Uh-Oh: Bonfire of the Builders
I have been stating for quite some time that we are only halfway through the Housing downturn, if that. The huge inventory overhang, increased mortgage rates, tightening credit regulations -- and a lack of new buyers -- are conspiring to make this cycle at least a 5 year or so process from the top (August 2005).
Now, we have heard many many erroneous Housing bottom calls from all manner of interested folks: former NAR economist David Lereah was a notorious bottom caller, as has been Treasury Secretary Hank Paulson, and even in CNBC/RealMoney's Jim Cramer (November '06).
All those prior bottom calls turned out to be dead wrong.
However, a recent item caught my eye, and suggests that perhaps we are closer to a bottom -- at least in the Builders -- than I may have realized: the cover story of the most recent BusinessWeek.
Now, before you run out and buy Toll Brothers (TOL) or Beazer Homes (BZH), quite a few caveats are in order.
First, magazine covers are notoriously imprecise to use as a Buy/Sell timing signal. We often do not see the true results -- did a cover story truly mark the top or bottom of an issue -- for many months if not years. Consider the Time Magazine Cover "Why we are going gaga on real estate" -- it was a mere 2 months from the peak in the housing cycle. Shorting the Home Builders then would have been painful for a few months, but then become highly lucrative.
Second, the jury is still out on a more recent BW cover: It's a Low, Low, Low, Low-Rate World: Why money may stay cheap longer than you think. That came out in February, and since then rates slipped lower, moved much higher, and then retraced some of those gains. As the author of that cover story, Mike Mandel, noted "Magazine cover curse had been evaded--so far." That is mostly true in terms of interest rates, it is far less so in terms of the availability of credit (see The Credit Window is Now Closed).
Still, its premature to claim that particular cover was a great indicator (yet).
And its worth noting that BusinessWeek may very well be a less reliable contrary indicator than mainstream publications like Time or Newsweek -- if only because BW covers these sectors anyway.
When an economic issue makes the cover of Time, its guaranteed to be already very late in the game. With BW, that's not necessarily true. I suspect BusinessWeek gets lumped into this group -- more so than Barron's or Fortune, or Forbes -- because they have never lived down the Death of Equities cover article . . .
>
UPDATE August 8, 2007 3:12pm
I see in comments that Calculated Risk (coincidentally) covered the same story yesterday, but reached a somewhat different conclusion. We are sympatico on the macro picture, but I think this bounce will be high enough to sucker some EMH believers back in . . .
>
~~~
A nice table accompanies the issue, showing the Home Builders performance
click thru for full table
~~~
For more on the Magazine Cover Indicator, see these articles
~~~
Sources:
Bonfire Of The Builders
Mara Der Hovanesian
Businessweek, AUGUST 13, 2007
http://www.businessweek.com/magazine/content/07_33/b4046601.htm
Home Builder's performance Table
http://www.businessweek.com/table/07/0802_homebuilding.htm
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» Pending home sales index drop to lowest level ever from The Big Picture
Ouch!The battered housing sector took another blow Tuesday, with an industry group reporting that a gauge of pending home sales tumbled to its lowest level ever as the credit crunch restrains purchases. The National Association of Realtors' index for p... [Read More]
Tracked on Oct 2, 2007 1:38:17 PM
Comments
High Interest rates are suffocating the economy already.
In the last three decades when the last(quarterly average) rise in interest rates takes place
and Nominal GDP year-over-year growth starts to decelerate , the Fed has
cut rates in within one quarter of this event, every time except for 1998.
This time around we are in the fourth quarter of declining Nominal GDP growth.
By this measure, Mr. Bernanke is already late!
The lower US Dollar, high CPI rate and the Chairman’s reputation, prevent
the Fed from lowering rates.
See this graphically at “Fed Meeting “, August 5, 2007
www.wrahal.blogspot.com
Posted by: will rahal | Aug 8, 2007 9:12:10 AM
Hank Paulsen to the rescue
http://fms.treas.gov/tip/auctions/tio-announcement-355-08082007.pdf
Here's another $12.5 billion to "help" out with that housing "issue".
With what Toll released and the stock is up a buck????? same with BZH..
The madness continues
Ciao
MS
Posted by: michael schumacher | Aug 8, 2007 9:59:36 AM
These have been crowded shorts for quite some time . . .
Posted by: Barry Ritholtz | Aug 8, 2007 10:10:16 AM
Toll Bros. Forecasts Another Brutal Quarter http://usmarket.seekingalpha.com/article/43860?source=d_email&u=3686
Toll Brothers said Wednesday morning in a preliminary earnings report its FQ3 revenue dropped 21% amid a widespread housing slowdown. The number-one U.S. luxury homebuilder forecast net revenue of $1.21B, down from $1.53B a year ago. This will mark its forth straight quarter of shrinking revenue, as homebuilders struggle with falling prices, tightening credit availability, and buyers intent on waiting for even lower prices. "You need some confidence on the buyer's part that when they do buy that home, it's not going to go down in value," Victory Capital Management analyst Jack Lake told Bloomberg. Toll said Q3 net signed contracts would be down 31% to $727 million, backlog would drop 34% to $3.67B, and cancellations would be 23.8% vs. 18.9% last quarter. Toll estimated its pretax write-down for land and land options at $125-175 million. "We are now in the twenty-third month of a down housing market," CEO Robert Toll said. "With the uncertainties roiling the mortgage markets right now, the pace of home sales could slow further until the credit markets settle down." Toll reports Q3 results on August 22.
Posted by: Bobby Toll | Aug 8, 2007 10:13:56 AM
Didn't ben say something about contained?
http://www.ft.com/cms/s/887b2398-45ae-11dc-b359-0000779fd2ac.html
Toll warns on deepening housing slump
By Daniel Pimlott in New York
Published: August 8 2007 15:07 | Last updated: August 8 2007 15:07
Toll Brothers, the largest US luxury homebuilder, on Wednesday warned that home sales might fall even further in the latest sign that the worst housing slump in 16 years has not yet reached its lowest point.
“With the uncertainties roiling the mortgage markets right now, the pace of home sales could slow further until the credit markets settle down,” said Robert Toll, chief executive, as he announced that Toll Brothers’ revenues fell in the company’s third quarter. “We are now in the twenty-third month of a down housing market. Hesitant customers remain on the sidelines, unsure of whether home prices have bottomed.”
Lenders have been raising requirements for home loans following a flood of defaults and late payments on homes purchased with subprime mortgages. This, combined with still falling prices across most of the US, has deterred home buyers, leading to a string of poor results and losses for major US homebuilders, such as KB Home and DR Horton, over the last year.
Posted by: me | Aug 8, 2007 10:19:22 AM
BR-
Totally understand that however with horrible fundies and yet another revision to it's guidance (well not officially) would that cause me , as a short, to cover??..no way.
THis is something else. Not weak shorts.
Just like the financials leading the way on monday.....after BSC "assured" the market. And then they quickly turned there attention to it's share price (that was at a 2 year low at the time).
No these rally's are not the work of shorts...they certainly contribute to it but it's not coming from them initially.
See post #2 for the "help"...
Ciao
MS
Posted by: michael schumacher | Aug 8, 2007 10:22:11 AM
Speaking of madness continuing, we had a surreal experience last night. We live in an older neighborhood in a medium-sized North Carolina city. The old lady who own the 60-year old house three doors down is going to the nursing home, and her kids put her house up for sale. A local scrape-and-build guy bought the house and is planning to tear it down and replace it with a new megahome. He met with the neighbors to discuss his plans, because we've already succesfully blocked other infill. He's a nice enough guy and I understand he's just making a buck. The surreal thing was when he got into who he thought would buy the house. First, he says "this house will be bumping up on 950K." To you New Yorkers, that might seem normal, but that still is hard to contemplate in NC. Next, after explaining he's building a spec home, he says, "the buyer will probably be a couple, around 37 or 38, with kids age 6 and 4." Christ. I must be getting old, but that just seems fucking nuts. Where is this all going to end?
Posted by: tuolome | Aug 8, 2007 10:27:15 AM
In the ultra value portfolio that I run on bloomberg, many homebuilders are showing up. Its scary, but this portfolio has really performed in the past. I think I am going to wait for some very large event to happen before I jump into these. These type of cycles tend to have an easily identifiable event as a catalyst that shows there is a sea change.
Posted by: mickslam | Aug 8, 2007 10:33:07 AM
MS,
The short side is a very different trade than the long side. The whip in heavily shorted names forces under-financed investors who are late to the trade to cover. Shorting is an art....very few people can do it successfully. Fundies and earnings revisions are barely useful once a sector has fallen apart.
Posted by: matt m | Aug 8, 2007 10:37:00 AM
With the announcement of pending home sales up 5% last week, mortgage applications up 8% this week, and the ten year yielding 4.85%, it's hard to stay short the builders.
The housing industry is going to suck probably until spring '08 at the earliest. But I think there's a chance the bears who spread the false BZH bankruptcy rumor for the obvious purpose of covering their shorts may have created the capitulation selling needed for a bottom in the stocks. It was a classic puke 'em up at any price.
Posted by: Groty | Aug 8, 2007 10:39:48 AM
Well aware of that Mat...I've been successfully shorting for years, this is my primary source of income. Although one can argue that crowded shorts have contributed to this "rally" it is by no means the cause of it. The abolishment of the uptick rule has greatly assisted the ability to go short (and also provide the few who control the mechanics of the market the ability to squeeze them out when they want to- A KEY CHANGE IN THE MARKET) Not based on technicals, fundamentals....just because they can. Take a gander at XHB......you think that's normal market forces at work??
I find it hard to believe that all the overhangs in the market (far too many to list here) are discounted the very day after they occur and that the rally's we see are caused by weak shorts.
The institutions are now swimming against the tide (as witness to breadth and internals) they have had a following sea for the entire year. I still believe that they are distributing into all these rises (volume indicators have been horribly inaccurate on both ways for a few weeks now)but the market just ignores that (how it's ignored is completely relative).
Take a look at the headlines at Yahoo finance.......any one of those would tank the market easily and would keep most from jumping in blindly and contributing to a rise that has no basis in any technical or fundamental cause.
But all of that does'nt mean I can't profit from it...my long term shorts just keep getting fucked with for no other reason than
pure and utter denial by the people who control the media and all "official" releases. It's in such contrast to what is really happening. But hey we are less than 300 pts away from that record.......again.
Ciao
MS
Posted by: michael schumacher | Aug 8, 2007 11:03:35 AM
This really depends on the underlying thesis of the article, doesn't it? There are several aspects of the housing cycle cycle, and therefore several turns to look for, including inventories, home prices (new and existing), land prices, and homebuilder share prices. The last one is a leading indicator of some of the others, and is therefore least likely to be accurately called by Business Week or David Lereah. By contrast, price declines lag inventory builds as sure as night follows day (for example).
Posted by: John F. | Aug 8, 2007 11:03:58 AM
Maybe not a bottom, but enough for a bounce. I sold my TOL put position two days after the BZH bankruptcy rumor, and was very grateful to get out when I did.
Posted by: David | Aug 8, 2007 11:05:46 AM
Groty,
Even though the 10 year note is under 5%, lenders are repricing risk in the wake of the last couple weeks' credit fiasco.
For example, Wells Fargo recently raised its 30-year rate on jumbo mortgages from 6.875 to 8%:
http://money.cnn.com/2007/08/07/real_estate/jumbo_jam/index.htm?postversion=2007080711
Many of the new construction homes on either coast will easily exceed the $417,000 conforming threshold.
Higher mortgage rates combined with lenders' tightening of standards is only going to choke-off the builders' air supply further.
Posted by: Pool Shark | Aug 8, 2007 11:06:47 AM
"We're at the bottom right now in housing."
-Wachovia Senior Economist Mark Vitner.... THIS MORNING, 8/8, commenting on new mortgage apps.... (perhaps on the way into the office for the first time after a 3mo sabbatical..??? I hope?)
Posted by: jswede | Aug 8, 2007 11:10:33 AM
MS,
If you are short XHB, be aware that the recent double bottom that held at 24.5 on the 1/2 point P&F chart was the first bottom to hold since May, and todays 28 print is the first little double top breakout in 3 months on the scale chart. Sector's been an easy win...but if you don't respect the laws of supply and demand in the market, they carry you out in a box.
Posted by: matt m | Aug 8, 2007 11:12:57 AM
When you have at least two or more publicly traded homebuilders go belly up, you have much less capacity in the homebuilding mkt, and a bottom in the stocks. Any short covering rally before then is a great opportunity to get back in on the short side....IMHO
Posted by: pjfny1 | Aug 8, 2007 11:21:12 AM
I second Pool Shark...the mortgage rates don't seem to be following the 10 yr down these days. That jump in Jumbo rates should be scaring people because that is the type of loan lots of good borrowers need to finance their house.
I happen to think the Mortgage App figure is inflated by multiple applications. Anyone who had a mortgage with a lender that closed down or stopped funding certain types of mortgages (2/28s) had to go re-apply. Some may have tried to lock in a lower rate for the next 90 days, but I'm betting they aren't going to buy a house.
Posted by: Sven | Aug 8, 2007 11:24:31 AM
Calculated Risk had this exat same post yesterday, BR.
It would have been nice to see an attribution.
~~~
BR: I fastidiously source everything I write here -- on the bottom of each post, under "Sources."
On the way home last night, I saw the cover of BusinessWeek -- hence, what you read this morn. (I have not yet read CR's piece)
Not the first time this happened, and it won't be the last. Chalk it up to the coincidence of great minds thinking alike .
UPDATE: 3:18pm -- I just read his CR's post. Other than the cover, we approach the subject completely differently, oh, and reach the opposite conclusion . . . but other than that . . .
Posted by: Jason M | Aug 8, 2007 11:26:55 AM
A noteworthy comment from calculated risk.
the MBA index is flawed right now - and should just be ignored. They only survey a few lenders - so when a lender not in their survey goes out of business, potential borrowers move to lenders in the survey and the MBA index goes up.
Also there is evidence some borrowers are applying multiple times.
Just ignore the MBA index right now. It is worthless.
Posted by: Stuart | Aug 8, 2007 11:28:36 AM
Wow...a "positive" article on housing at TBP.
That's not a sarcastic statement on my part. You WERE early and loud on this, so you have 10 times the cred on this than anyone else.
While the idea of "book value" is obviously a moving target, the group is obviously tradinga at some historicly low ratio to that falling level metric.
The next melt down might be worth a stab.
Posted by: Fred | Aug 8, 2007 11:32:16 AM
Pool Shark:
I'm looking at lots of variables.
The most important piece of new information that is driving the stocks is Senator Dodd pushing OFEHO to allow FNM and FRE to expand their balance sheets. In terms of liquidity, that's may be better than a rate cut because it targets the specific area impacted by the credit crunch (housing/mortgages).
Posted by: Groty | Aug 8, 2007 11:32:19 AM
Sorry to be slightly off topic, but anybody else on here waiting to buy a house?
My wife and I are sitting here in NYC waiting to move to NJ. We have 20% down and good scores, but things are so screwy. We were anxious to have to market turn in favor of the buyers, but being in the market now is just as annoying as being in a bubble market. We're one or two of those mortgage applications, but we won't be buying anytime soon.
There are a bunch of couples in my apt building all in the same boat--stuck in apts with kids running out of room.
Posted by: Sven | Aug 8, 2007 11:39:05 AM
NAR came out with it's forecast today, and they are once again telling us we are at bottom.
http://www.realtor.org/press_room/news_releases/2007/hef_aug07_home_sales_hold.html
But when you look at the actual numbers, they for the first time are saying new home sales will be lower in 2008 then 2007.
HAS NAR finally thrown in the towel ? Maybe this is a turning point.
July 11, 2007
Existing-home sales are expected to total 6.11 million this year and 6.37 million in 2008, down from 6.48 million last year. New-home sales are projected at 865,000 in 2007 and 878,000 next year, compared with 1.05 million in 2006. Housing starts, including multifamily units, are forecast at 1.43 million units this year and 1.44 million in 2008, down from 1.80 million last year.
August 8, 2007
Existing-home sales are forecast at 6.04 million in 2007 and 6.38 million next year, below the 6.48 million recorded in 2006. New-home sales are expected to total 852,000 this year and 848,000 in 2008, down from 1.05 million in 2006. Housing starts, including multifamily units, are likely to total 1.43 million in 2007 and 1.40 million next year, below the 1.80 million units started in 2006.
Posted by: Michael Donnelly | Aug 8, 2007 11:44:07 AM
sven....i think it is not a good time to buy house as per fianancial aspect....but as per family aspect its always a good time to buy a house...
i think i will wait till all the doom and gloom are over in the housing sector...either by inflation (house prices dont fall much, but cheap credit availalable and people keep buying at these high prices) or by falling house prices.
Posted by: techy2468 | Aug 8, 2007 11:53:53 AM
