The Residential Real Estate Crash Index Message Board

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Strategies & Market Trends : The Residential Real Estate Crash Index

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To: Wyätt Gwyön who wrote (14791)	11/4/2003 1:14:01 PM
From: GraceZ	Read Replies (1) of 306849

Oddly enough I agree with you in regard to the homies. I have a big national home builder as a client (indirectly) and at one time they represented 2/3s of my revenues. My best year ever was followed by my two worst because of this. I'm far more diversified now because I won't be put through that again. When their biz slows down it doesn't just slow, it drops like a stone. They get an enormous amount of their revs from financing activities so not only are they subject to interest rate risk indirectly in the housing market but also in the mortgage market. They've become a great deal more conservative since the last bust, in that they tend to buy options on land instead of buying the land outright and they build very few spec houses, they hedge their interest rate risk but all and all that wonderful growth can disappear with a two point rise in interest rates. This is why the market isn't giving them any premium for growth, their growth is unsustainable in the long run and it is most likely to be followed by a contraction, not slowing from 25%-30% to a nice staid 7-10% as you'd expect from a growth company as it matures. Two additional interest rate points would put us about at historical rates for mortgages in the last twenty years. This could easily put the big homies at zero growth or negative growth. The time to buy a cyclical is when everyone hates them, not when people are wondering if there has been some fundamental shift in that maybe they can keep that kind of growth going indefinitely. Although I have to admit they are the closest thing to printing money when they are making it, but it can't and it doesn't last. If it did we'd all be living in million dollar dumps. I'm one who'd rather leave the party early while everyone is still having fun and I don't care if I miss a little.

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