Be Very Afraid: Higher Rates Killed Mortgage Activity [View article]
"very afraid" is an exaggeration, but every tick up in rates in a tick down in affordability for a population without much job or income growth. For the builders, that is a hit on profit margin because costs definitely do not seem to be going down. For the resale market, it's just a slip in seller pricing power. Should those rates go up to, say 4.5%,we would see more downward pressure on increasing prices. The buying power to sustain high prices in California should higher rates come into the mix is just not there. Investors cannot sustain a housing recovery alone. There just are not enough of them to hold a market for much longer.
Trulia's New 'Bubble Watch' Nudges California And Texas Housing Into Overvalued Territory [View article]
Who really knows, but we are selling for 25% more than 2007. I think the compounded CPI over that time is about 9%. Despite rates being about half of what they were in 2007, this current pricing reflects absolutely no decline in valuations since the crash. It's just a crazy situation out there.
Trulia's New 'Bubble Watch' Nudges California And Texas Housing Into Overvalued Territory [View article]
That's not completely true because of the nature of replacement costs for housing. While the hard costs of sticks and bricks will be somewhat stable, the value of land can skyrocket and plummet rather quickly. Lots or absolute teardowns in my neighborhood start at about $800k with most homes selling for around $1.1mm. With little exception and throughout the last bubble, homes were nearly always sold for less than replacement cost because of the high cost of land. There was no profit to be had for a spec builder unless they had an amazing formula, doubled the SF of the teardown, and really performed on estimated costs. I guess your statement about not being a bubble makes a little sense in markets where land is cheap and abundantly available. But I would see that conclusion as more of a single metric among a pool of metrics one can use to determine if a market is actually in a bubble. It's definitely not singular method for determining bubble status.
Trulia's New 'Bubble Watch' Nudges California And Texas Housing Into Overvalued Territory [View article]
All the adjacent zip codes to me in west LA/Santa Monica are selling above 2007 peak values. I guess if you called it a bubble before, then it's a bubble now.
Is It Time To Short The Home Builders? [View article]
Big builders don't make their money in Minnesota, Illinois, Ohio, or really anywhere other than sunbelt states (some exceptions: Virginia, Delaware Valley). Land is common in most of the sunbelt, but the easy parcels were consumed in the last boom. Leftovers are available, but the new raw land often needs a lot of backbone infrastructure to make it feasible for single family homes on any scale. When you underwrite a land deal and see the millions in offsite costs start to come in, the deals are tough to pencil. It's not like builders can't get through this over time, but with home values still so low, the land residual is often negative when considering the development costs. Builders were battling over complicated land that only barely worked when prices were much higher. Available water, massive amounts of import dirt needed, awkwardly shaped parcels, slopes, protected animals and habitats, high construction costs, etc...there are so many little issues that add up and need to be resolved before land is ready for a home's foundation. Most of the builders have a portfolio of ready land they either held on to or bought distressed, but that goes quick and when your stock valuation suggests you should be building 10,000-20,000 homes a year at an 18-20% gross margin, the land goes really quickly. And to beat a dead horse, the first time and move up buyer dry out quickly unless job growth is very strong.
Is It Time To Short The Home Builders? [View article]
Don't get me wrong, I'm definitely not shorting them, but they seem to be fully valued. They are beating expectations, but expectations are so low that it's not that hard. The valuation, however, reflects these guys returning quickly to pre-crash performance and pre-crash margins. That just won't happen, possible ever, but if it does it won't be there for 5-7 years. Also, the pre-crash valuation of these stocks reflected profit margins these builders can only get with several consecutive years of 10% home value growth. I don't think there is a bubble now, but if they actually started earning that money it would definitely be a bubble. To recap why builders can't perform to these valuations: 1. shortage of land 2. even greater shortage of entitled land 3. shortage of crews 4. ramping up overhead staff to manage process 5. water 6. household income growth 7. Numbys
Is It Time To Short The Home Builders? [View article]
Betting against homebuilder stocks is not betting against housing. It's betting that the builders won't catch up to their valuations in time to maintain their current hot status in the market. It will take at least 5 years for these guys to develop the pipeline enough to justify the valuations. You don't just increase your home closings by 5,000 units within a short time frame. I come from this industry and can attest to the complexities of ramping up home production. It's just impossible to do on short order. Whether you think housing is bottomed, off to the races, or whatever, it doesn't mean the builders are overvalued relative to expected actual earnings.
Is It Time To Short The Home Builders? [View article]
I think builders will be a short simply because the market will cease to care about them when they realize it will take 4-5 years for them to grow to a size that supports these valuations. Soon they will be a boring stock again, regardless of housing recovery or economic data. They were stock darlings during the last boom because the peak earnings potential (and actual) earnings were being trailed by the stock valuation and the stock prices were being supported by earnings without even having high P/E's. This time, the stock price is front loaded and they have to catch up to it. And these valuations are largely reflecting mega, mega growth and profits, something that doesn't happen quickly in homebuilding. So, get ready for that.
Is The Housing Recovery About To Come To An End? [View article]
The housing market is all about payrolls. You can't have a sustainable recovery without middle class employment and income growth. No amount of investors/foreign buyers/whatever can support the housing market for long. And when the investors lose interest, it's not a pullback that happens over the course of years, it's fast, and it's radical. Basically, the music stops. The housing market is way too large for investors to prop up for a sustained period. There just seems to be a lack of alternate investments, so big money has made housing the latest fad. It won't last unless they can move to further damage the middle class, keep job growth low, and make housing unaffordable for all but the most successful. I'm a skeptic, but I don't think they are actually trying to enslave the rest of the population. It wouldn't work as a long-term plan. It's just business as usual: siphon more, move on to the next big idea.
The Biggest Lie About The Real Estate Recovery [View article]
Also this big/smart/connected money isn't buying investment properties at retail prices. They are still buying directly from banks, Fannie, Freddie, etc. at solid discounts to conventional sale pricing. The guys I know in this sector are not really focusing on rental properties, but rather are looking for flip profits. A few of the funds I know have already encountered the challenges of a managing a portfolio of SFRs. It's not good overall strategy when compared to owning apartments or multi-tenant commercial/industrial.
Think of it like this, housing renters are typically among the worst credit tenants out there. Once someone achieves the stability and credit needed to buy a house, they typically buy a house and are out of that market. I compare it to an industrial property I recently sold. It was a multi-tenant property with about 20 units ranging from 500 to 3,000sf. These are the small, mom and pop style tenants who are either just starting, or haven't done well enough to own their own property or grow into something larger. They are typically barely making ends meet. It's a management nightmare. Management costs and default ate up so much of the income because these guys were always having problems. This is just like single family tenants, especially those in low priced markets where jobs are scarce and salaries are low. Fortunately for us, they were all in one location, similar to an apartment, so we could address numerous issues across multiple tenants without traversing the City and that saves so much money. Spread everyone out around town and add to that the individual traits of diverse homes with wide ranges of construction errors and materials, and you eat up profit very fast. Sure, SFR portfolio holders attack it with a formula that starts to standardize things, but you have to end up using more crews, more fuel, longer times to address issues, and you are subject to individual market risks. It's just not good real estate strategy for the long term.
What is good real estate strategy, however, is to assemble these portfolios bought with steep discounts to market, employ a rehab formula, and sell quickly at discounts to other conventional sales. This is helped by artificially low for-sale supply, low interest rates, and a general media onslaught that we are bottom. I'm not saying it's a cabal, but it's suspect that all these factors line up to benefit the big boys of Wall St. It also buys time for the rest of the market to heal and the economy to grow, which would definitely limit the downside if, in fact, this is a head fake recovery.
Signs The Housing Market Is Starting To Head South [View article]
With appraisers wisely not catching up the recent market heat, many borrowers are having trouble bridging the gaps among appraised value, LTV, and the amount they have available for down payments. What I'm seeing is a massive preference by sellers for all-cash buyers partially because of this problem. On the west coast we are seeing a lot of failed escrows by well-qualified traditional buyers who don't have the extra $100k cash to make up for the gap created by the appraisal. If I were a seller I'd definitely target the all-cash buyers, even if the offer is a bit less. That said, with the transactions in my neighborhood, the all cash buyer have consistently been the high bidder.
So, should some investor money go elsewhere, it would definitely impact valuation unless we see some loose mezz lending coming in to bridge the gap. There are so many what-ifs to all of this, but as a real estate investor, I'm completely surprised that anyone would want to hold a portfolio of single family homes. That's just the worst. Those funds might soon be looking to liquidate.
More Confirmation Of Price And Cost Pressures In Homebuilding [View article]
Just about any builder who has an earnings call is not going to be subject to the constraints of construction credit. Nearly all public builders fund their construction with big lines of credit and cash. Also, in terms of the supply chain, the public builders are first in line with long term contracts with most of the major suppliers of materials. The guys probably bringing down the NAHB index a bit are smaller, local builders who have to get in a separate line for debt and materials.
I wonder how they allow for additions and subtractions on the securitized asset? If I had a portfolio like that I'd want to be able constantly move homes in and out of it and not be held down. In several markets the early buyers of huge blocks of housing can liquidate with enormous profits. Banks were disposing of REO, mortgages, etc at 15-20 cents/dollar. To me the whole market seems like a pump and dump for the most connected early capital who can manipulate enough and stoke the media enough to cause a short term pop. Seems more likely than a true jobless recovery. Housing is always about employment. Don't try to boil housing down to a payment, that's exactly what was being said all during the last bubble. It's always jobs people. And the market is too huge to be sustained by investors.
Why The Housing Market Index Worries Me [View article]
I trade the builders, but the only trades have been based on seasonal info, periodic hype from those who control the info, and general swings. If you think the builders can shoot up much from here over the long term then I think you need to look at how the market views builder when things are normal. The market has placed some very favorable valuations on the builders; valuations that reflect them returning to their performance at the peak of the market. It would take nearly another decade for them to be able to ramp up to their peak home closings years. There is nothing groundbreaking and new that will ever come out of the builders, nothing that rocks the market and legitimately sends valuations to the moon. No, instead they will go back to selling homes, turning a 8% profit margin, and battling for the leftover land sites not located in the middle of nowhere. You'll see strong earnings, but low P/E. Some will grow, some will merge, housing prices will trickle up, but so will land and materials costs. The margins will be the same. Full recovery to peak performance from 2006 is pretty much priced in to these stocks.
I still don't see much changing for the builders. In the absence of big mergers or just bouncing off the low performing bottom years, It's impossible to grow exponentially as a builder. You just can't scale it. So, when I say I don't see much changing, I mean it. Not much has changed, just some upticks in sales and a little profitability. Sans carryovers and write offs, a lot of the profitability doesn't even exist.
And I have traded a few of the builders, over and over for years, a heavily in the last year, but I got out about month ago and I won't get back in until a huge pullback.
Be Very Afraid: Higher Rates Killed Mortgage Activity [View article]
Trulia's New 'Bubble Watch' Nudges California And Texas Housing Into Overvalued Territory [View article]
Trulia's New 'Bubble Watch' Nudges California And Texas Housing Into Overvalued Territory [View article]
Trulia's New 'Bubble Watch' Nudges California And Texas Housing Into Overvalued Territory [View article]
Is It Time To Short The Home Builders? [View article]
Is It Time To Short The Home Builders? [View article]
1. shortage of land
2. even greater shortage of entitled land
3. shortage of crews
4. ramping up overhead staff to manage process
5. water
6. household income growth
7. Numbys
Is It Time To Short The Home Builders? [View article]
Is It Time To Short The Home Builders? [View article]
The Biggest Lie About The Real Estate Recovery [View article]
Is The Housing Recovery About To Come To An End? [View article]
The Biggest Lie About The Real Estate Recovery [View article]
Think of it like this, housing renters are typically among the worst credit tenants out there. Once someone achieves the stability and credit needed to buy a house, they typically buy a house and are out of that market. I compare it to an industrial property I recently sold. It was a multi-tenant property with about 20 units ranging from 500 to 3,000sf. These are the small, mom and pop style tenants who are either just starting, or haven't done well enough to own their own property or grow into something larger. They are typically barely making ends meet. It's a management nightmare. Management costs and default ate up so much of the income because these guys were always having problems. This is just like single family tenants, especially those in low priced markets where jobs are scarce and salaries are low. Fortunately for us, they were all in one location, similar to an apartment, so we could address numerous issues across multiple tenants without traversing the City and that saves so much money. Spread everyone out around town and add to that the individual traits of diverse homes with wide ranges of construction errors and materials, and you eat up profit very fast. Sure, SFR portfolio holders attack it with a formula that starts to standardize things, but you have to end up using more crews, more fuel, longer times to address issues, and you are subject to individual market risks. It's just not good real estate strategy for the long term.
What is good real estate strategy, however, is to assemble these portfolios bought with steep discounts to market, employ a rehab formula, and sell quickly at discounts to other conventional sales. This is helped by artificially low for-sale supply, low interest rates, and a general media onslaught that we are bottom. I'm not saying it's a cabal, but it's suspect that all these factors line up to benefit the big boys of Wall St. It also buys time for the rest of the market to heal and the economy to grow, which would definitely limit the downside if, in fact, this is a head fake recovery.
Signs The Housing Market Is Starting To Head South [View article]
So, should some investor money go elsewhere, it would definitely impact valuation unless we see some loose mezz lending coming in to bridge the gap. There are so many what-ifs to all of this, but as a real estate investor, I'm completely surprised that anyone would want to hold a portfolio of single family homes. That's just the worst. Those funds might soon be looking to liquidate.
More Confirmation Of Price And Cost Pressures In Homebuilding [View article]
Wall Street Has Officially Arrived [View article]
Why The Housing Market Index Worries Me [View article]
I still don't see much changing for the builders. In the absence of big mergers or just bouncing off the low performing bottom years, It's impossible to grow exponentially as a builder. You just can't scale it. So, when I say I don't see much changing, I mean it. Not much has changed, just some upticks in sales and a little profitability. Sans carryovers and write offs, a lot of the profitability doesn't even exist.
And I have traded a few of the builders, over and over for years, a heavily in the last year, but I got out about month ago and I won't get back in until a huge pullback.