patrick.net

Glen and Conor,

I'm pretty naive on homebuilders but my impression has been:

(1) they have bought a lot of inflated priced lots, which may be unbuildable for at least a couple years
(2) they have built a lot of houses at inflated costs for lots, labor and materials - which they may not be able to sell for a profit
(3) they have built and sold a lot of new housing inventory to flippers and find themselves in a scenario similar to Detroit's big 3 (excess inventory depress demand for future production)

It seems to me that these builders may have to take some losses and suffer through years of underproductive markets before they can start to take off again.

Glen,

I've picked through your post with a fine toothed comb and....... I can't find ONE thing to refute!

June Phillips,

O.K now we're getting somewhere! Welcome aboard. We get a lot of folks that visit the blog pretending to be sincere in their quest for knowledge only to boast, tout and flaunt their "big fat stacks".

The BA has been the most difficult to call (however there are some real "bargains" to be had in Sacramento and San Diego!)

If you don’t believe me, see this house. They INCREASED the asking price 2-3 days ago.

Anyone can ask any price. Many properties have their prices raised while they are sitting. The sellers want to ensure that the houses are priced-to-sit.

tannenbaum Says:

No prob - I just LOVE calling on people’s BS!

You obviously missed the humor :-(

I did not put in any smiley. I thought the idea that someone "increasing" their asking price is so hilarious in current market that the sarcasm would be obvious.

I recently changed my handle from "To BA Or Not To BA" to "StuckInBA". You can trace my previous postings to confirm the sarcasm.

Nevertheless, thanks for the additional info. It really makes the listing even funnier. I will now bookmark it and see what happens with it in future.

Sheesh…even without Jupiter and Mercury, its still enough to put a kink in your day. Thanks - I’d have looked it up myself but my last Ephemeris ran out in 2000.

SpeedingPullet, you may want to download a free astrology program like Astro123.

http://www.astrowin.org/astro_sw.htm

June Phillips,

The point I was trying to make in the previous thread about why you were thinking of buying in 2001/2003 had a whole lot less to do with jumping on your back about being an "evil speculator" (hence my "not trying to be a jerk here" comment), and had a whole lot more to do with the following:

--Decent housing in California is now very expensive for what you get vs. almost everywhere else, regardless of whether you're buying or renting. It's also all but impossible for most ordinary middle and working-class people to buy here most of the time, without committing financial suicide in order to do so.

--People here have become conditioned to the sadly true "new paradigm" that, in order to buy a decent place for you family, you HAVE to time the market very precisely to grab your Golden Wonka Housing Ticket when it comes by once every 15-20 years. If you don't, then you're stuck renting, probably in an amenity-challenged substandard apartment. Which is probably more along the lines of what you were (correctly) thinking in 2001/2003.

These secular developments in CA have little to do with the current cheap-credit bubble, and a whole lot to do with lax immigration policies, entrenched NIMBY anti-housing politics, and forced Boomer wealth redistribution (Prop. 13, etc.).

What really bugs me is that Californians have become so inured to this situation that they now regard it as "normal".

Thank you Peter P :-)

Its been a while since I dabbled..

Peter P,

Is it true that Mars will be the closest to Earth for the first time in the last 60,000 years? I'd heard by mid-August it will look as large as the moon, and won't be this close again for another 60K years. Any truth to that?

Conor,

Just curious, how long would you go in LEAPS? At what point does theta outweigh your upside sentiment?

Is it true that Mars will be the closest to Earth for the first time in the last 60,000 years?

That would be astronomy, a real science. ;)

BTW, I heard that too. But I am not sure if it will look as large as the moon side by side. That would be scary.

Randy, Conor, have you guys considered writing short-term options against the long LEAPS?

I’m pretty naive on homebuilders but my impression has been:

It seems to me that these builders may have to take some losses and suffer through years of underproductive markets before they can start to take off again.

Astrid,

You are absolutely correct that the HBs are heavy on inventory. It will take a few years to work off the excess inventory with a much slower pace of sales. The short term outlook for the HBs stinks.

But sometimes when you invest, you need to look out a few years. The HB stocks have priced in a significant amount of downside. Is it enough? I don't know, but my guess is that the stocks are oversold. I know that for those of us who live in CA, it is hard to see the bigger picture, but the reality is that the downturn is going to hit us a lot harder than it will hit most of the rest of the country. It will also hit FBs a lot harder than it hits HBs.

Unlike previous downturns, when builders were regional companies who rose and fell with the local housing market, many of today's companies are national builders. They will continue to sell houses at roughly the same prices in TX, OK, MI, OH, IL, NC, etc., which will offset the huge drops in sales in CA, NV, AZ, NY and FL.

I like DHI, specifically, because I think management will be proactive in slashing prices to move inventory. And they will focus their future building in markets where prices are holding steady.

The HBs may lose money for a few quarters, but they will not all go out of business. We are not talking about dot-coms that never showed a profit.

Conor,

I have a drinking buddy that worked CBOE for years. Started as a clerk in the 80's. He would always tell me, "at some point you just need to "own" the stock" and I always wondered what the hell he was talking about! Some times things make more sense when you hear them, others when you read them. I'm feelin' the love baby!

BTW, I heard that too. But I am not sure if it will look as large as the moon side by side. That would be scary.

Mars is half the size of Earth. The moon is 1/4 if I recall. Just how close does it need to come relative to the Moon for this to work? Use your high-school geometry. I highly doubt it unless there's some kind of "gravitational lens effect" I'm not aware of.

Conor and Randy,

I bought the Jan '09 LEAPS on DHI with a $25 strike price whent the stock was around $20. If the stock falls below $16, I will buy more LEAPS. I don't really need to worry about market liquidity because I am just a tiny individual investor with a few extra bucks to gamble. As for theta... huh??

eburbed Says:

Stuck - Cupertino, Mountain View, Palo Alto, - when will the insanity end!

I don't think it will. Although I am very much in the a hard landing camp (calling for average sqft price in Santa Clara to go back to $400 by end of 2008), I think a soft landing for a place like Cupertino is very much possible.

Some may think I may be saying "Cupertino is different" like perma-bulls. No I am not. The thing is Cupertino is a very small place. The inventory for single family homes is less than 100 ! The BA population virtually guarantees 100 GF. There are too many desperate Asians wanting to buy a piece of this holy Cupertino land. And if it's in Monta Vista, aaah, it's pure Nirvana for them.

The prices will come down. But not as much as rest of the Santa Clara county. Currently the GF are patting their back for reducing 5K from the 1.5M asking price. So let's not underestimate the stupidity of these folks.

There are a lot of condos being built in Cupertino. I do not know how it will affect the SFH market. We will see.

For such reasons, I consider Cupertino to be a great gauge for market sentiment. The direction and acceleration of price movement is more important than actual amount. If Cupertino drops by 10%, rest of the BA will be in deep trouble.

Randy, the size of the moon can "change" due to optical illusion. I think DinOR was talking about perceived size.

This should be VERY easy to prevent, theoretically. All it takes is for the city/county/state to retain the “right to purchase” the property at the stated price.

This wouldn't prevent private land contracts, which an owner of a property has a Constitutional right in the US to execute, short of some eminent domain (as I understand it, but IANAL, so worth what you paid).

Glen,

By theta I mean the component of theoretical options pricing that is the time left on the contract. As that goes up, the option gets more expensive. At some point, the premium you pay for locking a far future price is more than the value at that price, considering the risk-free rate, etc.

Conor said,
The CEO of DHI said in the earnings conference call that orders had “fallen off the Richter scale.” And now the group has bounced 12-13% in a short period of time. I think a lot of these names will ultimately show actual losses, not just lowered profits, and am in absolutely no hurry to get involved yet.

I'm taking a gradual approach. Bought a few LEAPS a couple weeks ago...if the HBs get slammed again I will buy some more. At some point, the stocks will bottom out. (probably about a year or two before the housing recovery starts). Then the upside will be huge, IMO.

You may be right that the HBs will show actual losses. But I think they will eventually recover. But you could be right--I might be a year or two early here...

I agree with SP. This is one of the easier problems to solve.

In Mumbai (Bombay) this law was actually put in practice. The reported official price used to be way below 50% of the real price. That was not to save on property taxes, but to hide your actual income. Loans were difficult to obtain. Almost all rich people payed cash. Cash from undeclared income.

So if you go overboard with under-reporting, the income tax people would forcibly buy the property from you at a slightly higher price.

This was 15+ years ago in Mumbai. It should be easy to do similar in US.

TN

I hope you're right and this time results in the daytraders getting trapped. I only say this because I have sector hedge positions with downside bias; and they're not looking great right now.

How much do you really think the daytraders add to price movement? I got the impression most remaining daytraders were either scalpers or day momentum players using super low commission brokers and esignal or tradestation...

Peter P,

Thank you for clarifying (on my behalf) that which I did not fully understand myself.

Yeah, yeah that's the ticket! "Perceived size". Yeah, yeah.

Randy said,
By theta I mean the component of theoretical options pricing that is the time left on the contract. As that goes up, the option gets more expensive. At some point, the premium you pay for locking a far future price is more than the value at that price, considering the risk-free rate, etc.

Oh, ok. I understand this conceptually, but I don't have an MBA, so I can't do the math precisely. I'm not a big believer in Black-Scholes anyways... just kind of go by the seat of my pants...

I’m not a big believer in Black-Scholes anyways… just kind of go by the seat of my pants…

Black-Scholes is still useful in what-if analysis.

B-S is pretty close to actual trading market price for liquid options. Whether this is because B-S is accurate or because everyone is using B-S is a question I leave to Peter P and others to ponder.

I will say that there are other methods, like the bi-nomial method, which are much more complex but tend to produce results very close to B-S. I'll leave the arguments about why that might be to our resident postmodernist, DS.

Glen,

I did a similar play back in OCT 01. Nobody, and I do mean nobody was touching telecom with a ten foot pole. I found this rinky dinky Global Science and Technology Fund that tanked right out of the gate. IPO'd just prior to 9/11. After holding it for about a year it was up over 70%. I figured people aren't going to out grow the need to communicate and we're not going to "out grow" the need for housing! I'd have to say though (no matter how successful) it was a pretty speculative play.

Whether this is because B-S is accurate or because everyone is using B-S is a question I leave to Peter P and others to ponder.

Why me, I was only B-S'ing. :)

tannenbaum,

No problem. As I said, the info you provided, makes it even funnier.

DinOR,

I did something similar, but with the big tanking telecoms that were ripe for consolidation. But I was very much an industry insider at the time, so I'm not sure how speculative that actually was, looking back on it.

Peter,
I definitely think it is useful. It is actually a pretty decent way of looking at the factors that should affect option pricing. But I think it can also lead to systematic mispricing in some cases.

Real Estate Expo in SFO at end of August. Anyone ?

You don't want to miss Al Gore and George Foreman teaching about RE, do you ?

But I think it can also lead to systematic mispricing in some cases.

Just make sure you have the "right" volatility input. If you do, you will have the "right" price. ;)

In practice, this is very difficult because volatility changes across strikes, time, and underlying price.

DinOR,

I have a few bucks set aside as "mad money" for purely speculative purposes. I can afford to lose it all if my strategy backfires (though of course, I would prefer not to). These kinds of investments are the most fun. (Especially with DHI up over 5% today--go baby go!) Gambling, pure and simple. I don't pretend it is anything else.

You don’t want to miss Al Gore and George Foreman teaching about RE, do you ?

Huh? Does grilling food contribute to global warming?

The next thing they usually learn is “don’t ever be short naked options, it’s too risky.”

However, one can be tempted into writing too many contracts of Far OTM options. When the market makes the "wrong" move, the margin requirement can escalate very quickly.

Conor,
You are right... I have a lot to learn. Which is why I am very cautious about the amount of money I put into options. (More like a trip to Vegas than a deposit on a house.) And I know enough to know what my downside is on any particular trade.

I guess what I am saying is that I'm not sure that things like historical volatilty should matter so much. It is really just technical analysis dressed up in scientific clothing. Historical volatility tells you very little about future volatility, IMO.

There are so many non-quantifiable factors that go into investing. Sometimes you just need to sit down and figure out what you think a stock is worth, then hope the market agrees with you before your LEAPS expire.

Your sarcasm’s often funny, but I don’t find any humor in your racial comments.

How is that a racial comment? It has some truth to it.

Ok, ok. This runup is ridiculous. Nothing goes up 7% a day on no news. Plus, Conor is scaring me about my ignorance. I sold my DHI LEAPS. Maybe I'll buy them back later.

I know, I know. I'm a filthy daytrader!