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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 (6165)	5/11/2004 9:22:19 PM
From: mishedlo	Respond to of 116555

I am clueless. I would think they would be better prepared or that land prices do not sink that far. As for mortgages, they could get creamated by defaults. I will see if Splotto has any comments M

To: Elroy Jetson who wrote (6165)	5/12/2004 9:03:30 AM
From: mishedlo	Read Replies (2) \| Respond to of 116555

Reply from Splotto to what is bolded If you look at the balance sheet of a home builder, their assets consist of three primary assets: 1.) a small amount of cash; 2.) land in various stages of development; 3.) mortgages on homes they have previously sold. Well, getting back to my previous points, builders aren't holding much land. They are holding the rights to buy the land in the future. We have an AOS with a seller and once everything is in place, we settle. Of course sometimes we NEED to settle early in order to keep the property (the time runs out on the AOS). However, as a rule we are not holding much land. Big builders lik NVR doesn't do any of their own approvals (at least in this market). They just buy approved/improved lots. That is the JIT inventory I mentioned. It's easy to put the brakes on. Granted it will hurt profits, but that's better then being stuck with unsellable inventory. While many builders have affilitations with mortgage companies or even own them outright, no one I know is holding the paper any longer then needed to flip it. Why hold 5%-6% debt that is at risk? The paper gets sold up the food chain (ultimatly to the GSE's I imagine). Home builders have few assets other than land and mortgages. What makes you believe this downturn will be different from 1991? All I can say is that I don't agree that this is the case in this market. We have a current inventory of approved lots which we are building on right now. We have a bundle of land which we have the right to buy which we could abandon for about a 10% hit (deposit money, cash spend to date, etc.). We, unlike the big nationals, have a large portfolio of rental units to offset the home sales market as well. I just think you need to see the difference between sales slowing in a JIT inventory model vs. a downturn that leads to ruin. The model in the homebuilding industry has changed. I am not saying that there won't be losses on some of the land held, I am just saying that under the new model, risk has been reduced. Splotto

To: Elroy Jetson who wrote (6165)	5/12/2004 9:06:02 AM
From: mishedlo	Respond to of 116555

From GTE on the FOOL I'm no Splotto, nor do I play one on TV, but in my view, the key differences from "Early 90's" are: 1) Builder debt levels are MUCH lower than the early 90's. The financing structure places a greater premium on equity, which is now provided by public shareholders, so the builders themselves remain well insulated from the risk, i.e. personal recourse. 2) Inventory management - Much more of "JIT" inventory approach as opposed to "land farming" in the past. The market has bifurcated with patient private capital primarily taking on the "land farming and initial development" work. Builders take it from there via purchase from the "farmers". 3) I challenge the statement "The value of mortgages, which often represent 100% financing" . Show me a public builder that has a high percentage of 100% LTV loans on the books. Of the few that exist, I'd be surprised if there wasn't substantial levels of mortgage insurance to share the risk. All that said, risk levels are rising for builders, and equity shareholders will take the first hits. In my view, most PE's already reflect this. There are always exceptions on the margin.