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Lex on US Housing Market


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2006 May 24, 2:59am   15,765 views  186 comments

by Randy H   ➕follow (0)   💰tip   ignore  

Homebuilders
Readers of the FT will be familiar with the (newly expanded) Lex Column. Today's featured an interesting little bit on US housebuilders, and its relation to the US housing market.

Feeling sorry for the builders does not come naturally to most homeowners. But as US households worry about the value of their dwellings, they might spare a thought for those even less fortunate. Since July last year, shares in US homebuilders have lost over a third of their value.

Things have been most painful at the top end of the market. Shares in Toll Brothers, the luxury homebuilder, have more than halved. Over the past few months, the question for most investors has changed from whether there will be a slowdown, to how bad things could possibly get.

The column goes on to mention:

  • Signs of significant inventory overhang in many regions
  • Speculative buyers trying to unload holdings
  • Owners hoping to upgrade increasingly finding they cannot sell their old homes for the prices they need/expect.
  • Nonetheless, builders have not significantly slowed new building efforts

Toll is considered a bellwether indicator. Why? Because it markets upscale homes to a sophisticated clientele. Sentiment has grown so negative on Toll that their recent guidance further cutting earnings forecasts actually triggered a relief rally. The market capitalization of Toll is less than the value of all its land and inventory.

Or is it? The problem is that the only potential buyers for construction projects in-progress are other builders, who are similarly depressed for the same reasons. This kind of "vicious circle" is hard to break and usually causes an overshooting of reasonable valuation.

But before you jump in to buy undervalued REITs or homebuilder stocks, keep in mind that this may just be the beginning. The entire sector is trading at about 5.5 times ever shrinking earnings estimates. But (and this is a big but), direct costs are skyrocketing, general inflation is increasing, rates are rising, and industry consolidation is probably nowhere near done. Lex's conclusion: it will be increasingly difficult for these builders to defend returns as capital costs soar. Result, more downside probably left.

Why on earth do we even care? We're sure to hear from at least one Troll that "New Home Starts" don't matter, or that homebuilders aren't relevant, or that "sales of existing homes" is the only game in town. My answer: perhaps, this time, everything is different and we've entered a great new economic paradigm where leading indicators no longer lead. Or, the correction is well underway.

--Randy H

#housing

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15   astrid   2006 May 24, 4:44am  

-alone
+along
:oops:

16   edvard   2006 May 24, 4:45am  

Astrid,
While there are fools that blow through money, the kinds of people I saw day to day coming in were genuinely rich, and rich enough to not be bothered by door knobs and stuff. I think there are more of these kinds of people than we realize. What I'm getting at is that there is a diffrence between those that want to be rich, and those that are rich, and the kinds of homes that these groups find appealing. A wealthy person would never want to live in a group of homes. The single biggest desire I saw in the true rich was exclusivity. The desire to be original, outlandish perhaps, eccentric, tasteful, and very, very showy and particular about the smallest things to the point of being obnoxious. On the other hand,I can see those that want to be rich aspiring to live in a cluster of look-a-likes with very " nice" looking interiors, but more like the disneyland version of a castle. So... what extent of homes built by luxo-home builders are actually built for the true rich, and the wannaberich? that would indicate that a signifigant chunk of the upper level market is way too underleveraged to actually afford them. if it were mostly true rich buying these, then they wouldn't care.

17   astrid   2006 May 24, 4:51am  

WWII,

I think your experience may have skewed your perception. There's only so many truly rich people out there and they're in a completely different market segment from the rest of us. As you said, no one in that segment wants to buy an imitation luxo-home. As for the wannabes, I think we'll soon discover that they're actually quite asset poor and worse off than someone with the financial discipline to live below their means.

18   astrid   2006 May 24, 5:11am  

Toll isn't that exclusive. They seem to build primarily to cater to people with some assets (often in the form of a much inflated former home). I do think of their construction as McMansions. They tend to have nicer lots and somewhat better detailing, but they're semi-custom rather than fully custom builders.

No way they could get as big as they are if they were only custom builders for the truly rich.

19   Randy H   2006 May 24, 5:12am  

Toll builds for the top end of the "educated class". The neveux rich if you will. But not all these folks are irresponsible wannabees. Many are doctors, lawyers, business owners who enjoy living next to others like themselves, often surrounding a golf course and behind deco gates. My point is that not all of them are the McMansion McHomedebtor who pays $1.7M for a monster home in Emerald Hills (otherwise known as unincorporated Redwood City).

It's a bit dangerous to mix socioeconomic strata categorizations with lifestyle choices. There are uber wealthy who snort their wealth up their noses and run over house guests in restored sherman tanks, losing it all in the process. There are neveux rich who quietly hump along, plowing their law partner income into vehicles that will create generations of wealth legacy for their descendants. In fact, the neveux rich that I know who aren't zombies are quite the opposite: they often rose so far in life that they appreciate every bit of their success and don't take a penny for granted. They may buy a nice Toll Bros home on a golf course, but only if and when they can afford it after planning for their children's and their own future.

20   Randy H   2006 May 24, 5:17am  

Astrid,

What exactly is a McMansion then? Almost all the stock of homes in the US are semi-custom. Of the 3 old houses I inhabited as a child growing up in the Midwest, all of them over 100 years old, they were still semi-custom. They were built by a local builder who constructed a number of homes over a relatively short period of time, all of which had similarities of design and aesthetics to some degree. In fact, people in town would know if they had a Mr. A home or a Mr. B home, etc. These were homes built in the late 1800s through 1930s. I guess my grandparents were McDebtors too.

21   surfer-x   2006 May 24, 5:18am  

Wow, the propoganda "housing sales unexpectedly up" hasn't attracted a troll comment yet. What gives?

22   astrid   2006 May 24, 5:25am  

Randy H,

I go with wikipedia's definition:

http://en.wikipedia.org/wiki/McMansion

True, not all of Toll buyers are wannabes, but quite a few of them are. I know some people who bought into that type of development and it seems half and half. In these neighborhoods, you'll find people who are worth tens of millions next to people who are barely getting by on their income.

Most new construction nowadays is somewhat customizable. I've seen some $1.5-2M neighborhoods where the houses still look similar to each other. These are 4000+ sqft houses. And there are still quality issues associated with the homes. The Toll houses might be bigger and have a better finish, but they're not even close to custom.

I think of fully custom homes as (1) buying your own land (2) hire an architect and crew. If you go with a national builder, then the home is not custom and the main difference is scale and location.

23   astrid   2006 May 24, 5:38am  

newsfreak,

You can do that, but I'm not comfortable living with that much untempered glass in an earthquake zone.

24   Randy H   2006 May 24, 5:53am  

I'm with you newsfreak. When (I don't like to say if) I hit the fabled land of critical mass I'm moving to a place where neighbors need to charter a flight to visit me. But lots of truly rich people aren't this way. Atherton is an example. Belvedere Island is pretty compact too.

Astrid,

By the way, my father-in-law custom built his own house. He is a farmer who gets by with the mercy of government subsidies. Nothing wrong with his place, but I'd wager you'd take the most offensive McMansion to his 100% custom abode.

25   astrid   2006 May 24, 6:03am  

Randy,

Undoubtedly. I think "custom home" is mostly a technical term that's gotten hijacked to imply quality. Doing a high quality custom home usually means spending much more time and money than a similar quality track home, due to economy of scale and expertise. And anyone contemplating a custom construction better have high tolerance for unexpected delays and expenses.

Most "normal" rich people probably want to see and be seen by equals, so places like the Hamptons and Atherton will always exist. I'd personally like to see more high quality high density housing. Nothing wrong with a tract home, but I can do without the pretensions.

26   HARM   2006 May 24, 6:15am  

It’s a bit dangerous to mix socioeconomic strata categorizations with lifestyle choices. There are uber wealthy who snort their wealth up their noses and run over house guests in restored sherman tanks, losing it all in the process. There are neveux rich who quietly hump along, plowing their law partner income into vehicles that will create generations of wealth legacy for their descendants. In fact, the neveux rich that I know who aren’t zombies are quite the opposite: they often rose so far in life that they appreciate every bit of their success and don’t take a penny for granted.

Good points. There's nothing that automatically makes landed gentry --who applied zero effort/brainpower/sacrifice for their inherited wealth-- inherently "better" than the much maligned "nouveau riche". This term itself is pretty much a snobby put-down, no doubt invented by the "born on third base" elites to demonstrate their genetic superiority to the upstart newcomers. In reality, those who actually had to work hard to obtain wealth are statistically more likely to possess morally superior qualites (strong work ethic, thrift, respect/empathy for working class, etc.) vs. the self-absorbed playboy elite.

27   Randy H   2006 May 24, 6:20am  

astrid,

did you read that wiki on McMansions. after doing so i'm a bit more sympathetic to them (although i still don't personally have a taste for them). nearly all of the criticisms of McMansions equally apply to Tract Homes. it seems that McMansions are pretty much just a new generation of Tract Homes incorporating more of the amenities that people demand. My first home in Redwood City was a charming 1950s Tract Home. Much more character than a McMansion. But, if forced to make that choice again, I'd choose a McMansion. Having 1.5 baths for 4 BRs, a kitchen barely large enough to flip a pancake, a detached garage as the only storage space and not enough aggregate closet space for my (quite frugal) wife let alone the other residents just wasn't worth all the aesthetic charm in the world.

28   Peter P   2006 May 24, 6:22am  

In reality, those who actually had to work hard to obtain wealth are statistically more likely to possess morally superior qualites (strong work ethic, thrift, respect/empathy for working class, etc.) vs. the self-absorbed playboy elite.

Why this hatred against inherited wealth? Those who were "born on third base" must have done something good in their past lives. Too bad many of them do not take advantage of this gift and do something good. Their next lives may not be so great.

29   Peter P   2006 May 24, 6:24am  

Having 1.5 baths for 4 BRs, a kitchen barely large enough to flip a pancake, a detached garage as the only storage space and not enough aggregate closet space for my (quite frugal) wife let alone the other residents just wasn’t worth all the aesthetic charm in the world.

OMG! I much rather have a McMansion with 4BR and 5.5 baths. Character is good but bathrooms are more important!

30   astrid   2006 May 24, 6:25am  

Randy,

My primary problem with McMansions is that they're too big and wasteful. The track home characteristics of McMansions don't bother me.

My second biggest problem with McMansions is that they're associated with an overall unsustainable American lifestyle of big houses, big cars, and big debt.

31   Randy H   2006 May 24, 6:25am  

OMG! I much rather have a McMansion with 4BR and 5.5 baths. Character is good but bathrooms are more important!

They are at least more practical, especially when one has children and parents inhabiting their domicile.

32   astrid   2006 May 24, 6:26am  

Peter P,

Maybe it's good karma. Or maybe they're what the Chinese call "debt collecting ghosts" who come back to spend all the money their parents made, because of the parents' bad karma.

33   Peter P   2006 May 24, 6:29am  

They are at least more practical, especially when one has children and parents inhabiting their domicile.

Absolutely. In case everyone in the house eats something bad and needs to use the toilet NOW.

34   Peter P   2006 May 24, 6:30am  

Maybe it’s good karma. Or maybe they’re what the Chinese call “debt collecting ghosts” who come back to spend all the money their parents made, because of the parents’ bad karma.

Perhaps. There is no escape.

35   astrid   2006 May 24, 6:35am  

Randy,

True enough. However, most McMansions are not occupied by multiple generations. Based on what I see, most are occupied by parents with 1 to 3 children, and quite a few are occupied by empty nesters who want space for the two weeks out of the year when their kids might be in town.

Even if you want to design multi-generational homes, there are better ways to build them than via McMansions. If I was designing for such a family, I'd want a first floor guest suite for the elderly grandparents, a fairly private suite for the parents, and smallish rooms + a study room for the kids. For the exterior, a safe and convenient exercise/play area for the young and the elderly.

Most McMansion communities don't have these spaces. Instead, they boast of large swaths of underused kitchens, foyer, dining room, living room, great room, etc.

I don't profess DinOR's hatred of McMansions. I just mourn the opportunities that were lost to create something truly liveable and nice.

36   Randy H   2006 May 24, 6:41am  

Just in case you haven't experienced bathroom bottlenecks in a crowded house:

* Elderly mothers tend to occupy bathrooms for very long periods of time at entirely randomized times of the day.

* Children tend to require the use of bathrooms spontaneously and with little margin for error.

* Working parents tend to require bathroom time at times not open to much schedule flexibility.

And, you can't apply a Poisson distribution to the queuing, because seldom does one wish to immediately occupy the bathroom after another has vacated it. In very short order it is possible to find a 1 hour queue building for the bathroom in a family of five.

37   astrid   2006 May 24, 6:42am  

Peter P,

The house where I spent the first 8 years of my life had one toilet for 2 kids and 7 adults. I've lived most of the next 10 years with 2 adults and one bathroom. We managed, somehow.

Besides, reputable sushi places rarely serve contaminated fish. The risks are pretty low.

38   astrid   2006 May 24, 6:48am  

"astrid’s just a kid"

Huh? The ratio of bathroom to bums got much better once I hit college.

39   Joe Schmoe   2006 May 24, 6:52am  

Thank you! Thank you!

I have always believed that the McMansion is just the modern version of the tract home. A KB home community is nothing more than a latter-day Levittown.

My in-laws live in a 1950's tract home that is every bit as shoddily constructed as any modern McMansion. In fact, if you want to see what a McMansion will look like 50 years from now, just visit my in-laws' house.

My in-laws' kitchen is "galley" style; "barely big enough to flip a pancake" just about covers it. There is tacky 1970's pressboard paneling throughout the living room. The dining room's light fixture was made to resemble like the steering wheel of a ship. The avacado green appliances are gone, but that's just becuase they broke. There were orginally just 2 bedrooms; they added a 3rd some years ago, but it does not have a seperate enterance; the only way to get to bedroom #3 is through bedroom #2! If the occupants of those two bedrooms are on differnet sleep schedules, the occupant of bedroom #2 gets rudely awakened early in the morning or late at night when the occupant of bedroom #3 wakes up or goes to bed. My in-laws have no garage, and a lot of the neighbors have only a 1 car garage.

The modern McMansion is far superior to this horrible place. I'd take a 5br/4ba 3,000 square foot monstrosity over my in-laws' place any day of the week. There

My gripe with McMansions is that so much space is wasted, and for such pretentious reasons. The two-story entrance and living room are really tacky, especially when it's just a middle class family home, not a Newport, RI mansion. I do like the space -- I just wish so much of it wasn't frittered away on two-story foyers, Jacuzzi tubs in the "master suite," etc. But having enough room is a good thing in my book.

Actually, when you think of it, the Craftsman house that all of the artsy types are so in love with today is just an earlier version of the McMansion. It was the tract home of its day. I mean, you could order them from the Sears catalog! To my mind, that is the very definition of a generic middle class home.

And it's funny, a lot of your turn of the 20th century homes are...pretty big! We rented an old farmhouse for a while when I was growing up, and that thing must have been 2,800 square feet, more if you include the full basement. All of the old farmhouses in my Midwestern town were pretty darned large. Yeah, people had more kids back then, but maybe 4 or 5, most families did not have 15 children even in that era.

Ever been to New York City brownstone? Today a lot of them are two- or four-family flats, but they were originally single family townhomes. They're big, too! How about a 1940's "working man's" apartment in a place like NYC's Styvessant village? Those things are huge, no 800 square foot units there, more like 1,800 -- and that's in a housing project in the middle of New York City!

I think McMansions get a lot of unfair criticism. They're big, yeah, but there are plenty of 1920 Craftsmen in my town that are just as big. And back in the days before KB, when people built their own farmhouses by hand, a lot of them built nice, big, spacious homes. And even urban living, like in a NYC brownstown, was originally pretty spacious. You could even argue that the cramped little suburban tract house of the 1950's is something of an historical anamoly. The McMansion is part of a well-established historical tradition of American homes.

40   edvard   2006 May 24, 6:52am  

The Mcmansions you speak of exsist in huge numbers out where my parents live. When I was growing up, I figured we must've been well off because we had a 2 story home with 3 bedrooms while most of the neighbors had single story ranchers and trailers.Well, These days they are building MASSIVE 5 and 6 bedroom houses with 3 car garages, 2 story decks, and enormous living rooms. What I dislike about them the most is that they're usually built on ugly pieces of land, given small yards with no trees, and for some inexplicable reason simply look cheap and generic to me.

41   Randy H   2006 May 24, 6:53am  

C'mon astrid,

We probably all grew up that way.

a) Things were different then. Dad had priority, because he worked the "real job".

b) Mom worked around him.

c) Kids fit in where they could. And we didn't bathe daily until well past puberty. Often Mom plopped all the kids in the same tub, despite huge gaps in ages.

Was that really better than having adequate toilettage? I'm willing to go on record and say that I very much appreciate having enough bathrooms, and I am willing to make lifestyle decisions based upon that luxury. If that makes me an evil American conspicuous consumer, so be it.

42   edvard   2006 May 24, 6:56am  

Joe, the reason they built some of those houses so large back in the turn of the century was that the average family was expected to have a whole liter of kids. My grandad came from a family of 10 kids. So did most everyone else in his era.
As far as a ceiling fixture that looks like a steering wheel, that sounds freakin' awesome. I have a large pair of bull horns on my wall now, and a steering wheel chadalier would look great with it. I like weird old 50's houses, especially those that have hideously colored tiles in the bathroom.

43   edvard   2006 May 24, 6:59am  

You aught to see the house my brother owns. It's this teeny 2 bedroom deal built after the war. The kitchen houses the fridge, oven, microwave, washer, dryer, and everything else that's of that nature. The washer buts right up next to the oven. The bathroom has dining room fixtures screwed to the walls. The living room has this huge window that all the world can see right through.
but... he paid 46k for the whole thing, and he's 5 years younger than me!

44   Joe Schmoe   2006 May 24, 7:00am  

WWII,

It's actually a ship's wheel. You know, for the "nautical" theme. The glass lightbulb enclsoures look like fog lamps. You'd love it.

They also have these giant wooden salad spoons affixed to the dining room wall. They like Aztec sculptures. Picture a totem pole made out of Aztec dieties with a spoon or fork on one end. Those things are family heirlooms that will never be sold. I've seen a lot of kitsch in my time, being from the blue collar Midwest and all, but nothing tops those salad spoons.

45   astrid   2006 May 24, 7:01am  

Randy,

Nothing wrong with lots of bathrooms.

Numerous members of my family (who've moved out of the old abode and into 2+ bathroom apartments) have dramatically changed their behavior. Reading and talking on the phone has become the norm, and they're showering daily now as opposed to bimonthly.

Though, the lack of first floor bathrooms is another one of my complaints about McMansions. Most of the smaller ones have only a half bathroom for the entire first floor, which means that on the rare occasion when the owners might entertain some people on the first floor public rooms, the guests have to trek to the private second floor bathrooms just to relieve themselves.

46   Randy H   2006 May 24, 7:05am  

Joe Schmoe,

I was going to add a counter criticism that you covered. Tract homes quite often are more wasteful per land usage than McMansions. Most McMansions are not replacements within existing communities, but new developements. New developments inevitably have smaller lot sizes, and more inhabitable square footage on that land. There are lots of 2BR homes on tracts that have massive back yards and detached garages. A McMansion on 70% of the lot space can support 5BRs.

This is problem with comparative qualifying statements like too wasteful.

True also about the evolution of Brownstones and Graystones. In Chicago, pretty much all the Northside B/Gstones were SFHs when built. Over the years they converted to 3/4 family dwellings. When people in Lincoln Park started to buy those out and restore them as SFHs there was a holy hissy fit from the urban environmentalists about wasteful consumption, etc. I always found it funny that these same people showed up to oppose "Six-Pack" developments, which were condos of 6 units laid lengthwise across 2 city lots, usually replacing dilapidated row homes in gentrifying neighborhoods. Urban NIMBYism: call whatever you don't fancy "wasteful".

47   astrid   2006 May 24, 7:05am  

goober,

Ugh, sorry. At 18 I was going through my existentialist crises and doing all I can to avoid the light and other people :) Economics and critiques of American consumerism would have been the farthest thing on my mind.

48   Peter P   2006 May 24, 7:07am  

The house where I spent the first 8 years of my life had one toilet for 2 kids and 7 adults. I’ve lived most of the next 10 years with 2 adults and one bathroom. We managed, somehow.

Wow. I can use two toilets myself.

Most of the smaller ones have only a half bathroom for the entire first floor, which means that on the rare occasion when the owners might entertain some people on the first floor public rooms, the guests have to trek to the private second floor bathrooms just to relieve themselves.

A half bath ought to be enough for floors without bedrooms.

They should also build homes with a dedicated cat litter room. It needs a cat door and a powerful, energy-saving, long-running exhaust fan.

49   Randy H   2006 May 24, 7:08am  

The giant salad spoons in my grandparent's house had distorted 'pa and 'ma faces painted on them. Always gave me nightmares, along with all those damned little figurenes hiding in every single damned nook & cranny.

50   Randy H   2006 May 24, 7:10am  

Goob,

Tread lightly on the personal provocations. Thanks.

51   edvard   2006 May 24, 7:12am  

Joe,
Our house had yellow appliances. Actually, I guess they were "autumn gold".To continue the theme, we had metallic gold carpet, yellow painted walls, and get this- the exterior was chocolate brown. My grandmother had those same huge wooden spoons in the kitchen. she later gave them to me, which I used as "decoration" inside my clubhouse. She also had these freaky looking pictures hanging up in the hallway. They were velvet paintings of precious moments looking children walking to go fishing. There were also lots of glass chickens in the kitchen. They were sort of abstract and painted strange colors- like green and orange. One of my friend's uncle had this plastic outhouse that sat on their toilet. If you opened the door to it, a little plastic clown would piss all over you. Hilarious.
It's funny to think about that stuff because out here, the stuff sells for a MINT. The ugly fake hide lamps shaped like flying saucers, figurines, and fake vinyl furniture all sell for oodles. Back home, people give it away. I've thought there aught to be an "import" business to ship it out here for all the yuppies to slobber over and buy. I'll be stinkin' rich!

52   astrid   2006 May 24, 7:15am  

Randy,

I hope I've established to your satisfaction that I'm not anti McMansions and McMansion-dwellers (cough in Mill Valley cough), I just think they're a very imperfect solution.

McMansions do use less land than older houses. But given that they give their owners basically no usable lot, the builders would do better just to build large 2 garage townhouses and insert good sound insulation between the houses.

BTW, I do agree with you that NIMBY zoning codes and zoning boards bear much of the blame for many of these unhappy solutions to a real need for more and better housing.

53   Randy H   2006 May 24, 7:15am  

ww2,

I can set you up with a nearly inexhaustible supplier of those goods if you're serious. All you need are a couple of retired garage-sale hounds in the Ohio/Indiana borderlands.

54   astrid   2006 May 24, 7:18am  

Randy,

It's fine, goober likes to poke fun at how young I am. But I'm probably just 2 or 3 years younger than Peter P and WWII. Hell, I'm even older than Conor.

WWII,

And you say IKEA was bad taste! ;)

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