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Lex on US Housing Market


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2006 May 24, 2:59am   15,845 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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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?

111   Joe Schmoe   2006 May 24, 9:33am  

Well, they are classy people in the only way that really matters -- they are very nice.

But before meeting them, I always bought into the strereotype that people whose families have been rich for a long time are quiet about it. They don't feel the need to engage in ostentatious displays of wealth because they don't have to impress anyone, etc. Obviously, that's not true.

112   astrid   2006 May 24, 9:35am  

Yup. Are there any problems I should be aware of?

113   Peter P   2006 May 24, 9:36am  

Are there any problems I should be aware of?

Drop some water on the writing and see if the ink dissolve. This may not be a big issue though.

114   astrid   2006 May 24, 9:39am  

Peter P,

If that's a concern, maybe this would work for you.

http://www.leevalley.com/gifts/page.aspx?c=2&p=40958&cat=4,104,53210

115   GallopingCheetah   2006 May 24, 9:40am  

Joe,

Being nice to people, yes. Truly nice to people. Not being nice because you want a favor from them. Being nice to people, truly nice from the bottom of your heart, because this is the way you have been treated all your life and you treat others likewise.

116   requiem   2006 May 24, 9:42am  

Any fountain pen knowledge I have came mainly from this "Ask Slashdot" topic:
http://ask.slashdot.org/askslashdot/03/10/05/171257.shtml

Pelikan, Rotring, and Lamy seemed well-thought of (as writing instruments in general).

117   astrid   2006 May 24, 9:43am  

I thought Rotring only made graphic pens...

118   GallopingCheetah   2006 May 24, 9:45am  

Vielen Dank, Requiem.

119   Peter P   2006 May 24, 9:45am  

I thought Rotring only made graphic pens…

They also make very nice mechanical pencils and multi-function pens.

120   Joe Schmoe   2006 May 24, 9:45am  

GC-

Yes, that is how they are.

121   surfer-x   2006 May 24, 9:47am  

And I’m not even a Boomer, just on the leading edge of X.

I beg your pardon Sir.

122   Peter P   2006 May 24, 9:48am  

And I’m not even a Boomer, just on the leading edge of X.

I beg your pardon Sir.

We should consider someone a boomer only if he has Pluto in Leo.

123   GallopingCheetah   2006 May 24, 9:48am  

I also believe the more one matures -- I mean the older one gets, hopefully but not necessarily -- the less one is susceptible to social and societal pressures. Young folks are impressionable and always out to impress others.

124   astrid   2006 May 24, 9:49am  

I've just checked out the prices on celluloid pens, insane! I guess I'll try to get a bit more life out of my Esterbrook before trading it in something fancier.

125   astrid   2006 May 24, 9:51am  

Surfer-X,

I just found that according to wikipedia, I'm a generation-Xer. It's really weird and disorienting. But what the hell, I'm in good company.

126   Peter P   2006 May 24, 9:51am  

I’ve just checked out the prices on celluloid pens, insane! I guess I’ll try to get a bit more life out of my Esterbrook before trading it in something fancier.

You should be able to get a new Pelikan 400 for well under $200.

127   astrid   2006 May 24, 9:53am  

Peter P,

You're right, very pretty.

128   Peter P   2006 May 24, 9:54am  

I just found that according to wikipedia, I’m a generation-Xer. It’s really weird and disorienting. But what the hell, I’m in good company.

Pluto in Virgo or Libra?

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