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Lex on US Housing Market


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2006 May 24, 2:59am   16,243 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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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?

97   HARM   2006 May 24, 9:08am  

...and LV handbags? Ugly!

I'll second that. Don't know why they're so popular with so many women.

98   Joe Schmoe   2006 May 24, 9:11am  

Astrid,

It's farther out, one of the northernmost communities in the San Fernando Valley. In some ways Northridge was the original "exurb," a second-generation suburb built up in the 80's and populated by people who grew up in older suburbs built in the 50's and 60's. It's not really a true exurb, becuase it's not that far from LA, but you get the idea.

99   Peter P   2006 May 24, 9:12am  

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”).

True. I just need a good quality pen. Prestige is not important. But it needs to be BIG.

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.

Volvo sedans are too small though. They need something much bigger than the S80. Older Mercedes are solid, but they do need some TLC.

100   astrid   2006 May 24, 9:15am  

It's better to buy pens second hand. Especially the celloid pens. So pretty!

From a practical standpoint. I have Chinese made fountain pens that I've bought for $1 or $2, they're easy to use and don't clog up or bleed. The main problem is that the nibs are too stiff.

I was given a cute little restored Esterbrook. Really nice until it started leaking. It's not big though.

101   GallopingCheetah   2006 May 24, 9:16am  

I am amused by Joe Shmoe's example of the couple born into well-to-do families. Rich people can do whatever they like. These days, tastefulness is not necessarily a mark of upperclassness. As a matter of fact, uppers tend to have a coarse taste. Only the upper middles strive to be cultured and tasteful. Somewhere I read that the current ruling house in UK had a reputation for philistine taste. The old Duke of Kent, who died in an air crash in 1942 (or 1943), was the only exception: He was the only tasteful, cultured person in that clan. PoW may be another reasonable person. I don't know.

But that couple might not have come from the upper families. Yes, their respective father/mother was rich or struck it rich. But you know les nouveau riches tend to marry poorly, for they didn't have a choice. Sadly, the poor genes from the spouse side have a 50-50 chance to leave discernible marks on the children.

As I said over and over again, conspicuous consumption (or a pretentious imitation thereof) is no longer the mark of an upper class; it probably never was a mark of a hereditary upper class.

102   Peter P   2006 May 24, 9:18am  

It’s better to buy pens second hand. Especially the celloid pens. So pretty!

Have you tried Pelikan?

I use only rollerballs because I am too lazy to maintain fountain pens.

103   GallopingCheetah   2006 May 24, 9:19am  

Requiem,

I prefer your approach to the ones espoused by others. Do what you like and what suits you. Leave it to the others to ape you. Trust me, they will.

104   astrid   2006 May 24, 9:20am  

Peter P,

I'd say go with a low end Schaffer or Mont Blanc. Odds are, you'll only use it occasionally for signatures, so you just need enough bling to impress the other person. Actually, you probably don't want Schaffers because they're too pretty for conservative business uses.

105   Randy H   2006 May 24, 9:21am  

GC has reëmerged?

106   astrid   2006 May 24, 9:23am  

Pelikans are nice, but I like Omas better.

(please note that I can't afford any of these, this is all gawking value)

107   GallopingCheetah   2006 May 24, 9:25am  

Also Requiem,

I was in the market for a fountain pen, to (re-)practise and enjoy handwriting. What do you think would be a good pen for around $100? Does Waterman makes a good pen? I don't care about the brand image. The pen will stay at home. One does not travel with a fountain pen. I've had my share of inked shirts back in my school days. Besides, when in need, you can always borrow a MonBlanc from a rich man.

108   astrid   2006 May 24, 9:27am  

Peter P,

My normal pens are Pilot G-2s. They're definitely worth the 75 cents or so I pay for them. I don't like anything cheaper since they tend to bleed, clot, and cramp my hands.

109   Peter P   2006 May 24, 9:31am  

Odds are, you’ll only use it occasionally for signatures, so you just need enough bling to impress the other person.

I just need a pen to write down my intuitions at home. I will not carry a pen with me... or it will be lost in a week. If I want to impress someone at the restaurant, I would just order 4 dishes. :)

I was in the market for a fountain pen, to (re-)practise and enjoy handwriting. What do you think would be a good pen for around $100?

See if Retro 51 works for you. Also, try LAMY.

110   Peter P   2006 May 24, 9:33am  

My normal pens are Pilot G-2s. They’re definitely worth the 75 cents or so I pay for them. I don’t like anything cheaper since they tend to bleed, clot, and cramp my hands.

Are those gel-ink pens?

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