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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: LLCF who wrote (29170)	3/23/2005 1:15:01 AM
From: John Vosilla	Read Replies (1) \| Respond to of 110194

I read today that public homebuilder NVR was below a buck in January 1992. Today it is $800. To believe builders have tangible assets that will cash flow and take them through the next downturn is very naive thinking. Most of them have negative free cash flow even during the best of times. Builders build until they go bankrupt I was once told and I lived through the days after they went under picking up incredible bargains that were common for the 1992-1997 time period.

To: LLCF who wrote (29170)	3/23/2005 9:08:02 AM
From: Ramsey Su	Read Replies (1) \| Respond to of 110194

DAK, yes, building can dry up but it will not be bone dry. There will always be some activity unless you expect the mother of great global depressions. In the old days, the builders get killed for many reasons. e.g. it used to far more prevalent to build at least some inventory before having a contracted buyer. Construction loans, including land draw, are all on the hook awaiting this buyer. When that did not materialize, everything came tumbling down. Today, the builders can simply stop building and obligations became minimal. When speculative markets finally collapse, you will find a lot of messy unfinished projects that the smaller private builders simply cannot complete. Just like the daisy chains during the S&L fiasco, these projects are going to end up in the hands of lenders who do not have the expertise to finish them. The textbook work out would be to find a capable partner or take the lumps and sell at market price (under very unfavorable conditions). I suspect the collapse of the early 1990s actually provided the foundation for today's homebuilders. Ramsey

To: LLCF who wrote (29170)	3/24/2005 3:46:17 PM
From: t4texas	Respond to of 110194

well they don't have much cash or even cash. these public homebuilders are always floating bonds or convertible bonds every three to six months months to finance their business. they have to do these big bond issues so often, because they can't self-finance their construction through their own cash flow. this is because their gross and net margins are quite thin. these are the best times they have ever had and their profit margins are only about 10%. the leverage of borrowed money works on the upside and cripples on the downside in such businesses. the public homebuilders the past five years have been a consolidation play in a historically low interest rate environment. timing will be everything.