Homebuilders: Earnings & Prices

One of the weaker arguments mustered by the Real-Estate-has-bottomed crowd is the move off of the lows by the homebuilders. "Look how far the homebuilders have rallied" they declare. What more proof do you need that the carnage in Real Estate is over?   

I find this analysis flawed: 1st, a short-term stock move up after a sector gets shellacked is hardly proof that this economic sector has bottomed; with the homebuilders, its more likely proof that they have been a crowded short.>

If you suspect that argument sounds familiar, you are correct: We have seen this movie before:

Source: ContraryInvestor.com


Second, as this table (courtesy of ContraryInvestor.com) reveals, the Homies have not only had a huge run in share prices — their earnings went through the roof also, peaking in 2005. Now, we are on the other side of that mountain, and for many of the major builders, their Earnings are right back to where they were before the big run up began. 

The difference? In 2002-03, rates were down and heading towards 46 year lows. Now, they are elevated and likely heading higher.


Source: ContraryInvestor.com 

Lastly, as we learned just yesterday, prices of homes are still falling — and in an increasing number of regions –about half nationwide:

"Home prices declined from a year earlier in about half of all metropolitan areas in the fourth quarter, the National Association of Realtors reported.

It was the first time the trade group has recorded declining or unchanged prices in the majority of cities covered since it began collecting the data in 1979, a Realtors spokesman said. On a national basis, the median home price during the quarter was $219,300, down 2.7% from a year earlier. Prices began falling in many areas last year after a boom that pushed prices up at double-digit annual rates in much of the country in the first half of this decade.

In the latest quarter, the median price declined in 73 metro areas, increased in 71 and was flat in five. The biggest decrease was in the Sarasota-Bradenton-Venice area of Florida, down 18% from a year before. Many of the biggest decliners were in Florida, where a glut of new condominiums is weighing on the market, and in Rust Belt cities like Youngstown and Toledo, Ohio, hurt by shrinking industrial employment."

Not exactly the sort of stabilization Greenie has been chatting about for a few Qs, is it?

click for larger table


UPDATE 2 February 16, 2007 11:32am

Ken Fisher disagrees:

Housing Boom!


UPDATE February 16, 2007 9:42am

More proof of the bottom! Marketwatch notes:

Housing starts plunge 14.3% to 10-year low; Pace of building new homes down 37.8% on year-over-year basis

"U.S. home builders started the fewest homes in nearly a decade last month, as housing starts plunged 14.3% to a seasonally adjusted annual rate of 1.408 million, the Commerce Department reported Friday.

January’s rate was the lowest for housing starts since August 1997. Starts were down 37.8% compared with January 2006. Also, building permits dropped 2.8% to 1.568 million in January, 28.6% below the same month a year ago. Read the full government report.

The starts figure was much lower than expected on Wall Street, where economists were looking for a 2% drop to 1.60 million annualized units. The permits figure was close to the median forecast of 1.58 million expected in a MarketWatch survey of economists. See Economic Calendar.

The stunning drop in home construction indicates that builders are scaling back their plans on a massive scale, aiming to work down the excess inventory of unsold homes on the market."


Home Prices Decline in Majority of Cities
February 15, 2007 11:29 p.m.; Page A2

Housing starts plunge 14.3% to 10-year low
Pace of building new homes down 37.8% on year-over-year basis

Rex Nutting
MarketWatch, 9:05 AM ET Feb 16, 2007

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What's been said:

Discussions found on the web:
  1. Craig commented on Feb 16

    The Big Money is with you Barry.
    I don’t know who manages the Gates Foundation portfolio, but they are awesome.
    They caught the true bottom on the homebuilders and stepped off them (publically announced) yesterday.

    Hmmm, just after those sub-primes go bad….and they say they don’t ring a bell on wall street.

  2. S commented on Feb 16

    Housing starts stunk. Gotta be the bottom.

  3. Nova Law commented on Feb 16

    What is different from housing compared to other asset classes is that if an owner cannot get the price he wants, the tendency is not to lower the price, but to just hold on to it and wait the market out.

    Speculators will surely be hurt most in a declining real estate market, but it’s unlikely that genuine pain will be widespread amongst homeowners. They’ll just hang on to what they have a few years longer than they otherwise would have.

  4. Gary commented on Feb 16

    However if we get into a nasty recession those houses are going to have to be unloaded at all costs. That could depress the price of real estate for years to come. But then of course the Fed has now solved the problem of the business cycle and we will never have another recession and the market will only go up forever. Didn’t you know that this time it really is different.

  5. Winston Munn commented on Feb 16

    Note to David Lereah: returning a home to the lender via foreclosure is not the equivalent of flipping.

  6. Mike_in_FL commented on Feb 16

    Someone mentioned the housing starts report … and yes, the report was downright U-gly (that’s with a capital “U”). Here are my thoughts (I also have a longer-term chart of starts at my blog)…

    Anyone who wants to sugar-coat the housing industry’s state of affairs better look at this morning’s housing starts report. Construction of new single-family and multifamily properties plunged 14.3% to an annualized rate of 1.408 million units from 1.643 million units in December. The year-over-year drop was even more dramatic — 38%. Not only was January’s starts figure well below the forecast for 1.6 million, it is the WORST TO DATE for the down cycle in housing. It leaves starts at the lowest level since August 1997. Both single family and multi-family starts dropped.

    Building permit issuance also dropped — 2.8% to 1.568 million units from a revised 1.613 million. Permits declined for single-family homes, but increased ever so slightly in the multifamily sector. Speaking of revisions to December data, they were mild on the starts front (+1,000 units), and a bit larger on the permits front (+17,000).

    I’ve been saying it for a long, long time: The housing boom was the biggest in U.S. history in terms of construction activity … sales … price gains … and speculative buying activity. That has left us sitting with near-record levels of homes for sale — condos, town homes, single-family homes, you name it.

    We had “see-through” office buildings in the commercial real estate boom that ultimately went bust in the early 1990s … and we have “see-through” condo buildings and subdivisions now. It will take quite some time to work through that inventory overhang, and one component of that are sharper cutbacks in new housing construction like we saw this month

  7. Incognitus commented on Feb 16

    Nova, it’s not so simple.

    All the debt created to buy homes is someone else’s income. Indeed, even more than that since the money turns around several times.

    So prices falling is not so important as the debt that doesn’t get produced if transactions fall (though it’s still important because when prices fall a lot of debtors can’t refi, go under, and make prices fall some more).

  8. lewis commented on Feb 16

    It’s still all about interest rates though. Courtesy of the still very low rates, the real estate bust is not nearly of the magnitude it deserved and is, to date, just a soft landing. If rates actually do go seriously up (defined as about 5.75 on a ten year, which is a long ways away as my chart goes), then grown men with houses will weep and owners and lenders of sub primes will jump out the windows (hopefully of the condos, because a couple floors from a single family won’t do the job). But I see no signs of this, and if there were, Helicopter Ben will spring into action to save the day (but not the dollar, which should then freefall and global funds would be the asset class of the decade).

    I mean, if $150 billion a year in interest payments to foreigners doesn’t get anyone’s attention, surely we can just keep printing more billions of paper backed by our best wishes to cure whatever ails us, and we are ailing. It will be like that Kevin Costner movie Sea World, except it will be dollar bills (and yen, I guess, as long as the Japanese choose to finance the hedge fund world), not water. As they would say at Indy, “Gentlemen, blow your bubbles”.

    But until any such excitement starts, I am skipping along with Candide Bernake.

  9. Bill a.k.a. NO DooDahs! commented on Feb 16

    I haven’t seen anybody arguing that “real estate has bottomed as evidenced by the homebuilders’ stocks.” I have argued that we shouldn’t GIVE a darn about the state of “housing.”

    It seems that both the overall stock market, here in the U.S. and around the globe, and the homebuilders’ stocks as well, agree with that perspective.

    It’s all in how you define your reality. I use my P/L. If it goes down, or lags the general market, too many months in a row, I may need a “reality check.”

  10. Lori commented on Feb 16

    Expect construction employment in the southwest to look a little odd (not dropping as expected). The reason is the undocumented workers were the first to lose their jobs. They are now standing on the street corners hoping for “drive by” work (guys with pick-ups who say “hop in and I’ll pay you $5.00 and hour. We see it all over our city (Phoenix).

  11. brion commented on Feb 16


    Still, the trade group statement said it believed that the worst was over for the drop in prices.

    “Examination of data within the quarter shows home prices stabilizing toward the end,” said a statement from David Lereah, the NAR’s chief economist. “When we get the figures for this spring, I expect to see a discernable improvement in both sales and prices.”

  12. strasser commented on Feb 16

    Bloomberg this morning, Stoval was stating that we should not look at the housing data until March or April! Ok. That should allow the big boyz ample time to unload housing stocks while mom and pop are holding them in their IRA’s and mutual funds.

  13. John F. commented on Feb 16

    For extra credit, what’s wrong with the following statement, just made by Bob Pisani on CNBC (paraphrase):

    Sales are improving, and housing starts are down, so inventories are getting smaller.

  14. Estragon commented on Feb 16

    John F – Okay, I’ll bite.

    The statement doesn’t include demand factors (household formations, incomes, etc.). Any housing starts > 0 means aggregate supply is increasing. Inventories will continue to grow if aggregate demand growth is lower than aggregate supply growth.

    Also missing is any question of whether the inventory is located, priced, and configured appropriately for whatever demand growth there is. It’s possible, for example, that the inventory is large SFD in suburban areas, but the demand is among new households looking for urban rentals.

  15. strasser commented on Feb 16

    Per Bloomberg right now, Moskow is regurgitating “there are signs the housing market is stabilizing” and “inflation is a bit higher than…”. Why don’t they just STOP!!!

  16. Cherry commented on Feb 16

    I wouldn’t get to happy with these starts numbers. Take the last 2 months and it equals=1.5, or where I said they were since October(essentially). But a big decline in permits over the last couple of weeks may show a secular decline below 1.4 by late in the spring/summer. Something we will have to wait and see.

    The industry is trying to fight the last 4 week decline, but like many things, the media and the industry itself is lagging behind. Sales aren’t improving, neither is demand. They pick and choose little “bright spots” and ignore the gloomy spots which outnumber them. A sad state of affairs, but one that is sadder yet with denial.

    Housing busts take years, not several months to go through. The people that accept that and understand this will survive, while the rest…………………

  17. VJ commented on Feb 16

    Nightline > More than 25,000 new condos will finish being built in Miami in the next 18 months.

    Mr. Rogers would ask – Can you say GLUT Boys and Girls ?

  18. DavidB commented on Feb 17

    Not only was January’s starts figure well below the forecast for 1.6 million, it is the WORST TO DATE for the down cycle in housing.

    So Greenspan’s final bubble has begun to pop. HOOOORAY!

    Now the heat from the easy money junkies will ratchet up and Bernanke will finally be able to earn his wings in the heat of battle.

    I’m hoping he doesn’t buckle and run to the printing machine. I hope he stands firm and lets the storm come on strong while he weathers all the flak that panic can throw at him. If he can do that then he will have earned his wings and he also will have set a new tone and direction for the US marketplace. The Greenspan put will finally be dead with a bullet to it’s heart and a new era of a freer market mechanism will be born.

    It’s time for traders to hope. It may soon be time for traders to rejoice for we are on the cusp of a new dawn.

    ……end dream

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