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Lex on US Housing Market


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2006 May 24, 2:59am   15,762 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 147 - 186 of 186        Search these comments

147   FRIFY   2006 May 24, 10:39am  

Why do you care, the only effect on you will be a reduction in the amount you have to pay your household staff.

You forget that GC just lost his shirt in gold derivatives... ;-)

148   Peter P   2006 May 24, 10:40am  

As soon as software became avaialble for $99, though, I stopped. I mean, you can get the basic version of MS office with a new Dell for like $149 or thereabouts. Why would anyone pirate it when the real thing is so cheap?

Absolutely.

Why pay for marginal MS bloatware?

Why use it?

149   surfer-x   2006 May 24, 10:40am  

Wow, you must make more money that Ha Ha, I sure bet he is envious. Amazing that you find the time to post your pearls of wisdom here; shouldn't you be out reformulating strategy with Bill? Hey while visiting his house you should consider giving him an upper tanker.

150   GallopingCheetah   2006 May 24, 10:40am  

Joe,

Did you make a lot of money from your adventure? If so, that is quite an adventure. Of course, no near as dangerous as bootlegging liquor.

151   surfer-x   2006 May 24, 10:41am  

You forget that GC just lost his shirt in gold derivatives…

Ahh yes, but it was a fake Hermes, as he is so rich any shirt he wears has to be the real deal, pitty those poor saps that now have his fake Hermes shirt.

152   GallopingCheetah   2006 May 24, 10:44am  

surfer-x,

I am janitor at MSFT. But they pay good benefits. I like my job.

153   Joe Schmoe   2006 May 24, 10:44am  

GC-

What adventure? I can't recall having an adventure or making a lot of money. I would have liked to have done either one.

154   surfer-x   2006 May 24, 10:45am  

Of course, no near as dangerous as bootlegging liquor.

you sir are in the wrong field, I think any major university would give you a full professorship judging from the wide ranging topics you are expert in. Stunning. I feel blessed, and not by that heathen Jeebus, but Shiva, the one true god. How did you get to be such a renaissance man? I imagine the universities you hold degrees from reads like a who's who in education. Hurry and write more as I hang on every syllable.

155   GallopingCheetah   2006 May 24, 10:50am  

I have to defend MS software. It does make a lot of things more convenient and easy to use. A lot of Open Source affectionados and advocates are resentful bunch of people.

I heard a story that at an open source conference, most attendees whipped out their laptops running Windows, Powerpoint, and Outlook. That was 4-5 years ago.

Things might have changed a little bit. As the open source guys have been furiously playing a catch-up game. But we shall see. Vista is awesome, so is Office 2007. The delay is troublesome. But things will eventually work out.

PP, I do see why a lot of shops prefer Linux-based solutions for their servers and backend apps. But I believe things will change to MS' favor.

In the server space, Linux has essentially been taking market shares from traditional Unix. The market share for Windows servers has steadily grown.

Let us just keep a fair and cool mind. Don't get too emotional on religious wars.

156   GallopingCheetah   2006 May 24, 10:52am  

Joe,

I thought you said you pirated DBASE when it was selling for $999. So I presumed that you made a lot of money from that. It's OK. I am not representing the company. I am just a poorly paid desk jockey.

If I mis-understood you, I apologize.

157   Peter P   2006 May 24, 10:54am  

I have to defend MS software. It does make a lot of things more convenient and easy to use. A lot of Open Source affectionados and advocates are resentful bunch of people.

I like MS because I am a big fan of Bill Gates (not because of his wealth). I am under the impression that he is a generous person.

158   GallopingCheetah   2006 May 24, 10:55am  

PP,

He is. Armen to that.

159   Jimbo   2006 May 24, 10:58am  

I don't like conspicuous consumption, or over consumption in general. I think it it tacky, wasteful and hard on the enviornment. I also think that by over consuming, you are indirectly taking from people who don't have enough, by pushing up the price.

I know this attitude is pretty rare and might even be considered un-American.

"Live Simply That Other's May Simply Live"

But on the other hand, if I am going to by a new bookcase, I see nothing wrong with buying a heirloom quality one, like a Stickley or Micheals or even an antique.

This is one of the main things that my wife and I fight about. She is constantly buying crap she finds at garage sales and on Craig's list and I am constantly having to get rid of it. At least she doesn't buy new crap.

I also find lots of good furniture just sitting on the sidewalk. I have a great old turn of the century desk that I found on the sidewalk. Tiger oak, dovetail joints, really solid and someone just threw it out. It needs to be refinished but still...

160   surfer-x   2006 May 24, 11:00am  

In the server space, Linux has essentially been taking market shares from traditional Unix. The market share for Windows servers has steadily grown.

One only needs to watch the seminal Simpson's episode "Das Bus" to understand the Microsoft business model.

Be a Dear and explain to us Microsoft’s pricing strategy on back orifice. I am especially interested in reductions offered if the client whips out a copy of RedHat. Someone as profoundly intelligent as yourself should never confuse ruthless business practices with good product. Mosey on over to slashdot and look up what happens when the Microsoft salesman comes calling and you utter "open source".

161   surfer-x   2006 May 24, 11:02am  

I respect Gates and he is giving his money away, but his pitbull Ballmer I can do with out.

162   Peter P   2006 May 24, 11:03am  

I respect Gates and he is giving his money away, but his pitbull Ballmer I can do with out.

No comment.

163   FormerAptBroker   2006 May 24, 11:05am  

SQT Says:

> What exactly is the criteria for a McMansion?

I've always wanted to know if there is a difference between a "McMansion" and a "TractMansion"

Whenever I think "McMansion" or "TractMansion" I always picture the Belcourt neighborhood in Newport Beach (where an old girlfriend's parents lived):

http://www.dreamhomes.us/Home118283.html

164   GallopingCheetah   2006 May 24, 11:05am  

surfer-x,

You are being rude and callous. I want you to take a deep breath behave properly.

I don't know what you are talking about w.r.t. Simpsons. I don't watch TV.

Regarding the pricing and sales practices by MS, can you point me to the actual links? I do not read slashdot and is incapable of navigating through the myriad of opinions.

165   Joe Schmoe   2006 May 24, 11:09am  

GC-

Oh, no, I made a copy of the $999 dBase for myself. I didn't sell copies to anyone, I wouldn't have done that.

166   Randy H   2006 May 24, 11:10am  

FAB,

I'm not sure I'd call $5M McAnything. It takes some real wealth to afford that, even with the most exotic NAAVLP loan you can imagine.

Of course, for $5M I'd just assume have some horses and land between me and the greater fool.

167   Randy H   2006 May 24, 11:15am  

MSFT, ORCL, and earlier dBase, FoxPro, Paradox, Clipper and all the rest of them used to practically encourage developers to "pirate" their stuff (at least illegally develop for clients whether or not they bought an appropriate developers license or joined their developers networks, etc.). The thinking, which proved right, was that proliferation of their technology would yield greater licenses from the companies that hired all these ISVs and lone guns. Compare that to the likes of ParcPlace, DigiTalk or the various great Apple development platforms which took steps to prevent unauthorized development. Who remembers Argos now? But you can still find friggin Foxpro jobs on CL.

168   Joe Schmoe   2006 May 24, 11:16am  

The thing is, it really is a McMansion -- look at it, it looks just like a $150k KB McMansion in Texas, albeit a well-built one.

Newport Beach is a mighty nice neighborhood, though. I'd sure love to live there, too, even if the houses look like that.

169   Randy H   2006 May 24, 11:18am  

So maybe it's the difference between an InandOutMansion and an McMansion. Still fast food, but much higher quality.

170   Joe Schmoe   2006 May 24, 11:18am  

LOL! That pretty much sums it up!

171   surfer-x   2006 May 24, 11:19am  

I want you to take a deep breath behave properly.

Wow one comment about smooth skin and a person is branded a pedi......

You are being rude and callous.

From the likes of you, I consider this an honor. Godbless you tiny tim.

172   GallopingCheetah   2006 May 24, 11:19am  

Jimbo,

I also like very old furniture. They are very well made (of good, solid wood). One can see excellent craftsmanship and attention to details. The furniture made these days, I mean ones in the mid range, are cheap and exhibit shoddy workmanship. The low-end stuff, you know what you are getting. The high-end stuff, you know you get excellent quality. The mid-range stuff offers the least value and is there for one purpose only: To rip off the suckers.

But you know, you can go to Asia and buy well-made furniture for a fraction of the price you would pay in US.

But if you are rich, you can get top-grade things anyway.

173   Randy H   2006 May 24, 11:20am  

X,

I'm keeping a watchful eye, against my [probably not] better judgement.

174   Peter P   2006 May 24, 11:21am  

So maybe it’s the difference between an InandOutMansion and an McMansion. Still fast food, but much higher quality.

I may lose all "food" credibility over this but I prefer McDonald to In and Out.

175   GallopingCheetah   2006 May 24, 11:23am  

So maybe it’s the difference between an InandOutMansion and an McMansion. Still fast food, but much higher quality.

I must admit that this is a great line, even though Randy H had personal gripes against me.

176   Peter P   2006 May 24, 11:27am  

I don’t like In and Out french fries, so I guess I lose credibility with you.

Huh? I do not like their french fries either.

I much rather have a Fillet-O-Fish.

177   OO   2006 May 24, 11:33am  

Peter P,

you're not alone, I also prefer Fillet-O-Fish to In and Out.

178   Peter P   2006 May 24, 11:37am  

I prefer McDonald’s french fries.

Same here. But I do not eat much fries.

you’re not alone, I also prefer Fillet-O-Fish to In and Out.

That is what I usually eat there after breakfast time.

179   OO   2006 May 24, 11:45am  

How does McDonald's decide the price of their burgers? I used to head down LA by driving, and the closer you are to urban center, the cheaper the burger price becomes. If you are stuck in some main stop center along I-5, they charge you an arm and a leg for the same thing.

For example, Chicken burger (or whatever burger with chicken patty in it) costs 89-99 cents when you leave San Jose, it soars to 1.29 in San Luis Obispo, and reaches the height of around 1.59 an hour north of Bakersfield.

180   Joe Schmoe   2006 May 24, 11:56am  

It's funny, the McDonald's accross from the (former) World Trade Center in NY charged close to $8.00 for a Crispy Chicken Sandwhich Value Meal in the mid-90's. The very same meal in Chicago's financial district was $4.85.

I guess they charge whatever the market will bear.

181   Peter P   2006 May 24, 12:37pm  

You guys are so funny. You’re talking about french fries?!?!

I mean Freedom Fries. :)

182   Peter P   2006 May 24, 12:37pm  

New thread: The Perfect House

183   Peter P   2006 May 24, 12:40pm  

Apple Pie Rocks … (Twice)

I am hungry. ;)

184   Randy H   2006 May 24, 1:21pm  

Joe Schmoe,

In Chicago McD's had to compete with Billy Goat's.

185   astrid   2006 May 24, 1:55pm  

I prefer all in-n-out offerings to all McD offerings (Yes, even over the precisely engineered McD fries. In-n-out fries taste more authenic because they're fresh.

However, I'm still going against that Newport Beach McMansion. No $5M estate should be placed that close to the street. It looks like a monstrous McMansion...kind of a funny concept, a McMansion mansion.

186   HARM   2006 May 24, 3:53pm  

Great tips, Bap33 - thanks!

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