0
0

Lex on US Housing Market


 invite response                
2006 May 24, 2:59am   16,028 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

« First        Comments 57 - 96 of 186       Last »     Search these comments

57   Randy H   2006 May 24, 7:23am  

OFGS, you're making me feel ancient. And I'm not even a Boomer, just on the leading edge of X.

58   edvard   2006 May 24, 7:25am  

Randy,
While I don't rent a Mcmansion, the house I rent is pretty old( 1916) but was more recently renovated. The only bad thing about is the shower, which is a sheet plastic liner that I've had to caulk several times already. If I ever get my own place, this will be the only place I'll spend the money. Tile all the way- either that or vintage stuff. The plastic sheeting has got to go.

59   astrid   2006 May 24, 7:27am  

(disclaimer: his IB higher level math 7 notwithstanding, my boyfriend profess absolutely no interest in money management, corporate law, management consulting, or anything else that would result in big money -- it's pretty much a hopeless situation)

60   astrid   2006 May 24, 7:32am  

Randy,

I know, that's why I said dweller;) Sorry. If I was in your situation, I'd do exactly the same thing.

61   astrid   2006 May 24, 7:34am  

PS - Randy, that's not my job anymore. That's Conor's job.

62   Randy H   2006 May 24, 7:38am  

If I was in your situation, I’d do exactly the same thing.

I'm not sure I would. But I'm existential about such things.

63   HeadSet   2006 May 24, 7:45am  

I don't have a problem with McMansions, it is just a style of home like Victorian or Colonial. Many 1900 era Victorians around here (VA) are McMansion sized, 3,000 sqft or more. They seem to be quality built, but that may be from original construction or from renovation.

If someone has saved his money and wants the benefits of lots of space, I see no problem. I just have a distaste for a McMansion Heights whole neighborhood of fiscal fools pushing a facade of wealth, inhabited by the couple so stretched out financially that wife yells at husband for wasting money on a candy bar. No problem with a new Expedition though.

64   StuckInBA   2006 May 24, 8:04am  

Oh. so this is "McMansions are not bad" thread. Just a few threads ago they were bad.

I like McMansions. I do not like the 40 year old floor plans in Cupertino at all. In every such house the first thing you notice after entry is kitchen ! There is nothing pretty, classy etc about these plans.

I need big kitchen, big bathroom and a big room for a big TV. Rest is too subtle for me.

65   HeadSet   2006 May 24, 8:05am  

Astrid says:

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

In the '60s when we were at my grandparents house in central VA, we had to take a bath in a steel tub with well water heated in a kettle on a cast iron stove. The toilet was an outhouse 50 yards from the house. However, nothing beats the fresh eggs we gathered from the henhouse, or the fresh veggies from the garden (no pesticides). Also, nothing beats the taste of water from that well. We also used kerosene lamps since they did not get electricity until the 70s. None of us live like that today, of course, but the place was great fun during extended family gatherings.

66   astrid   2006 May 24, 8:08am  

SP,

I don't completely agree with you. I know people who can afford the "real thing" but chose not to. Sometimes, it's just not efficient to spend $100K on a deck, even if you're extremely wealthy. If a knock off Gucci bag will satisfy the social pressures without spending the money on a real Gucci bag.

67   HeadSet   2006 May 24, 8:12am  

SP,

Do you still smell like elephant piss?

Cheers!

68   astrid   2006 May 24, 8:13am  

Headset,

My first home was not a matter of eccentric grandparents. The house I lived in didn't get indoor plumbing until the late 1970s. Even now, there are legal residents (as opposed to slum dwellers) in Shanghai who don't have indoor plumbing and are forced to use waste buckets and public latrines.

I guess I have a tendancy to mildly mock Peter P's (and maybe my own) sybaritic tastes and expectations.

69   astrid   2006 May 24, 8:14am  

SP,

Good grief, did you memorize all the Monty Python episodes?

70   HeadSet   2006 May 24, 8:14am  

SQT says,

I live in what some here would refer to as a stucco $hitbox, but frankly I like it. It’s almost 2000 sqft with an excellent floorplan.

Who would call that a $hitbox? That sounds like a practical, desireable home. Especially if it is paid for or has a low financial drain.

71   edvard   2006 May 24, 8:17am  

There's something to be said for imitation and the " real thing" For example, one of my hubcaps came off my toyota truck. It is 11 years old, and the dealership wanted $75 PER HUBCAP! So.. I went to Kragen and bought a box of 4 fake plastic chrome hubcaps for $30. Ghetto. Nothing else describes the way my truck looks now. Anyone can tell that those "rims" on my truck are cheapo plastic. It doesn't feel or look cool at all. That's the same way I feel about fake wood and cheapy interiors on some of these massive houses.

72   HeadSet   2006 May 24, 8:18am  

Astrid,

I hope you don't think I was implying you had eccentric grandparents. I assumed your grandparents lived how they lived for the same reasons mine did - economics.

73   astrid   2006 May 24, 8:21am  

SQT,

As long as a home provides value to its owner and/or resident, it's fine. There are huge multi-million dollar homes in Jackson Hole that gets use 2 weeks a year, but if money is no object and the primary value is to boast of a Jackson Hole home, then more power to them.

What I object to is that general uselessness of houses built btwn 2000 and now. They sell an imagine of high quality and high class but are actually poorly designed and shoddily built. Their owner will quickly discover just how quickly those two facts will conspire to deflate the value of their house.

74   astrid   2006 May 24, 8:24am  

Headset,

At least you got fresh vegetables and eggs. We had food rationing for the entire time I was in Shanghai. ;)

(to SP, ugh, sorry. Last time, I promise.)

75   HARM   2006 May 24, 8:24am  

I'm fairly agnostic on "McMansions" as a contemporary style/class of tract homes, however one chooses to define them. However, depending upon the specific builder/location, there is some valid criticism out there in terms of poor construction quality, needless use of sub-par materials and inefficient use of space, poor design issues, etc. That said, the main issue to me isn't the style of housing being built, it's the insane valuations and financing used in this part of the country.

There are some viable alternatives out there for non-rich hard-core D-I-Y types who want a truly custom-built house, without having to pay $millions to have a world-famous architect build the thing for you: straw-bale, adobe, rammed earth/cobb, etc. The possibilities are limitless, assuming you have the necessary skills, time and willpower to see it through (which few people have).

76   Peter P   2006 May 24, 8:26am  

I like McMansions. I do not like the 40 year old floor plans in Cupertino at all. In every such house the first thing you notice after entry is kitchen ! There is nothing pretty, classy etc about these plans.

I need big kitchen, big bathroom and a big room for a big TV. Rest is too subtle for me.

Same here. I like a big master bathroom with tub, separate shower, and separate toilet stall. If I cannot spin around freely with my arms fully extended, the bathroom is too small.

77   astrid   2006 May 24, 8:30am  

SP,

Very few people in this world are truly indifferent to cost and most of the world does hold some value for perception of prestige. Thus, I do not discount such behavior outright but measure for durability of such perception under duress.

If we go solely by actual usefulness of goods, most luxury goods makers would go bankrupt very quickly.

78   astrid   2006 May 24, 8:32am  

SQT,

It just sounds like you found a home you're happy with, and that's really more important than anything else.

79   astrid   2006 May 24, 8:34am  

Peter P,

One of these days I will create a thread called "build the perfect house for Peter P." You just wait!

80   Peter P   2006 May 24, 8:34am  

If we go solely by actual usefulness of goods, most luxury goods makers would go bankrupt very quickly.

True. I enjoy luxury food very much. But it gets turned into human waste just as quickly as normal food. :(

Perhaps I should condition myself into hating good food.

81   Peter P   2006 May 24, 8:37am  

Maybe there is something to Feng Shui.

Absolutely.

82   astrid   2006 May 24, 8:38am  

Peter P,

I think my analogy would be for you to trick your mind into believing that PB&J sandwich tastes like toro and $2/lb hamburger tastes like Kobe beef.

83   edvard   2006 May 24, 8:38am  

If I eat rich food like the kind people in California must have every day, I tend to have a profuse amount of gas and very frequent bowl movements. On the other hand, if I go home and eat all that southern food again, boy oh boy! It literally lubricates my innards.

84   astrid   2006 May 24, 8:42am  

OT

I can't believe there are so many idiots who want to buy into Bank of China's IPO. Have they learnt nothing from the last ten years?

85   edvard   2006 May 24, 8:43am  

Ya.. Went into the outhouse humor land there for a second.

86   Peter P   2006 May 24, 8:45am  

I think my analogy would be for you to trick your mind into believing that PB&J sandwich tastes like toro and $2/lb hamburger tastes like Kobe beef.

I do enjoy plain pasta with olive oil, garlic, and chili flakes, with or without clams.

87   astrid   2006 May 24, 8:48am  

Joe,

Thanks for confirming my own belief about the behavioral patterns of the rich. I think when the upper middle class and the (gilt) gold collars start acting like the rich, the rich will mutate into some other sort of craziness.

Thus, Paris Hilton dresses like a skanky ho and the Olson twins dress like bag ladies. When the poor dresses like the rich, the rich will dress like the poor.

Or something. It's not a very well thought out theory.

88   Joe Schmoe   2006 May 24, 8:58am  

My old coworkers' house was for sale last year (don't know whether he ever managed to find a buyer), and I was looking for it on realtor.com and debating whether to post a link to it so that everyone can see the inside. It seemed a little like an invasion of privacy, so I was unsure about whether I should do it.

The question was moot, because his house wasn't on the site, but one of his next-door neighbors has listed their house for sale:

http://www.realtor.com/Prop/1060284957

To picture my coworker's place, imagine the same basic house with approximately ten times as much bling.

Note that what you are looking at the is one of the very first McMansions, built in 1987. CA really set the trend here.

89   HARM   2006 May 24, 8:59am  

When the poor dresses like the rich, the rich will dress like the poor.

Derelicte

90   Peter P   2006 May 24, 9:01am  

I believe if you really want something it is better to get the best example of it that there is within your reach… i.e. if I want a Mont-Blanc, and I can afford it, I get it. If I cannot afford it I don’t see the point of buying a cheap knock-off because I get no satisfaction from knowing that it is fake.

Is Mont Blanc any good? I heard that the resin body cracks easily. Is that true?

91   astrid   2006 May 24, 9:01am  

SP,

I think you're ignoring the market segment that places an extremely high value on the opinion of others, rich enough to afford the real thing, but unwilling to pay full price. I will argue that for this segment may find McMansions to be a good match for their needs. I think Randy's earlier comments about potential Toll Brothers purchasers go to the same demographic.

92   HARM   2006 May 24, 9:03am  

Note that what you are looking at the is one of the very first McMansions, built in 1987. CA really set the trend here.

But what about Tony Montana's place from Scarface? That pre-dates it by at least 4 years.

93   astrid   2006 May 24, 9:03am  

I'd go with an Omas. They're sooooo pretty. Monte Blancs are too heavy and stiff.

94   astrid   2006 May 24, 9:05am  

HARM,

When you think about it, high fashion has been going into the ghetto look for quite a while. John Galliano's entire line is pretty much crap in my eye and Prada has managed to market generic black stuff for a pretty outrageous price...and LV handbags? Ugly!

95   requiem   2006 May 24, 9:06am  

SP,

The true connisseur will realize the MontBlanc pens, from a practical standpoint, are like a low-end Jaguar (the one that's really just a dressed up Ford). High on prestige, low on quality. My own preference is to look for quality, and often that will guide me to a brand that's outside the normal "prestige-brand continuum".

For a pen, I might spend 100$ or more for a nice Namiki model (first brand I can think of right now, so not that obscure, sorry). It provides some satisfaction of eliteness both over those who wouldn't pay even that much (the price angle) and over those who buy the MontBlanc (the "actually knowing what you're buying angle").

Oh, and to bring this back to housing, if I wanted crown molding, I'd go buy power tools and lumber (or visit a friend with power tools). The "rich" I have known seemed to generally take a healthy attitude of "who cares what the others think; I'll buy it if it works for me". So, they might drive an older Mercedes or higher end Volvo, but it was usually because it was a solid car, not for the prestige value.

96   astrid   2006 May 24, 9:07am  

Joe,

Talk about price compression. That house actually looks pretty reasonable for the price. If I remember correctly, Northridge is a reasonably good Westside neighborhood, right?

« First        Comments 57 - 96 of 186       Last »     Search these comments

Please register to comment:

api   best comments   contact   latest images   memes   one year ago   random   suggestions