Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: mishedlo who wrote (6235)	5/12/2004 4:00:59 PM
From: Elroy Jetson	Respond to of 116555

Look at Splotto's statements about his own company. He claim's that home builders do not hold large inventories of land -- yet he also said his his own small employer is an exception to this "rule"! So not even his own employer follows the mythical model he claims home builders now use. Just imagine, his tiny employer is selling lots "just in time" to NVR, a homebuilder whose size dwarfs the company he works for. Yet a cursory read of NVR's Balance Sheet shows large inventories of land and puts to lie this nonsense about how home builders don't own large tracts of land anymore. He does suggest that his own employer holds the undeveloped land through partnerships, a technique developed by an ex-client of mine, Bill Bone of Sunrise Development in Palm Desert California. Bill has a PhD in Finance from UCLA and has promoted this technique of off-balance sheet partnerships for small home builders through the National Association of Home Builders. The primary reason for "land partnerships" is that capital gains on land are taxed as ordinary income to a builder. As a consequence, large land holdings are held in a subsidiary company at large builders. Small builders do not have sufficient capital to meet lender requirements to borrow and maintain large land holdings, hence the partnerships. However there is a price for this. Most of the profitability in land development in the finished lot. Profit margins for builders who purchase finished lots are extremely slim which is why most builders either own the land through a subsidiary or own as much of the land partnership as they can afford. Most ridiculous of all, Splotto claims that home builders do not own their own mortgages. Let's examine this. Home builders are extending 100% financing to their customers. This provides favorable "installment sale" tax treatment for the builder. If the buyer could obtain 100% financing for these new homes, why is the builder even involved? Smaller home builders do not have the capital to hold mortgages for long. As a consequence small firms hold each mortgage until there is sufficient appreciation to bring the loan to value ratio down to the level where the mortgage can be sold. Of course this means when a downturn occurs the only mortgages they still hold are those most likely to default! Bill Bone developed a superior strategy for this process. He offered only adjustable rate mortgages to his buyers modeled on his "warehouse line of credit" from Bank of America. In this way he was able to keep all mortgages until maturity with a 75 basis point profit spread built in. Once he reached his lending limit with B of A he purchased a savings and loan to roll the loans into, eliminating the need for the B of A loan. Large home builders already control a separate banking unit, such as Weyerhaueser Mortgage for Pardee. I doubt very much that Splotto understands the financial structure of his own employer and the risks they are incurring. Every home builder always has always claimed to use "very sophisticated hedging strategies to eliminate risk". > > > > This is why almost every home builder went bankrupt in the early 1990's. The only antidote to this is a "Capital Heavy" financial structure like Pardee enjoys as a subsidiary of Weyerhaueser Corp. A review, once again, of some sample home builders (below) reveals that most still use a "Debt Heavy" financial structure, regardless of what they may claim. Balance Sheets always trump bullshit. Centex $11 billion Annual Revenues $12 billion Assets at market value $9.0 billion Debt (-$3.0) billion Downturn Equity Pardee Homes, a division of Weyerhauser (I used to work there) $ -- Revenue not publicly disclosed $5.5 billion Assets $0.0 billion Debt $2.5 billion Downturn Equity Ryland Group $3.5 billion Revenue $1.7 billion Assets $1.2 billion Debt (-$0.8) billion Downturn Equity NVR Inc $1.0 billion Revenue $1.4 billion Assets $0.9 billion Debt (-$0.2) billion Downturn Equity