April 18, 2007

Bizarre-o-world: Homebuilder stocks jump because they're (supposedly) adding more dead inventory into a crashing market

We're officially in la-la land now.

The untrustworthy and error-prone Commerce Department new home permit numbers yesterday prompted the media to deceptively headline that homebuilding rebounded - up 0.8%! Party time!

This is strange in and of itself because the number was actually down 23% year over year, which is the only number that really matters. It was up 0.8% vs. the month prior, but nobody looks at month to month (nobody smart that is). Plus the numbers themselves were bizarre (and obviously so error filled they're worthless). A 44% surge in the midwest and down in all other regions. Yeah, right. Detroit and Cleveland we need more houses!

So homebuilder stocks rallied off their lows, as Wall Street bets are coming in the the housing crash is over, because they think homebuilders are building new homes at a faster pace (which they aren't), which is great news - more inventory! (which is actually terrible news)

Confused? Because Wall Street sure is. They should be FREAKING OUT that homebuilders are building ANY homes, given that inventory is skyrocketing and sales are falling. This would be like celebrating that Global Crossing was laying more fibre-optic lines during the telecom crash. More inventory! Great news!

Even the government warns people not to rely on these numbers - with AN 11% MARGIN OR ERROR ON EITHER SIDE! Permits flat? Maybe - they could have been down 11% or up 11%, f*ck, we just don't f*cking know! Don't trust us!

Folks, there's an 8.1 month supply (at least) of dead inventory out there, only fools are buying houses, you can't get a mortgage anymore, and the number of completed but unsold homes is up 43% vs. last year, at 179,000 unwanted units (thanks housingdoom!)

Bottom line - homebuilders are on the way to Chapter 11. Adding ANY more inventory into this disaster is a horrific business model. And this will all end so, so, so badly.


Ajay said...

Great Read:


Anonymous said...

Regarding the dramatic jump in the Midwest...it doesn't surprise me. I live in Omaha and I can honestly say our area has been in "boom-mode" since 2003 and if anything, things have been accelerating over the past twelve months.

I have friends in Des Moines, Iowa who say the same thing has been going on in their area. My home, in Omaha, would sell today for roughly 13% more today that it would have one year ago.

Bust? Not here.

Anonymous said...

People are looking at a report with a 22% margin of error swing and buying stocks because of it?

They're screwed

DM1976 said...

"(DR Horton) the nation's No. 2 home builder, reported that the number of new homes it sold in its fiscal second quarter fell nearly 37 percent. The value of those homes fell about 40 percent to $2.6 billion in the period, which ended March 31."

"New home sales: Slowest in six years"

"Last month Horton CEO Donald Tomnitz told an analyst conference that the market for new homes "is going to suck, all 12 months of the calendar year.""

"The worst declines were in California, where volume was down 59 percent, and value of the homes sold fell 56.8 percent."

After reading all this I totally understand why the stock market is up and celebrating the good news...

Wait! What FN good news!?!

Pump and dump... keep everything high while the insiders get out, then let the whole mess collapse.

I got out almost 400 points ago (Dow) and my broker keeps rubbing in every climb... "See, I told you it wasnt' going to crash..." I'm in gold and silver for now and I'm short a few things waiting for the denial to end...

Anonymous said...

Unfortunately, it's not so simple as saying "builders, stop building". After all, that's what they do: build homes!

Builders are in a Catch-22: they need to maintain the facade of operating as business as usual, for if they don't keep building their individual stocks will plummet. As in the buyer vs. seller RE market, all the builders are waiting for the OTHER guy to 'blink' first, but there's definitely alot of sweating going on.

Scuttling the infrastructure of the builder's business will be costly: you can't exactly lay-off your all your staff, and then expect to quickly reassemble the team to start up again if things 'turn around'. So they're forced to cautiously downsize without killing themselves.

As noted, many of the builders rely on illegal labor, and they've already let alot of those workers go (and they're easier to pick back up, if needed; they'll leave the fields for construction, if given the chance).

Bottom line: this stock rally is a bull trap, and no doubt an excellent time for bears to buy homebuilders stock for the purpose of shorting / buying puts.

Anonymous said...

The weather can cause a big change YOY in the Midwest or NE.

Don't know why they'd build so many houses in Omaha or Des Moines...are there really alot of businesses expanding?

I guess farmers are doing well...corn prices skyrocketed (doesn't that mean they're GOUGING??)..due to the ethanol nonsense.


Wall St. frequently celebrates bad news. There are two main reasons why: (1) bad economic data makes it more likely that the Fed will lower interest rates thus benefiting businesses and increasing the likelihood that people, unhappy with poor returns from savings will invest in stocks, and (2) a company that is doing poorly may be an acquisition target and may be bought out for a premium.

These factors are no doubt perverse, but they are very real.

Anonymous said...

Given how ridiculous the run-up in prices has been over the past few years, I would expect that builders will keep churning out new homes far longer than people expect.

The only thing the builders care about is if they can sell the homes for more than they cost to build. Home prices have a long way to drop before they get anywhere near cost.

As in any competitive market, the builders will overbuild until there's no profit to be made.

Anonymous said...

Omaha has been fairly insulated from the housing boom the last couple years. Even with that being said, there is trouble brewing here too. My father has been a carpenter in Omaha for 30 years. For the last couple months he has been without work for the first time ever. Pretty good indicator that whole industry is a mess.

Anonymous said...

Lies, Damn Lies, and statistics

Anonymous said...

Poor old homebuilders. What can they do except build houses?

Make jam?

Actually, that's an idea - loads of people would want to buy a house pre-stocked with delicious jam.


deDesertKnight said...

They should be FREAKING OUT that homebuilders are building ANY homes,

thats what I say...

Anonymous said...

Regarding the dramatic jump in the Midwest

go to themlsonline.com and you'll see: "53,121 home listings of Twin Cities and Minnesota Real Estate."

like last year, the numbers seem to go up 1000+ per week and there are lots of homes for sale under $100,000, that's what I saw the last time I looked-- in the more dicey neighborhoods where the city of minneapolis started assessing the junkly little homes there at $200,000+ even though crime abounded....

depending on where you are, it could be the ethanol subsidies which are impacting the local economies-- although, we'll have a hangover from ethanol's environmental impacts down the road.

irrationally complacent said...

Seems like a good reason for the market to rally!

stuckinthecity said...

Folks, there's an 8.1 month supply (at least) of dead inventory out there,

...And all that inventory is OVER PRICED! I would be different if people could actually afford one, or two.

hayley said...

Can someone please explain this or am I living in an alternate universe or is the Bush Whitehouse living in an alternate universe (much more likely)

From MarketWatch:

"Healthy inventories and a rebound in refinery activity should help ease prices for crude and gasoline," said Rakesh Shankar, an economist at Moody's Economy.com.`

From Bloomberg:
April 18 (Bloomberg) -- The average price of gasoline in the U.S. might touch a record this summer because of refinery disruptions and the high cost of crude oil, Energy Secretary Samuel Bodman said.

Anonymous said...

Yea those stupid Wall St guys sure are stupid what with their fancy shmancy MBAs from Wharton and Kellog. WTF do they know about? I would much rather listen to the advice of anonymous posters on blogs who check in on their 15 minute break at work.

Anonymous said...

Folks, there's an 8.1 month supply (at least) of dead inventory out there, only fools are buying houses, you can't get a mortgage anymore,

I disagree. Mortgages are still very easy to get. For all the talk of lenders clamping down on subprime, etc I think it's business as usual.

Every 2nd radio/tv commerical I hear/see if for some kind of mortgage product. And all of them have the same "we work with poor or no credit individuals" tagline. No different than 6 months ago.

Now they have 40 and I've even heard 50 year loans available(!!). They will create 1000 year loans if need be, but they will still lend out money to anyone with a pulse and people will still take those loans thinking they MUST buy a home no matter what.

And that is the reason IMO why prices have yet to fall substantially. Still plenty of greater fools out there buying with easily available mega-toxic loans.

dow at all time high said...

we should sell short all stocks especially homebuilding stocks now......i am very smart that way and would have made a lot of money if i done so

Anonymous said...

Newsflash: Dow hits new record.

How's that prediction of 7000 DOW coming along HP bubbleheads? Look back at archived posts from late feb. Any of you geniuses man enough to admit you were dead wrong?

Mort? Richard? Keith? Anyone?

David in JAX said...

Anonymous said...
Regarding the dramatic jump in the Midwest...it doesn't surprise me...

Is this from "investors" moving out of the Florida, Arizona, California, etc. markets that are falling and into the Midwest? I know that the housing market is complete toast in Florida, and the dumb money had to go somewhere. This is a legitimate question and not a comment.

Anonymous said...

Hey Keith genius, how's your short on NDE doing?

Ouch, that must hurt!

But we've been here before when your HD puts expired worthless... How much money have you lost so far on your genius stock picks?

Mr. Long Housing

Anonymous said...

Lots to choose from in St. Louis with builders still going full on balls to the wall with development projects of all types. No slow down on mortgage lenders advertising on the radio – Golden Oak Lending Jet Copter Hamster Commute Sky Chief reports in regularly. Some places have been on the market for going on a year and there are a ton of places with no occupants. Realtor buddy of mine (she’s a decent gal trying to make a buck – works part time selling houses and full time for a paycheck with another company) told me straight up that there just aren’t very many buyers out there looking at this time and the only places selling quickly are the ones that are priced right (translation – cheaper than everyone else with a similar house in the area).

One bedroom community that I’m interested in that has a population of about 45000 has 426 properties that are SFH with at least one bedroom/one bathroom for under $200,000 – and growing. I’m going to have a butt load of houses to choose from by fall. I’m a patient guy with lots of self-control. The same community has a sh*t load of builders who are still building.

Anonymous said...

NEWSFLASH: Bankruptcy filings hit 18-year low

Hmmm DOW is at record. Bankruptcy are at 18 year lows. Unemployment is under 5%.

Yup it'sa great depression.

Hayley said...

"I got out almost 400 points ago (Dow) and my broker keeps rubbing in every climb... "See, I told you it wasnt' going to crash..." I'm in gold and silver for now and I'm short a few things waiting for the denial to end... "

I agree with the poster, this is the first investing I've done in about 10 years (I actually decided to take advantage of the 0% money they've been throwing at me the past ten years) and the longer it takes for the fall, the more time it's given me to get reaquainted with the markets (I don't invest in the US) and position myself for the next few years.

I think denial is probably the most plausible explanation for why the DOW industrial railroad keeps running. People really believe that if they are doing the wrong thing then something bad will happen to them. Since nothing bad has happened to investors in quite some time (I really don't even count the tech bust because those gains, while not ill gotten for the average AANG (all around nice guys), were just pleasant surprises as opposed to the hard earned nest eggs that now occupy their little Merril Lynch accounts.

Wait until they wake up with the feeling they didn't do anything wrong and their money starts slipping away. Wait until they realize their "buddy" the investment guy doesn't really do sh** with their accounts following his intitial presentation and up-front commission.

That's when Keith's prediction will come true about cash being king.

Personally I hope to watch the investment community go down with the two party system. I think both institutions are pretty much beyond saving.

Anonymous said...

Am I crazy? Briefing.com and some other economists are forecasting 6.5 million (annual rate, seasonally adjusted) existing home sales starts for March. Looking at the data posted on this site and other blogs, I come up with March existing sales (national) of between 400,000 and 500,000 (non-annualized, not seasonally adjusted). The factor for converting March raw monthly data to seasonally adjusted annual is 12.45. If you multiply 400,000 to 500,000 sales by 12.45, you get 5.0 to 6.2 million annualized seasonally-adjusted starts for March. My best guess would be right in the middle, 5.6 million.

Is it possible that so many big-shot economists could be so wrong? I guess we'll find out on April 27. Maybe that's the day it all comes unglued.


I think big-shot economist play it safe by extrapolating data. And maybe they missed a big inflection point in early March.

its all bull said...

IMHO the markets will keep going up due to inflation from the Fed until foreign investors get sick of it and pull out from the US markets adn dump the US$.

Here's a little factoid for the bulls:

US markets up 6% since last fall

US dollar down 8% since last fall vs most other currencies

You are actually down 2%

With that being said, being a bear is not good either. The Fed will kep pumping liquidity into the system until the printing presses blow up. The best thing to do is buy precious metals or foreign denominated stocks and bonds.

rogersmith8080 said...

If this keeps up it will be the home builders and not the foreclosures that cause the panic selling.

"NEWSFLASH: Bankruptcy filings hit 18-year low

Hmmm DOW is at record. Bankruptcy are at 18 year lows. Unemployment is under 5%.

Yup it'sa great depression. "

Wait a minute your Right! Don't forget inflation is under control too as long as you discount the cost of Housing, Energy(Gas) and food. That is about 75% of what my paycheck goes to and it is not included in the inflation numbers!

Reminds me of the old saying: "Figures lie and liars figure".

They said pretty much the same thing just before the Dot-COM bubble burst. But wait folks it is different this time.

Shakster in the pits said...

Okay- I will say I was wrong just for you.Now since I am wrong alot I will predict that the Dow hits 15,000 next,sure fire,no doubt.
But then again their is still alot of time left in 2007 for it to go to shit.Nah ,I predict 15000 cuz I don't get it.LOL HAHA.

Shakster at the GUN SHOP said...

Go ahead ,GO LONG the DOW,it's a sure thing,slam dunk retirement.OH Yeah.I'm might be wrong alot,but not this time,IT's DUE.Come-on do it ,get in before your locked out!

Anonymous said...

I find it frightening that things have gotten so much worse in Europe in terms of crazy unaffordable.

In Milford CT, a nice New England town along the shore, a 1000 square foot shit box house is going for (not selling for but offered for) 300k. Which is absurd of course. What is actually SELLING I don't know. But if you know anything about the value of a dollar (meaning you worked for that dollar) 300k is ridiculous.

But that somehow it was possible for Europe to get even 2 or 3 times more distorted, Wow. That means it's possible for that to happen here (in the land of the fat).

Anonymous said...

Catherine Reagor
The Arizona Republic
Apr. 18, 2007 12:00 AM

It took three tries, but a large swath of state-owned land in north Phoenix's Desert Ridge finally sold at auction for a record $149.45 million.

The sale not only is the highest price a developer has paid for a piece of Arizona land, it also is an indicator of where the Valley's housing market may be headed.

Rightpath Limited Development Group bought the 269-acre site near Loop 101 and Tatum Boulevard, where it is planning to build 3,700 homes, condominiums and apartments during the next several years.

Phoenix home prices actually went up in March.

Zulu...Gee Wilakers Captain Panic, I shorted all my stocks in Feb and now what should I do?

Spock... That is not Logical.

Captain Panic.. Oh, don't worry about the stock market skyrocketing or houses going up in Phoenix, it will crash... some day... some day.... some day...

Anonymous said...

It is the ethanol craze.

I am buying corn futures.

Anonymous said...

Please, do not suggest that they should stop adding inventory. They might actually begin to understand the concept. The more inventory the better. The greater the inventory, the greater the price crash will be.

Builders, don't listen to Keith. Keep building as many as possible. The banks can handle the construction loses you throw at them. After all, the Fed can always print up more money at any time.

Anonymous said...

Samuel Gerdano, executive director of the American Bankruptcy Institute, a non-partisan research group, attributed the precipitous declines on a surge in bankruptcy filing at the end of 2005, when Americans rushed to file before the new law took effect.

Anonymous said...

Pulte lowers forecast
Michigan-based builder sees wider loss in signal that housing market remains weak.

house of pain said...

Tucson home firm files for Chapter 11
AmericaBuilt Construction, its affiliate hit by slowdown
By Shelley Shelton
arizona daily star
Tucson, Arizona | Published: 04.18.2007


The slowing real estate market has claimed its first victim among local home builders.
The nearly four-year-old AmericaBuilt Construction Inc. and its affiliate, AmericaBuilt Communities Inc., filed for Chapter 11 bankruptcy reorganization Thursday.
The companies, which made $12 million in sales last year, are reorganizing in response to the housing market downturn, which has resulted in fewer people getting financing for new homes, said Eric Slocum Sparks, company attorney.
The filings list as creditors numerous contractors owed as much as $238,000 for their work, as well as individuals who have paid deposits of up to $351,000 for homes under construction.
AmericaBuilt Construction is the building arm of the company, while AmericaBuilt Communities owns the real property and the homes, Sparks said.
"I assume AmericaBuilt is the first of many that are going to have to reorganize in order to stay in business," he said.
The companies' owner, Ron Peetz, is working to finish building the homes for which deposits have been received, Sparks said. Peetz could not be reached for comment.
"The intent is to build out all these properties, get these properties sold and stay in business," Sparks said.
AmericaBuilt Communities' list of 20 largest creditors includes individuals who have put down anywhere from $3,000 to $351,000 for new homes.
Sharon Chaimson has about $28,000 tied up in her home-to-be in Vactor Ranch, the site of the defunct Tack Room restaurant.
"I was very surprised that happened at that subdivision, and I'm hopeful that the home will be completed in a timely fashion," Chaimson said.
It's in an attractive part of the city, because there isn't anywhere left to build in that area, she said.
Amy Shimel, who with her husband has given AmericaBuilt $3,000 in earnest money to build a home near Interstate 10 and South Craycroft Road, said she was surprised to hear of the bankruptcy filing.
The couple put their money down in December and have seen several building delays since then, but nothing that alarmed them, she said.
The company always communicated quickly when there was a delay and gave good reasons whenever it happened, Shimel said.
Sparks, the attorney, said AmericaBuilt is working on getting permission to use money from sold homes to finish building homes for which deposits have been taken.
"All the people that have put up deposits for homes to be built, I think they're in good shape," he said.
AmericaBuilt Communities has about $8 million to $9 million in secured debts — that is, debts to banks and financial institutions — and if AmericaBuilt Construction were to liquidate all its existing lots without developing them, the company could pretty much break even, Sparks said.
But it stands to make money by developing those lots and selling the homes, he said.
Meanwhile, subcontractors are waiting to be paid as well.
"We're really hoping they're going to pull through," said Jennifer Green, office manager for ROR Construction Co., which is waiting for $238,000 in payments from AmericaBuilt.
"We're not a big company. That's a lot of money to us," she said.
The Chapter 11 filing has affected ROR's ability to pay some of its own bills, but ROR will continue working with AmericaBuilt, Green said.
"They were always a good business to work with," she said. "We all know what the housing market is doing right now."
Donald Strittmatter, another of those waiting for a new home, said he isn't worried about the $351,000 or so that he already has given to AmericaBuilt.
"They don't owe us any money," he said. "We pay for it as they finish a portion of the construction."
At the time of the Chapter 11 filing, the home was about a month away from completion.
Strittmatter said he's pretty confident that it will be completed soon enough once the court decides how best to consolidate the company.
"I think they're a good, solid company," he said.

buy_high_sell_low said...

Markets can stay irrational longer than you can stay solvent.

bozonian said...

For two days now on my way to work in Riverside, California, there have been house fires in neighborhoods alongside the freeway. I've never before seen even one house fire like this.

I wonder if people are "liquidating".

I'm just sayin' is all.

Anonymous said...

You will see tremors in the markets today - Dow will go down a lot - you'll see.

Anonymous said...

"Please, do not suggest that they should stop adding inventory. They might actually begin to understand the concept. The more inventory the better. The greater the inventory, the greater the price crash will be.

Builders, don't listen to Keith. Keep building as many as possible. The banks can handle the construction loses you throw at them. After all, the Fed can always print up more money at any time. "

Amen to that. As someone interested in buying a house in the near future (1-2 years), I cheer everytime I pass a new development. If you build it, they will come - Yes, yes, yes! Add more inventory. Don't worry, it will sell (eventually).