Lennar's 50% Jump and Median House Prices

Homebuilder Lennar (LEN) is up over 50% today on the 521st government assistance plan. Unlike certain TV personalities who were screaming at us (literally) this summer that the strong price action in the home builder (relatively) was foreshadowing a recovery [Aug 27: Don Harrold on Cramer's Housing Bottom Call], I think a housing "recovery" is a long time away. But after July 1st as our entire commodity/global growth part of the portfolio was impaled, we were looking for things that were actually working and the market fled into US based stocks - retailers, home builders, financials.

We said at the time it was based on hope and nothing else, but perception is reality. A thesis need not be correct, just enough people need to believe in it, and the stocks can go up in the interim. So we made an entry into Lennar and made a few bucks. Obviously from September forward that trade, and in fact ANY trade on the long side in any sector proved to be fruitless so we took a lot of pain despite a relatively small position.

Today's 50%+ move shows it is hard to even be a short many times in this type of market where government announcements can destroy you - anyone short Citigroup (C) going into the close Friday was faced with a 100% loss from the short side Monday morning. So we are going to book our losses and look elsewhere, and take this $17K loss with a sell just over $7 and close the 0.6% stake.


On top of the massive amount of money the government is using (I have another story on this) to hold up the system, they are putting another $800 Billion in play today. Amazing - truly. But this one is facing the consumer so the housing stocks seemed to respond in kind.

• The government, still struggling to manage a severe financial crisis, unveiled two new programs Tuesday that will provide $800 billion to try to help unfreeze the market for consumer debt from home mortgages to credit cards.
• To try to increase the availability of home loans to borrowers, the Federal Reserve said it will buy up to $100 billion in direct obligations from mortgage giants Fannie Mae and Freddie Mac as well as the Federal Home Loan Banks. The Fed also will buy $500 billion in mortgage-backed securities, pools of mortgages that are bundled together and sold to investors. The program on consumer debt will lend up to $200 billion to the holders of securities backed by various types of consumer loans. It will be supported by $20 billion of credit protection from the $700 billion bailout package that was enacted last month.

On another front, the median home price continues to QUICKLY move to my target of $167K [Dec 6: What Should Median Home Prices be Today?] - keep in mind I was being very generous at the time and saying home prices would hold up at 3.2x income instead of their historical 2.6-3.0x level to get to my price target.

Coming from the July 2006 peak of $230K, that would signal a national drop of 27%; f I dared to show up on any financial TV show and say "national median home price will drop 27%," I would of been laughed at. Remember at the time all the pundits they drag on financial TV were saying home prices could NOT fall nationwide! [Jan 24: They Said it Could Never Happen. Ever.] So even my call for 27% drop nationwide would have put me in the "loony bin". And again, I was being very generous as 3.2x income was ABOVE the historical mean - that's how ludicrous things had become.

Well, we are getting to my target fast and if 2.6x to 3.0x is the true range (which it should be) we're talking $136K-$156K as a median. If mortgage rates stay above 6% and unemployment goes where I think it will in the year ahead, I think these are more logical targets, but that would mean housing fell 32-41% from peak... nationally. Remember, "they" told us this would never happen... we're America. Things like that do not happen to us; we're not Japan. But don't worry the government is printing money to make sure this doesn't happen. (wasted money)

• The national median existing-home price in October was $183,300, down 11.3% from a year ago when the median was $206,700. In September, the median existing-home price was $191,400.
• October's median existing-home price was the lowest since March 2004, when it stood at $183,200. That means that homeowners who has lived in their homes for 4-1/2 years are seeing their homes worth the same or less as when they bought them.

So now we are back to early 2004 levels in homes and late 1990s/early 2000s in stocks. With the onslaught of foreclosures, I expect sales volume to actually pick up - as we said earlier we should start to see year over year sales increases in the hardest hit areas as 50-60-70% off homes draw in buyers. But the foreclosure glut will continue to draw down prices. Amazing how Economics 101 (low price = more demand) still works, despite government trying to not make it work.

• "About 45% of all sales in October were distressed sales," Molony said.

What a country - we are now up to 1 in every 2 homes sold are foreclosures. Little to no regulation ideology rules - reverse Robin Hood in America continues (largest transfer of wealth from the many to the few ever recorded in history the past decade). This is all for an ideology that the proponents of are now reversing when "free markets" work against them (socialism of the losses on the many while the enriched leave scene of the crime unscathed)... sickening. (not a political rant - both parties are complicit and asleep at the wheel)

Disclosure: No position

Comments

[notsosmart:]

our first ever socialist thanksgiving.chavez & a lot of europeans must LOL.if you run out of napkins dont worry there is a lot of phony rated AAA paper to use.any left over can be used on that elusive bottom.happy holiday.

2008 Nov 26 11:06 AM

[SteveD64:]

I find it interesting that everyone says "buy and hold for the long term" but if you house, which is suppose to provide shelter, goes down all hell breaks loose, LOL....

I also predict that most, if not all, publicly traded homebuilders will eventually go private or go under....they simply will not be able to compete with the smaller builders who know the market much better and can react much quicker.

The big homebuilders advantage is/was economy of scale on cost etc etc

The demand for large subdivisons is going to be greatly reduced for many years...and city government is going to much more reluctant to allow mass construction that is not needed....

2008 Nov 27 10:21 PM