I come at the homebuilders from the perspective that we are in a massive credit induced housing mania headed for a bust, not just a down cycle. Still in the short run, I think Wall Street will price these companies to their contract backlog, as this quarter and perhaps the next are slam dunks in terms of construction.
After that though it's already a little hazy. Note that the MBA purchase index of loan applications (a decent proxy of purchase activity) has fallen from an average of 414 per week in Sept to 385 per week in Oct (I split the 10/3 MBA report). Toll wouldn't comment on new October contracts in their call, just general market conditions, which are still fairly robust. I also noted that many if not most of the "excellent" markets are in financial sector areas like NT, CT, NJ. The others are in bubbleland like Calf, NV, AZ, where Robert Toll freely admitted folks were buying second homes "for investment". If buying a 600K home to keep in "mint condition" like some collectable isn't a mania, I don't know what is? Just an incredible misallocation of capital in the US economy, and a price will be paid for it. I think this housing bubble period will be compared to the TNT sector in 99-00 when it busts. $40 for TOL is unjustified in my mind, especially if the purchase index continues to soften, which it will with every BP increase in rates. Note the purchase index for the comparative period a year ago was 350-360. It averaged about 420 in the quarter just ended, and that popped their business 55%. They are going to be highly leveraged and conversely deleveraged to this index.
Fourth quarter 2003 contracts of approximately $1.02 billion
(1,757 homes), also the highest for any quarter in the Company's
history, grew by 55% versus 2002's record fourth quarter of
$656.6 million (1,205 homes). FYE 2003 contracts of approximately
$3.49 billion (6,161 homes) rose 27% compared to 2002's FYE record of
$2.75 billion (5,113 homes).
Some good commentary on refi and purchase activity that repeats a lot of what I've said here. However, one thing that stands out is the overlay of inverse interest rates and refis. 6% today engenders a fraction of the activity of 6% a year or two ago:
prudentbear.com.
A little more expansion of the consumer credit bubble here:
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