patrick.net

***but not on the agent/broker side of things***

Anyone have an explanation for the recent strong runup on homebuilder stocks and related ETFs? I would think rate fears, inflation fears, and recession fears would be stomping these formerly overpriced issues. Oversold?

George,

That is truly beyond belief! Talk about looking a gift horse in the mouth? As much as I hate to say it I DO hope they take it in the shorts. I'm sure the listing agent is "real" pleased too! Just what the area needs, another REPO on the market. Death or Glory.

Randy,

That sounds like ruthless market efficiency at work. 2.5% of 7 million is still $175,000 - no doubt many agents would be happy to grab such a listing for 1% or less. Not too bad for just listing the darn thing and have their assistants show the house as needed.

The deals themselves are probably too elaborate for the agents anyhow, I'd imagine multiple tax and real estate attorneys are involved in such transactions.

Anyone have an explanation for the recent strong runup on homebuilder stocks and related ETFs? I would think rate fears, inflation fears, and recession fears would be stomping these formerly overpriced issues. Oversold?

Oversold is my guess. I bought calls on DHI near the bottom after they announced that earnings would fall far short of their target. It looked like a capitulation sell-off to me. Everyone on wall street is wise to the bubble and these stocks are *hated*.

But, IMO, building houses will still be a profitable business in the future if you look out 5-10 years. These stocks are trading for 4-6 x peak earnings. Even if their earnings drop 75% over the next few years, the HB stocks would be at 16-24x trough earnings. And the earnings should recover as the industry consolidates.

Also, when the bubble bursts, raw materials prices and labor costs should go down, partially offsetting the lower housing prices. DHI is the largest homebuilder, but it only has a $6B market cap. This industry is ripe for consolidation. Eventually, there will be a few industry leaders that emerge. The rest will get bought out or will go bankrupt (sort of like the tech boom).

I picked DHI because it sells entry level homes, for which demand should remain fairly steady. Also, their margins are among the highest in the industry, allowing them to cut prices aggressively, which management has indicated they will do. My guess would be that TOL and other "luxury" brands will get hit hardest.

astrid,

(And I'm really not getting sized up for a "blue blazer" here) but that would be my FIRST question to a prospective seller!

"Obviously we're only too happy to show and sell your lovely home but due to current market conditions our firm requires me to ensure that you are in fact "current" on your payments"?

At this point if FB lies or in any way misrepresents his financial situation the firm can walk away from the listing, the "client" and the agreement without any further obligation. Dirtbags.

astrid,

That's exactly how it usually goes down. From my exposure, people buying $20M+ homes rarely handle much of that themselves. They have a wealth-manager who coordinates and executes the entire txn, taxes, contracts, financing, etc. The owners just cruise through, decide if they like it, and point out where to have the interior designers and contractors make changes.

The issue agencies are facing is that when you're talking about $20M or more, the tax consequences overshadow pretty much everything else. Often the financial engineering of the deal structure involves exchanges of cash and assets outside of the US jurisdiction...sometimes just exchanges of interest in various offshore funds. Of course this is explicitly illegal tax fraud, but as Homer Simpson says: "it's not illegal if I don't see it". (The problem is that it's very hard to catch such cheats).

Glen,

I can't disagree with your logic (I see it totally) but one would have to weigh the opportunity cost in the interim. As much as I LOVE to see RE having it's turn in the barrel I just don't have time to stand around and wait for the whole sector to do it's turn around. There are other issues/sectors with more compelling (and less risky) upsides.

DinOR,

I think the agent made a good bet and he/she simply didn't count on alarming thick-headedness of the FBs. Usually, the risk of foreclosure assured motivated sellers and the agent made sure there was a substantial cushion.

However, maybe good agents will start to demand credit reports for prospective sellers, so they don't commit to people who are in fact underwater.

Glen,

But, IMO, building houses will still be a profitable business in the future if you look out 5-10 years. These stocks are trading for 4-6 x peak earnings. Even if their earnings drop 75% over the next few years, the HB stocks would be at 16-24x trough earnings. And the earnings should recover as the industry consolidates.

Time to bail on the deep in puts downward strategy then, I take it. Luckily I closed most of that strategy in June; just playing with the newer ETFs now for volatility.

June Phillips,

I guess I'm lost here. You either did/did not buy/thought about buying (for reasons you don't seem to want to fully explain). I don't live in the BA so I can't speak to "signs that things were heating up" but I do go every spring for a tax seminar and in 2002 things could not have been more dead (in the Mission District anyway) still reeling from the wake of the dot bomb implosion. Any specifics at all might help.

DinOR said,

There are other issues/sectors with more compelling (and less risky) upsides.

Don't get me wrong, I am not putting 100% of my investable assets into HB stocks. Just a small allocation to try to take advantage of some bargain prices. Wall street leads main street and these stocks have already taken it in the pants. But have they overcompensated for the coming downturn? My guess is that they have, but time will tell.

I haven't found a lot of industries with compelling upsides and safe downsides. So I try to take a "bottom up" approach and focus on a few stocks which the market currently hates. I'm a contrarian by nature (eg: I bought MRK shortly after the VIOXX news), so right now I am looking for bargains in the housing industrial complex (I bought Home Depot shares recently too). But I won't buy Fannie Mae (even though it is now at 6x earnings) because I think it could be the Worldcom/Enron of the crash.

astrid,

I don't know that they need to go to the expense of pulling credit (wow, that would be hoot though) but just a one pager saying I am not in arrears and I don't lie. If I am fibbing then "the firm" has the perfect right to protect "the firm's" interest by recovering any advertising expenses incurred yada yada.

Randy and SFWoman,

Thanks for the info. That's really interesting indeed and it sounds awfully logical to me. (One irony of the current housing bubble is the democratization of tax driven financial expenditures. The 2 yr 250K per head exemption, the 1031 tax free exchange, the mortgage tax deduction and Prop 13 are all tax considerations -- but average homeowners who lack the proper advice of responsible attorneys and wealth managers tend to get in way over their head)

Incidentally, DinOR and I had speculated about financial managers taking the lead in buying/selling homes and working with RE lawyers on transactions. It's nice to get some affirmation on that idea from the actions of the very wealthy.

astrid,

Btw, making an FB sign said document is like getting blood from a turnip but at least they'll think a little bit before they agree to exploiting the selling firm (while discreetly attempting to sell "back door" on C/L)?

My Vegas bud told me he saw some "Take Over Payments" on yards with cardboard stapled to a stick! Classy huh?

June Phillips,

I don't know. I have a hard time justifying owning in the BA if (a) I knew with relatively great certainty that prices will fall in the near future and (b) the interest on the profit from the sale is likely to cover rent .

The majority of the BA isn't some tiny, exclusive neighborhood that rarely come to market (unlike certain exclusive co-ops in NYC and maybe SF). If there's a high likelihood that you can sell for a sufficiently high price to cover the transaction cost + purchase price of the house when the market troughs, I really don't see why the hypothetical you won't sell when you are able to do so.

DinOR,

Perhaps... That would be a cheaper option. However, such credit report pulls are de rigour for prospective apartment tenants (who pay for it out of pocket) so I don't think it would be particularly difficult.

Right now, the problem is that there are too many realtors and not enough buyers or sellers to sustain them all, so the practices are targeted at getting any listing. If the realtor market thins out a lot, then the remaining realtors may have the leverage to screen only the most desireable clients and pick out the ones that waste their time. (ie, just about every other profession)

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...