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

To: russwinter who wrote (54693)	2/25/2006 3:06:27 PM
From: Ramsey Su	Read Replies (2) \| Respond to of 110194

Russ, this article was linked by you and others yesterday. money.cnn.com As expected: But the trade group's survey found only 15 percent citing job losses by buyers as a cause for the cancellations. The survey, which allowed the builders to cite more than one cause for cancellations, found 45 percent saying it was due to a buyer's inability to sell their existing home and a third citing the buyers not being able to qualify for financing at a time of rising mortgage rates. But Seiders and others say a big concern is a factor not cited on the survey, the fear that cancellations are being driven by real estate investors who were ordering new homes with the intention of selling them quickly in a hot real estate market. And Seiders said many of the 72 percent of those surveyed not yet reporting an increase in cancellations are already worried. Let us examine this cycle by looking back to around 2002. Decline in interest rate - lower underwriting standards - active real estate market - price appreciation - more equity - easy MEW - MBS market at risklessly low rates - second homes - investments - more active real estate market - more price appreciation - more equity - third homes - more investments ..... on and on and on ...... For months, I have been searching for the best way to describe how this cycle is different from previous cycles. I believe I have found the best words: RISK LAYERING. Never before, in my opinion, had so many layers of risk been piled on to drive the real estate market. Now the cycle may be reversing, could this be the way that it is going to play out? Increasing rates - stagnant prices - higher inventory - no more MEW - no more flipping - less sales - no trade up - sell third home - sell second home - sell primary residence - negative cash flow - short sales - neg equity - defaults - REO - on and on and on ...... So how can we make some money? This led me to one thought this weekend regarding the homebuilders - BACKLOG. Backlog is the backbone of the business, the support for most earnings guidances and bullishness. However, backlogs are not certainties and are exposed to changes over a long period of time. How vulnerable is this backlog? I dare say that if interest rates go up 2% across the board for all loan products, 90%+ of the backlog would be wiped out. I dare say that if the CTX 24 hr sales or the DHI 30% discounts in the Sacramento area becomes the norm vs isolated markets, 90%+ of the backlog would have to be renegotiated in some manner. I dare say that if nationwide home prices drop by 10% AND it triggers a sell off reaction of some magnitude, 90%+ of the backlog would have to be renegotiated in some manner. How realistic is that? TOL just reported their cancellation rate is up to 8.8%. This is significant because TOL is famous for their huge deposit requirements usually at over 5% plus cost of upgrades. They charge over 5% even for California, knowing they can only keep 3% maximum just to psychologically lock buyers in. So there is some serious money being lost when buyers cancel a TOL backlog. WLS is already seeing their cancellation rate jump to just over 30%. So far, most are using the "normal" slow time of the year as the excuse. As soon as the busy spring selling season rolls around, all will be well. I think therefore this is a great signal to watch for. If this spring selling season is disappointing for the homebuilders, then I suspect a number of them is going to be seeing not only declining earnings this year but some could potentially be switching from record earnings to record losses.