Hello Jay,
just some random thoughts on the homebuilders. All the data for indicators discussed below are readily available. Furthermore, the homebuilders have odd ending quarters so someone is always reporting something every month, making it easier to spot a trend.
Backlog. This has to be considered the strength of the home builders. Ever builder that I looked at are carrying record backlog into the future and beyond. No builder has given any hint that cancellation rate is anything but normal. In fact, some said it is improving. Backlog is probably not going to be a leading indicator but a confirmation. If this starts to decline, then the end is near.
# of contracts vs price. I looked at a number of builders and compared the percentage increase in contracts vs the actual increase in revenue. DHI is the only builder who appeared to have grown their revenue via building more homes. The rest benefited tremendously from the escalating real estate prices. While no builder is saying that they factor appreciation in their projections, it is unclear how they determine their estimates sales price for each tract. I suspect that if real estate stop appreciating, the profit margin has to come down substantially.
Employment.I have long opined that employment is the single most important factor affecting anything to do with housing. While employment is not strong, neither is it that weak. Furthermore, just like the wealth effect of the equities dotcom bubble era, employment is supported by a real estate wealth effect. This obviously is creating a double jeopardy scenario if employment heads south and real estate appreciation became depreciation as the same time.
Interest rate. Interest rate was not an issue, even if it goes up. However, the aggressiveness of lenders compounded by the high prices are making it an issue now. I had to visit a few bank branches last week and took the opportunity to do some field work. The Wells Fargo guy said business is good. Why? Refi and equity loans doing well, with cash outs. Also the 1 yr, 3 yr and even 5 yr ARMs are getting concerned and are looking at alternatives. The WM guy, after realizing that he had nothing to sell me, said he is concerned with all the ARMs with payments that are at best going to remain same but most likely going up. Any borrower who are stretched to qualify at the initial rate is going to be super stretched as rates go up.
Why do I now think interest rate matters, a lot more than before? Listening to the TOL conf call last week, in the midst of the biggest bull session, TOLL said that average LTV is over 70% now and over 70% are ARMs, albeit the 1-3-5 yr type, not the monthly adjustables. TOL does not sell starter homes. I am certain that TOL has a much higher percentage of cash buyers than other builders. Bob Toll had repeated many times in the past the interest rate would not impact their sales. I think he is in for a rude awakening.
The following is in today's San Diego Union. Look at that cancellation rate.
signonsandiego.com
December 12, 2004
Housing cool-down continues brings normalcy
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If you need more confirmation that the super-heated housing market in San Diego County is cooling down, consider some thoughts from a large builder operating here.
Lisa Gordon, president of Richmond American Homes' San Diego area division, said the number of cancellations from new home buyers seen by the company is running around 25 percent, up from 9 percent recorded in the market's more fevered days earlier this year.
And, she said the days of a quick buck for home buyers wanting to parlay their new house into instant riches are behind us. That's when as much as $50,000 could be charged for the same model house in some projects in subsequent phase releases, allowing early buyers to make quick profits on quick sales.
"It has normalized," Gordon said of new home sales business here.
It may sound strange, she said, but that's a relief to builders as well as home buyers, who both can return to more prudent planning in a less-frenzied environment.
Richmond American set up its San Diego division in January 2003 and this year plans to complete about 550 new houses, focused on the single-family detached market.
The division, which builds houses in North County and southern Riverside County, is looking to expand operations to South County areas such as Chula Vista, said Gordon, who formerly worked for KB Home.
The company says that next year it will have a larger presence here, with plans to build approximately 700 homes in the area.
"All our land is lined up; we're going to be bigger here," said Gordon.
Based in Denver, Richmond American is Colorado's largest home builder and is active in markets across the nation. The company is a subsidiary of publicly traded M.D.C. Holdings Inc.
– CARL LARSEN
Sequential comparison vs y-t-y. Every builder has been reporting blow out y-t-y growth numbers. That should continue for another quarter or two, then the strong 2004 qtrs are going to be very hard to blow out anymore. HOV is already showing sequential declines. With the huge inventory of lots that many of these builders have accumulated, along with the lofty growth projections, sequential decline has to be the leading indicator to watch for. |
