There is only one problem with the home builders – expectations are way too high. The builders are not only priced for perfection by the market, the builders themselves have business strategies that are modeled for perfection. I believe the bar is set at an unattainable level.
Where are we today and why do I believe a storm front is fast approaching?
Easy Money, and Cheap too. With the help of the Bernanke QEs, every builder has since issued equity, convertibles, new debt and/or refinanced existing debt.
Land Cost. If we take a snap shot of the builders' land portfolios today, most builders have plenty of land but the finished lot inventory has been absorbed by the favorable conditions so far this year.
No Competition, for now. The builders could not have planned for a more perfect set of circumstances. Whether it is intentional or unintentional, public policies have been the greatest friend the builders can dream of.
Confused. The market is confusing a listing shortage with a housing shortage.
In summary, the building model is flawed. They cannot avoid boom bust cycles. Right now, builders have to keep buying even if they believe that the market may slow. Having used up most of the cheap land already, builders are now facing a "must appreciate" predicament. If the market slows, look out below.
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Companies with land to sell to developers often make land available in booms and not available in busts. Examples are the Irvine Company and Newhall Land and Farming. In their developments one sees many production builders who buy the land shortly before building.
By properly tracking the markets these land companies can extract the maximum value for their land over the long term.
In areas where the land is not held in strong hands, there is more volatility.
However in today's market the bust has lasted so long that builders are at risk of drinking their own Kool-Aid.
The 'boomers' are seeking to downsize or relocate to lower cost areas and their buyers are much poorer.
How long can a boom driven by a lack of inventory last? I have no clue as all asset markets are now manipulated.
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