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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Elroy Jetson who wrote (6100)	5/11/2004 8:58:03 AM
From: mishedlo	Read Replies (1) \| Respond to of 116555

From Splotto (a homebuilder) on Housing Mish: As for inventory and pre-sales, I consider that activity almost non-existent in this market (SE PA/NJ). No one puts a shovel in the ground until the Agreement of Sale (AOS) is signed and locked in. The only thing we prebuild here are 2 model homes and maybe 1-2% for 'quick delivery' homes for people who are relocating. The simple fact is that our lenders will not give us money to build homes until we have an AOS. Considering that we already have all the money escrowed with the local municipality for all the public improvements (bond, LOC or cash) we are already deep into the bank's pocket and that level of prudence would be expected. From what I understand, in other markets (like North Carolina) they do some prebuilding, but any builder who expects to continue operating after that specific development would be a little more wary. Small builders may be a whole other matter. However, I don't think they add up to much nor would their destruction be a major impact on the economy. Many builders like NVR have a 'just in time' inventory that they buy from developers like us. They take down lots at a certain pace and their biggest exposure is defaulting on the remainder of that contract and possibly losing their ROI on the underlying joint venture. If demand dried up they would simply slip into hibernation mode and choose their communities more carefully. That said, at some point demand will drop. Are we there yet? Perhaps people are buying new houses thinking they can sell their old one. If that is what is happening, then at the turn there will start to be mammoth numbers of homes offered for sale. With people reaching so far to qualify for these larger houses, I don't think anyone is carrying 2 homes. The way I see it, there is A LOT of appreciation build into the existing home market. I think the is room for people to lower the asking price for their exiting home and still be able to buy the new home. e.g. you planned on 200k profit from your existing home sale but it's not selling so you can drop it maybe down to 150K and still make the purchase of the new home. That would be a 25% drop in the window of your pending AOS which might be 6 months. That would be much more of a drop then any of us are expecting. The tipping point is at what point to prices on the existing houses fall so much to render the sellers incapable of qualifying for the new purchase of the home they WANT. That is when demand shrinks and people either need to look at a smaller home (in that case, what's the point of moving) or simply not move. I firmly believe the existing home appreciation is driving the housing boom (caused by cheap money/low rates). If rates were 10%, but the underlying appreciation was still there I think demand would remain at least strong. That is the pool that people are tapping to buy new homes. As for the warning sign, you are dead on. I would keep my eye on the inventory of existing homes (which would grow on a m-o-m basis if sales slowed) as well as the sale prices of those homes. That will point the way. Splotto

To: Elroy Jetson who wrote (6100)	5/11/2004 10:10:03 AM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Turns out I have a small spec homebuilder on my board as well. ItGoesToEleven confirms what you said: =================================================== "Major home builders did not go bankrupt in the early 1990's by building spec homes. They went into bankruptcy by buying too much land, which a year or two into the downturn was worth 1/3 of what they had paid for it." Correct. Land is inventory that makes no payments. Combined with the S&L meltdown, debt-laden builders, short of cash-flow, stared liquidity in the face and lost. That's why so many are "public" now, why deal with bankers debt demands when you can offload that risk on shareholders equity?