Dangerous Optimism in Homebuilders

Thursday morning Centex Corp. (CTX) reported results for its fiscal 4th quarter: a loss of $910.5 million, or $7.36 a share (!!!). Revenues for the quarter plunged to $2.31 billion from $3.64 billion, down 36.5% compared to the 4th quarter of last year. Closings in the 4th quarter declined by 33% and average sales price down 15%. Centex's profit margin on homes sold sank to 7.7% from 17.7% year earlier.

Is this kind of earnings report a reason to bid this stock up almost 7%?! Apparently the market felt it was.

Dow Jones Wire commented on a Wachovia note:

the quarter wasn't as poor as the headline reads, Wachovia says. Revenue and impairments came in better than expected, and orders were "much better than our overly-cautious estimate," firm notes. CTX is focusing on an asset-light model, and 4Q results are a step in the right direction. "Actions and numerics are beginning to inch along after the rhetoric," Wachovia writes.

An asset-light model is a good thing?! It's like being broke.

I was trained to believe that losing money is a bad thing... but not anymore! Apparently losing money is GOOD while making money is BAD! Just look at Exxon (XOM) being clobbered (down 4%) after earning almost $11 billion for the quarter.

Despite the obviously nasty and further deteriorating market for homebuilders, (see my April 22, 2008 article), homebuilder stocks are up as much as 60% this year. I do understand that markets anticipate, and that some believe that "it's so bad now, it can't get any worse." Well, it can and it will! Yesterday morning's surge in jobless claims by 35,000 is by no measure good news for the housing sector.

In its stock report on another large builder, Lenar Corp. (LEN) from April 26, S&P analyst Kenneth M. Leonn in attempting to put a positive spin on the homebuilders, was forced to admit that:

To date, we believe the key factor driving the housing downturn are a decline in buyer's confidence, a weakening of demand for new homes, an oversupply of new and existing homes available for sale, and the inability of many (potential) home buyers to sell their current homes.

Need I say more?

In my humble opinion, those who bet on an improving housing sector will be disappointed. The issue is not only the problems I listed in my previous article, the main problem is in the "Structured Finance" area, namely in the inability of bankers to package mortgage loans into mortgage bonds and sell them to investors. There are not too many buyers for mortgage bonds now and there may not be for a long time.

Without "Structured Finance" linkage, there is no money to lend! The system that provided a seemingly endless supply of money to the mortgage market in recent years is severely damaged and it will take a long time to repair it, if it can be repaired at all.

Homebuilder stocks have rallied on expectations of happy days and now their stocks are extremely overvalued. As for real happy days, they are nowhere in sight.

Disclosure: Short

Comments

[stefaith]

MR.MARKET has been alternating between manic and depressive moods with regard to the builders. No amount of data seems to have any effect on the price. Yesterday was a manic phase. Of course there is a limit to how long the market can run on empty, but it seems that the limit is higher than I or any rational person would think.

I am also short, and waiting for reality to bring the prices down again.

[Publicliterature.org]

How do you parse this data: Even with the sales rate more than 50% it's highs, inventory is still going down in terms of volume (granted each home is sold at a lower price). This could signal that home prices are done going down. This could mean that the writedowns are over and it is no longer to price in further writedowns.

[Slickflick]

The day traders and the institutions are keeping these curs propped-up. LEN is still paying its divvy !! No amount of reality will work to the short side until the funds and those who own these howlers call "calf-rope ". The builder/developers are past masters at painting the tape;it's an election year and the housing industry can't be allowed to crater..even though they've all crapped-out ! The penny is on the verge of dropping..finally. What's left in 'gubment' stimulii ?

[Small Town Indiana]

I'm short on CTX. Reality is writedowns or writeoffs are not done. Problem is, when a bank writes off $$ on a foreclosed home, when the home does finally sell at below market value (inventory turns count in all sectors), they will write up their bottom line with the $$ received. One thing NO ONE seems to be caring about is that even if these people were in over their heads and trying to "live the American dream", they are still people that have lost their homes. I'm sick of the big boys getting all the breaks and not giving two shits about the people that keep them in their "fat and happy" state of euphoria. I personally know of 3 people in 3 different states (Indiana, Mississippi and Wyoming) that have lost jobs they've held for a few years and can't find work and are now in the process of losing their homes. I too will be in that situation if I don't secure work in the near future. Being educated has only meant I'm over qualified and $10/hr won't pay the mortgage. I don't want to see the whole economy crash, but I do want corporate America to learn they're not the "sacred cow" they pretend to be and their CEO's are not worth the billions they're paid.

[QualifiedBuyer]

People losing their homes is never a good thing, regardless of whether it's due to job loss or to loans that should not have been issued in the first place. That said, however, home prices have skyrocketed over the last 8 - 10 yrs, while real wages have been flat. Home prices must be brought more in line with real wages. I keep hearing politicians talk about transferring the wealth of oil companies back to the public (which really means back to government), yet we're bailing out investment backs and providing tax breaks to builders, the entities responsible for the run up. Funny thing is, if the investment banks hadn't been so greedy to begin with, homes would be more affordable, and higher food and gas prices (more in line with the rest of the world) wouldn't really be a problem. So lets bail out the investment banks and builders, and put the burden for their greed on the backs of the public, and scream how unfair it is that oil companies are reaping profits due to the governments devaluing of the US dollar to bail them out. How about letting the free market economy work.

[Tom Lindmark]

I'd add one other key factor that's driving the downturn and is going to mute any turnaround. That's the much tighter lending standards currently being imposed by Fannie, Freddy and even FHA. Buyers actually have to qualify and to do so prices are going to have to come down to levels that allow them to do so. Look at affordability indices for the nation and for specific locales and I think you'll see that prices still have to move downward and stay there to get buying going again. Affordability was tossed out the window during the boom but it's back with a vengence.

[gordon]

I believe the rally in homebuilder stocks is a short-attack by hedge funds burning those shorting the XHB, they can pile into it, then exit on the squeeze. Barratt American (Barratt Group on London Ex) is on the ropes here in San Diego> tinyurl.com/6ch2et
CEO Mick Pattinson says the banks are getting out of the homebuilder -lending business as fast as they can. It's not coming back until at least 1 million resales are worked off. You think builders are going to build to "break even"? With the risk?
This morning Lyon Homes advertised one of their townhome projects in (crappy) Santee, east San Diego County, $340K for 1500 sq ft, essentially an apartment.(triplex, 3 units per bldg) We figured if you add homeowners dues, taxes/insurance w/ 10% down, you're talking about maybe $2700+/month, when you could RENT it for around $2000/month, and any upside in "beautiful " Santee is questionable at best! This is probably the most affordable new attached out there, and it sucks as an investment, until prices come down to under $200/sq ft. Most everything new is still closer to $300/sq. ft.

[tfnoon]

Correct. The bigger question is how the "markets" can be so wrong for so long. Intellectual laziness or outright manipulation?

[DSX Lover]

Homebuilders are way too overpriced and they will keep loosing money for at least 6-18 months. Their Book values, will continue to decrease, and unlike Banks, their cash flow from operations is decreasing because of lower revenues (less sales). Banks in the other hand, have steady cash flow, and with lower rates, are earning a higher interest margin. Once the write downs are finished the banks will be swimming into a pond of cash. The correct move here is to short the Homebuilders and to go long on large strong banks.