Housing bubble bursting fast
Anecdotes are no longer isolated events. They are now examples of economic trends.
1. April Housing prices dropped 7.3%, cancelling out most of the year-to-year growth (which was 10% as of end of March)
2. Phoenix Condos have dropped 50% in price http://www.azcentral.com/arizonarepublic/business/articles/0604catherine0604.html
3. Home builders are slashing earnings expectations
http://news.moneycentral.msn.com/provider/providerarticle.asp?feed=FT&Date=20060602&ID=5766904
I have been proposing that there is a houisng bubble that is in the process of bursting even though the facts seem to contradict me. Homebuilders reported record Q1 profits. Suppliers did the same.
I felt that Q1 was really reflecting 2005 buying (end of the year purchasing that closed in 2006). I also felt that suppliers were seeing a burst of business as builders rushed to finish building so that they could unload the houses before the rug gets pulled out from under them.
Supporting my hypothesis was that housing inventory was rising dramatically, home sales volume was dropping dramatically, and prices were dropping march-April.
I did some research on how home prices are reported. Apparently, we are the victims of sloppy statistics. A database of 149 metro areas is maintained and house price changes are tracked for each area. Then the midpoint (the median) of those datapoints is selected. From the standpoint of turning data into usable intelligence, we would want to adjust the data to weight the higher population areas over the lower population areas. We should care more about San Francisco, Boston, LA and NY than we do about what is going on in Decatur, Ill (population 78,000). Not only because these are the population centers, but mainly because more homes are being sold in those areas.
As it turns out, the recent report that Q1 2006 housing prices rose 10.3% in fact hides much more negative data. For Q1 2006 a sampling shows:
Boston (-1.5%)
Houston 3%
Chicago 11%
Las Vegas 9%
LA 19%
NY 11%
San Francisco 4%
Miami 11%
I can't see the April or May detail yet, but if April was a 7.3% drop in price from March to April, then 3 out of 8 of those areas are negative, 4 out of 8 are ~3% growth. The detail is needed, but the trend is obviously worrying.
"Pulte Homes, the largest US housebuilder by sales, on Friday cut its full-year earnings' forecast by a quarter in a move which will heighten tension over the cooling of the country's housing market. The Michigan-based group said new sales in April and May slumped 29 per cent, the latest and most severe of a series of declines reported by the largest US housebuilders."
New sales slumped 29%. Sales in the West are expected to slump 20%.
I am trying to understand their pre-earnings announcement that the full year earnings will be lower by 25%. In late April, they confirmed expectations and 1 month later they are offering lower guidance. That tells me that the last 8 months of the year (May-Dec) are problematic. For 75% of the calendar year to drive a 25% total year reduction, that means that they expect future earnings to drop 33%.
They make ~$1.4B in earnings or $1.1B for the period under question. But now they expect to earn $350M less. It sells ~18,000 units. They are looking at a loss of ~$20K per house. A little lower in some states, a little higher in others. My gut says that they are assuming some higher costs of supplies and some longer sales cycles (higher carrying costs), but primarily they are assuming incentives to sell a house. Like 1%+ interest subsidies and no closing costs.
Sure, Pulte could be sandbagging - guiding expectations even lower in order to exceed. I don't think so. In fact, I think sales are collapsing around them. In Phoenix, a hot growth market, high-end condos are falling 40%+ in price. Imagine the downward pressure on other condos and on houses. Condos and townhouses are inferior susbtitutes for houses. But if you want to buy in San Francisco and condos fell 50% in price to ~$400K, would consumers still be looking to pay $1M for run-down houses needing $200K+ upgrades for the comparable granite counters and double pane windows? Obviously, it puts downward pressure on existing, lower priced condos/townhouses and on houses.
And this is happening as we stand at the beginning of the season. Pulte's costs didn't suddenly jump in one month: they lock in supply prices and most of their houses are already more built than not. This is tied to sales problems. And another rate hike will not help.
How to play this?
1. Housing companies like TOL, PHM and so forth will continue to slide. Short.
2. Cancellations will hit suppliers hard. I am liking my BMHC puts more and more every day. I especially worry about window and door manufacturers. It strikes me that high rise condos use a lot of glass, windows and doors. Anyone suggest a specialized company that is looking especially vulnerable?
1. April Housing prices dropped 7.3%, cancelling out most of the year-to-year growth (which was 10% as of end of March)
2. Phoenix Condos have dropped 50% in price http://www.azcentral.com/arizonarepublic/business/articles/0604catherine0604.html
3. Home builders are slashing earnings expectations
http://news.moneycentral.msn.com/provider/providerarticle.asp?feed=FT&Date=20060602&ID=5766904
I have been proposing that there is a houisng bubble that is in the process of bursting even though the facts seem to contradict me. Homebuilders reported record Q1 profits. Suppliers did the same.
I felt that Q1 was really reflecting 2005 buying (end of the year purchasing that closed in 2006). I also felt that suppliers were seeing a burst of business as builders rushed to finish building so that they could unload the houses before the rug gets pulled out from under them.
Supporting my hypothesis was that housing inventory was rising dramatically, home sales volume was dropping dramatically, and prices were dropping march-April.
I did some research on how home prices are reported. Apparently, we are the victims of sloppy statistics. A database of 149 metro areas is maintained and house price changes are tracked for each area. Then the midpoint (the median) of those datapoints is selected. From the standpoint of turning data into usable intelligence, we would want to adjust the data to weight the higher population areas over the lower population areas. We should care more about San Francisco, Boston, LA and NY than we do about what is going on in Decatur, Ill (population 78,000). Not only because these are the population centers, but mainly because more homes are being sold in those areas.
As it turns out, the recent report that Q1 2006 housing prices rose 10.3% in fact hides much more negative data. For Q1 2006 a sampling shows:
Boston (-1.5%)
Houston 3%
Chicago 11%
Las Vegas 9%
LA 19%
NY 11%
San Francisco 4%
Miami 11%
I can't see the April or May detail yet, but if April was a 7.3% drop in price from March to April, then 3 out of 8 of those areas are negative, 4 out of 8 are ~3% growth. The detail is needed, but the trend is obviously worrying.
"Pulte Homes, the largest US housebuilder by sales, on Friday cut its full-year earnings' forecast by a quarter in a move which will heighten tension over the cooling of the country's housing market. The Michigan-based group said new sales in April and May slumped 29 per cent, the latest and most severe of a series of declines reported by the largest US housebuilders."
New sales slumped 29%. Sales in the West are expected to slump 20%.
I am trying to understand their pre-earnings announcement that the full year earnings will be lower by 25%. In late April, they confirmed expectations and 1 month later they are offering lower guidance. That tells me that the last 8 months of the year (May-Dec) are problematic. For 75% of the calendar year to drive a 25% total year reduction, that means that they expect future earnings to drop 33%.
They make ~$1.4B in earnings or $1.1B for the period under question. But now they expect to earn $350M less. It sells ~18,000 units. They are looking at a loss of ~$20K per house. A little lower in some states, a little higher in others. My gut says that they are assuming some higher costs of supplies and some longer sales cycles (higher carrying costs), but primarily they are assuming incentives to sell a house. Like 1%+ interest subsidies and no closing costs.
Sure, Pulte could be sandbagging - guiding expectations even lower in order to exceed. I don't think so. In fact, I think sales are collapsing around them. In Phoenix, a hot growth market, high-end condos are falling 40%+ in price. Imagine the downward pressure on other condos and on houses. Condos and townhouses are inferior susbtitutes for houses. But if you want to buy in San Francisco and condos fell 50% in price to ~$400K, would consumers still be looking to pay $1M for run-down houses needing $200K+ upgrades for the comparable granite counters and double pane windows? Obviously, it puts downward pressure on existing, lower priced condos/townhouses and on houses.
And this is happening as we stand at the beginning of the season. Pulte's costs didn't suddenly jump in one month: they lock in supply prices and most of their houses are already more built than not. This is tied to sales problems. And another rate hike will not help.
How to play this?
1. Housing companies like TOL, PHM and so forth will continue to slide. Short.
2. Cancellations will hit suppliers hard. I am liking my BMHC puts more and more every day. I especially worry about window and door manufacturers. It strikes me that high rise condos use a lot of glass, windows and doors. Anyone suggest a specialized company that is looking especially vulnerable?
posted by Andrew at
7:20 PM
3 Comments:
The 3 I know are all private, Pella, Millgard and Andersen.
I visited new signature home in Livermorw arae and they offer me "home of the week" with 170k option "included in price plus 30+ k closing cost credit" .Seems like they are desprate to unload finished home (1.4M) .
Homes in good school districts such as palo alto and cupertino are still marketed with an offer date and are getting multiple offers with 5% above asking price.
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