patrick.net

Not if this is a precursor to more inventory. Sure, hot markets like the bay area are still tight, but rents are easing already in other parts. SRS is near a 52wk high, though still very depressed from its continued beating since the Fed started inflating post 2008. Housing shorts have been utterly and constantly destroyed and decimated since 2009, many fighting the Fed bazooka probably ended up in the poor-house. They are raging and trying to roar back now that we're still effectively sitting at ZIRP and the end of the QE tunnel and foreign housing money has likely been reached - I'm not so sure about the end of QE, never underestimate the Fed, maybe operation titty-twist is imminent! It's gonna be a good tug-of-war.

Why are home builders so low? KB has a pe of 7?
Why did they fall so much when this is probably the only sector of the economy that is guarantied a lot of business and good prices independently of whatever happens in China/emerging markets?

Strategist says

I did. It looks like one helluva bargain to me.

If you want your 200% return there is your pick

Heraclitusstudent says

Why are home builders so low? KB has a pe of 7?

Why did they fall so much when this is probably the only sector of the economy that is guarantied a lot of business and good prices independently of whatever happens in China/emerging markets?

Besides the article above if you listen to why I said the Builders didn't have value on CNBC last year it makes sense

Theme of 2015

“You get my drift: The bar for housing is so low that some housing bulls might try the predictable tactic of bellowing about exponential growth portending a miraculous recovery when all that is occurring is a bump up from a pitifully low base. I take a more measured (or perhaps jaundiced) view of what the future holds”

They were doomed from the start, they could never hit their sales metric so the pricing was based on a thesis that they would

2:21 Mark

http://video.cnbc.com/gallery/?video=3000388493

Heraclitusstudent says

Why are home builders so low? KB has a pe of 7?

Why did they fall so much when this is probably the only sector of the economy that is guarantied a lot of business and good prices independently of whatever happens in China/emerging markets?

I assume partially because of what happened in 2008. The bubble was in full burst mode while major talking-heads still pushed housing. Another reason could be margin pressure as affordability is coming to an end, so they have to build and sell relatively "cheaply" on pricey land.

Logan Mohtashami says

all that is occurring is a bump up from a pitifully low base. I take a more measured (or perhaps jaundiced) view of what the future holds”

They were doomed from the start, they could never hit their sales metric so the pricing was based on a thesis that they would

It doesn't explain much: Ok they have a low baseline. Ok they grow from there. They meet a target or not, BFD. They are growing.
Why does TOL, a growing company with probably years of growth in front of it, trade at a forward pe of 8, when CVX trade at 17?
Housing is rare and much more expensive than production price.
Oil is cheap and plentiful.

My theory is that people think Home Builders will not do well if rates are rising.
But first rates (mortgage rates) are not rising, second credit is not the barrier to more building. Permits are more likely the culprit.
If so we are likely to see much more building just because housing is rare and the population keeps growing, and authorities may want high prices, but not so high that the economy gets killed. Therefore they will be under pressure to up the supply.

Heraclitusstudent says

It doesn't explain much: Ok they have a low baseline

Everyone assumed housing was strong that was their first mistake

They were always going to miss their mark so once the market place finally got it, they sold them off

That was my call for 2015, 8%-12% growth with upside if Median Price fell

Median price fell we got 14.5% growht that is a 10%-27% miss on sales expectations

Heraclitusstudent says

My theory is that people think Home Builders will not do well if rates are rising.

We had one rate spike in 2014, Builders missed their sales metric points by 20%-28% in 2014

Heraclitusstudent says

It doesn't explain much: Ok they have a low baseline. Ok they grow from there

The CNBC discussion is perfect clear on why the Builders had no value last year, I even amazed myself how right I was ;-)

Logan Mohtashami says

Everyone assumed housing was strong that was their first mistake

During the crisis, existing home sales fell far less than new home sales, as we had overbuilding.
Now this situation will reverse as we move into far under built territory. People maybe had incorrect hopes for new home sales, but building MUST happen sometime .

Logan Mohtashami says

They were always going to miss their mark so once the market place finally got it, they sold them off

That was my call for 2015, 8%-12% growth with upside if Median Price fell

Median price fell we got 14.5% growht that is a 10%-27% miss on sales expectations

Logan Mohtashami says

The CNBC discussion is perfect clear on why the Builders had no value last year

I don't understand. They had a pe of maybe 10, now fall to 7.
At what point exactly did the market get ahead of itself?
That is your definition of no value? pe 10 with a growth of 10+%? In what other sector do you see that?

Logan Mohtashami says

We had one rate spike in 2014, Builders missed their sales metric points by 20%-28% in 2014

Is there a rate spike now?

And again the problem is not that credit is hard to get or expensive, even in 2014. The key problem on buyer side is that prices are ultra high.
The entire reason why sales are low and prices are high is because they are not building enough.
"Not building enough" cannot be a barrier to more building.

Heraclitusstudent says

At what point exactly did the market get ahead of itself?

If you based the pricing multiple and book value on new home sales hitting 24%-41% sales growth for last year, you were lead to believe a false model of growth

Rate of sales were decelerating from the start of the year but no one picked that up until it was too late

People forget headline sale numbers are misleading both up and down, revision trends are key for new home sales, I wrote about that a lot last year

and now everyone is wondering why the builders got smacked

It's because they missed their sales estimates

Heraclitusstudent says

Is there a rate spike now?

Work of 4.5% 30 year as a test level 10 year is 1.73% basically the low level of the mortgage rates range I have talked about for 2 years now, we are in a channel now on 10's

Logan Mohtashami says

It's because they missed their sales estimates

What was the final growth?
What pe you would generally associate with that growth rate, and why?

Heraclitusstudent says

What was the final growth?

14.5% which means that if you didn't have such a miss in new homes sales in 2014 new home sales would have been down negative 6 -8 percent

Over estimating sales for the 3rd year in a room

Hence why a lot builders and the XHB are 2012/2013 levels

A lot Wall Street people lead investors to believe there was a escape velocity thesis when all it was was a slow and steady rise for a post WWII low level

Logan Mohtashami says

A lot Wall Street people lead investors to believe there was a escape velocity thesis when all it was was a slow and steady rise for a post WWII low level

It was always obvious we would go through years of slow building, after such a massive building boom.
But we are now getting under built.
This is being controlled. It was kept slow because they wanted prices to rebound. Now this is done, the incentive will align on the "build more" side.
If all this is true, this is probably the best buying opportunity right now.
It is unlikely rates will be a problem considering the rest of the economy.

Heraclitusstudent says

If all this is true, this is probably the best buying opportunity right now.

It is unlikely rates will be a problem considering the rest of the economy

The reason I mentioned median price falling is good, is because it means they're selling smaller priced homes

We have over 5 months inventory for new homes and they still missed sales by double digit, this is a demand problem only

Logan Mohtashami says

they still missed sales by double digit, this is a demand problem only

Demand is low because prices are too high.
They should have plenty of room to lower price/focus on more basic homes/apartments.
Still grow.

Heraclitusstudent says

They should have plenty of room to lower price/focus on more basic homes/apartments.

Profit margins

Bread and Butter are single family homes that sell big, that's their issue, even their lower end homes that don't have the bells and whistles ... they can sell them but it isn't as profitable

That gets into a complicated game with the builders, I minded everyone to just keep an eye out on conference calls, and when DHI the new wall street darlings began to speak their stock went down too.

So demand is one things but how much $$$$$$$$$$$$ you can make is the other factor

Logan Mohtashami says

Bread and Butter are single family homes that sell big, that's their issue, even their lower end homes that don't have the bells and whistles ... they can sell them but it isn't as profitable

No one says they can't continue to sell luxury houses for the same margin. The question is whether they address the demand for more basic homes thus making an extra profit.
Profits growth trump margin.

The question is whether to buy CVX with a pe 17, a profit margin of 3%, and revenues down 35% in an environment where oil prices are FUCKED.
OR I could buy DHI with a pe of 9, a margin of 7% and revenues up 5% in an environment where housing is rare and expensive.
Hummm....

OR LGIH, pe 6.5, margin 8%, revenue growth 88%.
Stock down 35% from October.

Heraclitusstudent says

I could buy DHI

KB Home is really selling at liquidation value

In Yahoo, the show book value at 35.50B, market cap at 9B. If true why no one buys them and sell them in pieces?

Heraclitusstudent says

If true why no one buys them and sell them in pieces?

Its never that easy or that fast.

KB Homes stock chart looks like a walking dead going down the hill

However, if you want value, there it is right there

Heraclitusstudent says

In Yahoo, the show book value at 35.50B, market cap at 9B. If true why no one buys them and sell them in pieces?

I think you're looking at the wrong stock, it's KBH vs KB (which has more debt than cash).

KBH

924 million market cap 1% div

Very surprising to me.
I would have thought this is the one sector with a lot of demand in front of it.

Heraclitusstudent says

I would have thought this is the one sector with a lot of demand in front of it.

It was just over hyped last year, that's it

Trend sales are at cycle highs, but people were paying way too much for the builders in 2015 ... (Value) that's the point I made on CNBC last year because the builders were the favorite trade for 2015

Logan Mohtashami says

It was just over hyped last year, that's it

I don't think the need for building to happen is hype. Your own graph shows that.

Logan Mohtashami says

Heraclitusstudent says

I don't think the need for building to happen is hype. Your own graph shows that.

It's price you pay for the company

We are selling new homes at recessionary level markets, so the profits have to be very high..

There is a reason why the Builders got smacked in 2013 and 2015 because those 2 years everyone was over hyping the story line to show top line revenue was going to be booming ...

It was impossible for that to happen in this cycle

Logan Mohtashami says

It was impossible for that to happen in this cycle

Why is it impossible to build more and make a profit when prices are ultra high?

Do you think, we will continue the slow sales at recessionary level until the next cycle?

Something has to give. You can't have prices go up forever and no one answering demand for cheaper structures, while people go increasingly homeless.

Heraclitusstudent says

Why is it impossible to build more and make a profit when prices are ultra high?

You don't have the proper demand curve this cycle. Which was my thesis from day 1, years 2020-2024 will be better though.

For the the most part the builders knew this, I always give them kudos that they tried their best to manage this cycle because they know their homes are too expensive compared to existing homes

Mass supply of cheaper homes is a problem for them

Heraclitusstudent says

I doubt anything will be better in 2020-24

College educated dual Income Americans will buy more homes then just based on the supply of more of them

Logan Mohtashami says

It won't happen

It will happen. Just not in the US. But the US will not be left unaffected.

Heraclitusstudent says

It will happen. Just not in the US. But the US will not be left unaffected.

We don't import recessions only export them.

Demographic economics is going to get better for us soon, No Great Depression, it will be a normal recession and we will have better household formation capacity for better trend growth for a mature country in the next cycle

Logan Mohtashami says

We don't import recessions only export them.

What we are looking at is a deep change in financial conditions, of the way finance works world wide.