity in Sin City, the subprime market fall-out will not spread beyond a limited and insignificant portion of the economy, ought to listen to a few conference calls to test their happy theory.

If they did, they would have heard the always-straightforward home-building Mr. Tomnitz, quoted above, discuss in detail precisely how the subprime liquidity squeeze has spread to all kinds of would-be home buyers:

And the real issue out there, frankly, is that four or five years ago almost 30% of the people in California could afford a home. And then that dropped to 11 or 12% affordability index. And unfortunately, the 11 or 12% was being supported by a lot of unusual mortgages -- Alt-A and subprime.

So what we're facing today in California is -- one, a very small pool of affordable buyers and that pool has been reliant largely on Alt-A and subprime mortgages, so we must get our pricing down, must get our costs down in order to move our number of units we want to move in California and that's what we're doing.

Time to get on the next call and hear what else happened in Sin City.

Jeff Matthews
I Am Not Making This Up

© 2007 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


miles_massey said...

Those who argue that the subprime market fall-out will not spread beyond a "limited and insignificant portion of the economy" would probably include home-builders in that “limited” group. To prove your point that woes will spread beyond the housing industry, an example from outside of the housing industry would probably make more sense. I'm not saying that it couldn't happen, but that is hardly a good example.

Anonymous said...

miles- your comment does have merit, but I think the point is that many pundits have been saying that the woes of subprime won't even spread to Alt-A or Prime. If the pundits are using your rationale, then they will have already started backpedaling. I do agree that examples from outside the housing industry will provide much more interesting fodder for commentary, but let us not forget that the early bullish views that this would be contained in the subprime sector of the mortgage industry have now been proven wrong. We see it creeping outside of that one sector.

Jake said...

Jeff, isn't the reality that market will self-adjust? I know there will be some casualties, but many of these homebuilders will do exactly what they're saying they will do -- lower pricing to meet the new supply curve. I'm one of those people who don't believe that subprime will submarine the overall market. It's a piece of the market and it will moderate returns for a bit, but once the issues are worked out, then the U.S. economy will be back on track.
Listen, we'll blow through 13K and then the sell-side will pump through 15K. The more interesting story is that people focused on the U.S. market will miss the far superior returns to be had overseas. And that will be a shame.