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

To: patron_anejo_por_favor who wrote (21577)	1/17/2005 7:02:28 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Part II from RodgerRafter on the Housing Crash I suspect that what we are seeing in terms of a drop off in demand in NV and CA isn't being felt fully yet in the building supplies department because many of the homes under construction now started before the big November slowdown in orders. I think that quantitatively what we are seeing absolutely is new. I doubt we've ever seen prices rise as quickly as they have in the hot spots, and I expcect the fall in prices and demand will be the biggest we've ever seen before. I also think that the level of speculation and the dependence on low interest rates are higher than we've seen in past booms. And of course we've never seen such lax lending practices as we're seeing from these upstart banks and inhouse lenders. I don't think we've ever seen such a high level of oversupply before, either. Whereas booming economies in the past led to booming real estate markets, this time there is a lot more hot air and aggressive selling behind the booms, which makes it much more likely to end badly with a big drop in home prices. If the there was a general slowdown in home buying activity the builders would be effected. But if people bought less cars, auto manufacturers would be affected. Home buildes might get stuck with some land, but rather that then billions tied up in idle factories and huge union mandated layoff compensation. Yes, GM is screwed whether or not the economy tanks. I'm sure you saw that thread. (It's still in the hot topics if you missed it.) The degree of the problem with builders is one of leverage. The more leverage they have, the more likely it is that they'll blow up in a decline. A big enough decline could wipe almost all of them out. I'm expecting rates to rise and the housing market to crash, and that the stocks of some builders will eventually become worthless. They wouldn't shut down completely, as the bondholders would get to take over ownership of the companies. Even if they don't go bankrupt, their stocks could still drop significantly when revenues and profits dry up. For the past few years taking on extreme risk has payed off very well for builders, and the riskiest ventures have grown the fastest. So far I don't see many of them bracing for the slowdown many of think is coming. Home builders are much better off than in the 70's, when they actually owned much more land and built on spec. Moreover they had big inventories of materials now non existent. Again its a question of the degree of leverage, not necessarily what they specifically have in inventory. Take Centex, CTX, the most leveraged of the bunch: $6.6 Billion in Inventory. $9.0 Billion in loans as investments. $1.0 Billion or so in more liquid assests $14 Billion in total liabilities. $3.5 Billion in Shareholder Equity If their main assets take a 10% hit, then they've got a liquidity problem. A 20% decline in values could wipe out their equity. When properties decline in value, most of that decline is in the value of the land, not the house. If inventories are more than 50% land based, and a 10 % drop in property values could easily mean a 20% writedown in inventory assets. Of course I think the loans on Centex's books are even more of a risk. William Lyon Homes, WLS, also is highly leveraged, but without the big loan portfolio: $1.18 Billion in Inventory. $75 Million or so in liquid assets. $970 Million in total liabilities $340 Million in Shareholder Equity Declining inventory values could wipe them out as well, especially since they are entirely in CA, NV and AZ. The question for each investor is: How much do you think property values will decline?