Uh-Oh: Bonfire of the Builders

BonfireI have been stating for quite some time that we are only halfway through the Housing downturn, if that. The huge inventory overhang, increased mortgage rates, tightening credit regulations — and a lack of new buyers — are conspiring to make this cycle at least a 5 year or so process from the top (August 2005).   

Now, we have heard many many erroneous Housing bottom calls from all manner of interested folks: former NAR economist David Lereah was a notorious bottom caller, as has been Treasury Secretary Hank Paulson, and even in CNBC/RealMoney’s Jim Cramer (November ’06).

All those prior bottom calls turned out to be dead wrong.

However, a recent item caught my eye, and suggests that perhaps we are closer to a bottom — at least in the Builders — than I may  have realized: the cover story of the most recent BusinessWeek.

Now, before you run out and buy Toll Brothers (TOL) or Beazer Homes (BZH),  quite a few caveats are in order.

First, magazine covers are notoriously imprecise to use as a Buy/Sell timing signal. We often do not see the true results — did a cover story truly mark the top or bottom of an issue —  for many months if not years. Consider the Time Magazine Cover "Why we are going gaga on real estate" — it was a mere 2 months from the peak in the housing cycle. Shorting the Home Builders then would have been painful for a few months, but then become highly lucrative.

Second, the jury is still out on a more recent BW cover: It’s a Low, Low, Low, Low-Rate World: Why money may stay cheap longer than you think. That came out in February, and since then rates slipped lower, moved much higher, and then retraced some of those gains. As the author of that cover story, Mike Mandel, noted "Magazine cover curse had been evaded–so far." That is mostly true in terms of interest rates, it is far less so in terms of the availability of credit (see The Credit Window is Now Closed).      

Still, its premature to claim that particular cover was a great indicator (yet).

And its worth noting that BusinessWeek may very well be a less reliable contrary indicator than mainstream publications like Time or Newsweek — if only because BW covers these sectors anyway.

When an economic issue makes the cover of Time, its guaranteed to be already very late in the game. With BW, that’s not necessarily true. I suspect BusinessWeek gets lumped into this group — more so than Barron’s or Fortune, or Forbes — because they have never lived down the Death of Equities cover article . . .


UPDATE August 8, 2007 3:12pm

I see in comments that Calculated Risk (coincidentally) covered the same story yesterday, but reached a somewhat different conclusion. We are sympatico on the macro picture, but I think this bounce will be high enough to sucker some EMH believers back in . . .   



A nice table accompanies the issue, showing the Home Builders performance
click thru for full table



For more on the Magazine Cover Indicator, see these articles


Bonfire Of The Builders
Mara Der Hovanesian
Businessweek, AUGUST 13, 2007

Home Builder’s performance Table

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What's been said:

Discussions found on the web:
  1. will rahal commented on Aug 8

    High Interest rates are suffocating the economy already.

    In the last three decades when the last(quarterly average) rise in interest rates takes place
    and Nominal GDP year-over-year growth starts to decelerate , the Fed has
    cut rates in within one quarter of this event, every time except for 1998.

    This time around we are in the fourth quarter of declining Nominal GDP growth.

    By this measure, Mr. Bernanke is already late!

    The lower US Dollar, high CPI rate and the Chairman’s reputation, prevent
    the Fed from lowering rates.

    See this graphically at “Fed Meeting “, August 5, 2007

  2. Barry Ritholtz commented on Aug 8

    These have been crowded shorts for quite some time . . .

  3. Bobby Toll commented on Aug 8

    Toll Bros. Forecasts Another Brutal Quarter http://usmarket.seekingalpha.com/article/43860?source=d_email&u=3686

    Toll Brothers said Wednesday morning in a preliminary earnings report its FQ3 revenue dropped 21% amid a widespread housing slowdown. The number-one U.S. luxury homebuilder forecast net revenue of $1.21B, down from $1.53B a year ago. This will mark its forth straight quarter of shrinking revenue, as homebuilders struggle with falling prices, tightening credit availability, and buyers intent on waiting for even lower prices. “You need some confidence on the buyer’s part that when they do buy that home, it’s not going to go down in value,” Victory Capital Management analyst Jack Lake told Bloomberg. Toll said Q3 net signed contracts would be down 31% to $727 million, backlog would drop 34% to $3.67B, and cancellations would be 23.8% vs. 18.9% last quarter. Toll estimated its pretax write-down for land and land options at $125-175 million. “We are now in the twenty-third month of a down housing market,” CEO Robert Toll said. “With the uncertainties roiling the mortgage markets right now, the pace of home sales could slow further until the credit markets settle down.” Toll reports Q3 results on August 22.

  4. me commented on Aug 8

    Didn’t ben say something about contained?


    Toll warns on deepening housing slump
    By Daniel Pimlott in New York

    Published: August 8 2007 15:07 | Last updated: August 8 2007 15:07

    Toll Brothers, the largest US luxury homebuilder, on Wednesday warned that home sales might fall even further in the latest sign that the worst housing slump in 16 years has not yet reached its lowest point.

    “With the uncertainties roiling the mortgage markets right now, the pace of home sales could slow further until the credit markets settle down,” said Robert Toll, chief executive, as he announced that Toll Brothers’ revenues fell in the company’s third quarter. “We are now in the twenty-third month of a down housing market. Hesitant customers remain on the sidelines, unsure of whether home prices have bottomed.”

    Lenders have been raising requirements for home loans following a flood of defaults and late payments on homes purchased with subprime mortgages. This, combined with still falling prices across most of the US, has deterred home buyers, leading to a string of poor results and losses for major US homebuilders, such as KB Home and DR Horton, over the last year.

  5. michael schumacher commented on Aug 8


    Totally understand that however with horrible fundies and yet another revision to it’s guidance (well not officially) would that cause me , as a short, to cover??..no way.

    THis is something else. Not weak shorts.

    Just like the financials leading the way on monday…..after BSC “assured” the market. And then they quickly turned there attention to it’s share price (that was at a 2 year low at the time).

    No these rally’s are not the work of shorts…they certainly contribute to it but it’s not coming from them initially.

    See post #2 for the “help”…


  6. tuolome commented on Aug 8

    Speaking of madness continuing, we had a surreal experience last night. We live in an older neighborhood in a medium-sized North Carolina city. The old lady who own the 60-year old house three doors down is going to the nursing home, and her kids put her house up for sale. A local scrape-and-build guy bought the house and is planning to tear it down and replace it with a new megahome. He met with the neighbors to discuss his plans, because we’ve already succesfully blocked other infill. He’s a nice enough guy and I understand he’s just making a buck. The surreal thing was when he got into who he thought would buy the house. First, he says “this house will be bumping up on 950K.” To you New Yorkers, that might seem normal, but that still is hard to contemplate in NC. Next, after explaining he’s building a spec home, he says, “the buyer will probably be a couple, around 37 or 38, with kids age 6 and 4.” Christ. I must be getting old, but that just seems fucking nuts. Where is this all going to end?

  7. mickslam commented on Aug 8

    In the ultra value portfolio that I run on bloomberg, many homebuilders are showing up. Its scary, but this portfolio has really performed in the past. I think I am going to wait for some very large event to happen before I jump into these. These type of cycles tend to have an easily identifiable event as a catalyst that shows there is a sea change.

  8. matt m commented on Aug 8


    The short side is a very different trade than the long side. The whip in heavily shorted names forces under-financed investors who are late to the trade to cover. Shorting is an art….very few people can do it successfully. Fundies and earnings revisions are barely useful once a sector has fallen apart.

  9. Groty commented on Aug 8

    With the announcement of pending home sales up 5% last week, mortgage applications up 8% this week, and the ten year yielding 4.85%, it’s hard to stay short the builders.

    The housing industry is going to suck probably until spring ’08 at the earliest. But I think there’s a chance the bears who spread the false BZH bankruptcy rumor for the obvious purpose of covering their shorts may have created the capitulation selling needed for a bottom in the stocks. It was a classic puke ’em up at any price.

  10. michael schumacher commented on Aug 8

    Well aware of that Mat…I’ve been successfully shorting for years, this is my primary source of income. Although one can argue that crowded shorts have contributed to this “rally” it is by no means the cause of it. The abolishment of the uptick rule has greatly assisted the ability to go short (and also provide the few who control the mechanics of the market the ability to squeeze them out when they want to- A KEY CHANGE IN THE MARKET) Not based on technicals, fundamentals….just because they can. Take a gander at XHB……you think that’s normal market forces at work??

    I find it hard to believe that all the overhangs in the market (far too many to list here) are discounted the very day after they occur and that the rally’s we see are caused by weak shorts.

    The institutions are now swimming against the tide (as witness to breadth and internals) they have had a following sea for the entire year. I still believe that they are distributing into all these rises (volume indicators have been horribly inaccurate on both ways for a few weeks now)but the market just ignores that (how it’s ignored is completely relative).

    Take a look at the headlines at Yahoo finance…….any one of those would tank the market easily and would keep most from jumping in blindly and contributing to a rise that has no basis in any technical or fundamental cause.

    But all of that does’nt mean I can’t profit from it…my long term shorts just keep getting fucked with for no other reason than
    pure and utter denial by the people who control the media and all “official” releases. It’s in such contrast to what is really happening. But hey we are less than 300 pts away from that record…….again.


  11. John F. commented on Aug 8

    This really depends on the underlying thesis of the article, doesn’t it? There are several aspects of the housing cycle cycle, and therefore several turns to look for, including inventories, home prices (new and existing), land prices, and homebuilder share prices. The last one is a leading indicator of some of the others, and is therefore least likely to be accurately called by Business Week or David Lereah. By contrast, price declines lag inventory builds as sure as night follows day (for example).

  12. David commented on Aug 8

    Maybe not a bottom, but enough for a bounce. I sold my TOL put position two days after the BZH bankruptcy rumor, and was very grateful to get out when I did.

  13. Pool Shark commented on Aug 8


    Even though the 10 year note is under 5%, lenders are repricing risk in the wake of the last couple weeks’ credit fiasco.

    For example, Wells Fargo recently raised its 30-year rate on jumbo mortgages from 6.875 to 8%:


    Many of the new construction homes on either coast will easily exceed the $417,000 conforming threshold.

    Higher mortgage rates combined with lenders’ tightening of standards is only going to choke-off the builders’ air supply further.

  14. jswede commented on Aug 8

    “We’re at the bottom right now in housing.”

    -Wachovia Senior Economist Mark Vitner…. THIS MORNING, 8/8, commenting on new mortgage apps…. (perhaps on the way into the office for the first time after a 3mo sabbatical..??? I hope?)

  15. matt m commented on Aug 8


    If you are short XHB, be aware that the recent double bottom that held at 24.5 on the 1/2 point P&F chart was the first bottom to hold since May, and todays 28 print is the first little double top breakout in 3 months on the scale chart. Sector’s been an easy win…but if you don’t respect the laws of supply and demand in the market, they carry you out in a box.

  16. pjfny1 commented on Aug 8

    When you have at least two or more publicly traded homebuilders go belly up, you have much less capacity in the homebuilding mkt, and a bottom in the stocks. Any short covering rally before then is a great opportunity to get back in on the short side….IMHO

  17. Sven commented on Aug 8

    I second Pool Shark…the mortgage rates don’t seem to be following the 10 yr down these days. That jump in Jumbo rates should be scaring people because that is the type of loan lots of good borrowers need to finance their house.

    I happen to think the Mortgage App figure is inflated by multiple applications. Anyone who had a mortgage with a lender that closed down or stopped funding certain types of mortgages (2/28s) had to go re-apply. Some may have tried to lock in a lower rate for the next 90 days, but I’m betting they aren’t going to buy a house.

  18. Jason M commented on Aug 8

    Calculated Risk had this exat same post yesterday, BR.

    It would have been nice to see an attribution.


    BR: I fastidiously source everything I write here — on the bottom of each post, under “Sources.”

    On the way home last night, I saw the cover of BusinessWeek — hence, what you read this morn. (I have not yet read CR’s piece)

    Not the first time this happened, and it won’t be the last. Chalk it up to the coincidence of great minds thinking alike .

    UPDATE: 3:18pm — I just read his CR’s post. Other than the cover, we approach the subject completely differently, oh, and reach the opposite conclusion . . . but other than that . . .

  19. Stuart commented on Aug 8

    A noteworthy comment from calculated risk.

    the MBA index is flawed right now – and should just be ignored. They only survey a few lenders – so when a lender not in their survey goes out of business, potential borrowers move to lenders in the survey and the MBA index goes up.

    Also there is evidence some borrowers are applying multiple times.

    Just ignore the MBA index right now. It is worthless.

  20. Fred commented on Aug 8

    Wow…a “positive” article on housing at TBP.

    That’s not a sarcastic statement on my part. You WERE early and loud on this, so you have 10 times the cred on this than anyone else.

    While the idea of “book value” is obviously a moving target, the group is obviously tradinga at some historicly low ratio to that falling level metric.

    The next melt down might be worth a stab.

  21. Groty commented on Aug 8

    Pool Shark:

    I’m looking at lots of variables.

    The most important piece of new information that is driving the stocks is Senator Dodd pushing OFEHO to allow FNM and FRE to expand their balance sheets. In terms of liquidity, that’s may be better than a rate cut because it targets the specific area impacted by the credit crunch (housing/mortgages).

  22. Sven commented on Aug 8

    Sorry to be slightly off topic, but anybody else on here waiting to buy a house?

    My wife and I are sitting here in NYC waiting to move to NJ. We have 20% down and good scores, but things are so screwy. We were anxious to have to market turn in favor of the buyers, but being in the market now is just as annoying as being in a bubble market. We’re one or two of those mortgage applications, but we won’t be buying anytime soon.

    There are a bunch of couples in my apt building all in the same boat–stuck in apts with kids running out of room.

  23. Michael Donnelly commented on Aug 8

    NAR came out with it’s forecast today, and they are once again telling us we are at bottom.


    But when you look at the actual numbers, they for the first time are saying new home sales will be lower in 2008 then 2007.

    HAS NAR finally thrown in the towel ? Maybe this is a turning point.

    July 11, 2007

    Existing-home sales are expected to total 6.11 million this year and 6.37 million in 2008, down from 6.48 million last year. New-home sales are projected at 865,000 in 2007 and 878,000 next year, compared with 1.05 million in 2006. Housing starts, including multifamily units, are forecast at 1.43 million units this year and 1.44 million in 2008, down from 1.80 million last year.

    August 8, 2007

    Existing-home sales are forecast at 6.04 million in 2007 and 6.38 million next year, below the 6.48 million recorded in 2006. New-home sales are expected to total 852,000 this year and 848,000 in 2008, down from 1.05 million in 2006. Housing starts, including multifamily units, are likely to total 1.43 million in 2007 and 1.40 million next year, below the 1.80 million units started in 2006.

  24. techy2468 commented on Aug 8

    sven….i think it is not a good time to buy house as per fianancial aspect….but as per family aspect its always a good time to buy a house…

    i think i will wait till all the doom and gloom are over in the housing sector…either by inflation (house prices dont fall much, but cheap credit availalable and people keep buying at these high prices) or by falling house prices.

  25. Pool Shark commented on Aug 8


    Well, it’s your money…

    But, my hobbies don’t include catching falling knives. With the myriad of recent negative developments in both the housing and credit markets, I just can’t imagine we’re anywhere near a bottom; like Barry, I think we’re only half-way through (at best).

    When the ARM’s begin to reset in October, there will be a new wave of panicked sellers competing with home builders for a shrinking pool of ‘qualified’ buyers.

    Additionally, I don’t think the enormity of the problem in housing has yet dawned on the American populace at large. My colleagues are all well-educated attorneys, and I am constantly amazed at how ignorant they are with regard to recent economic developments. They all seem to view this as just a ‘soft-patch’ in housing. (Maybe they were listening to closely to David Lereah.)

    That’s why I refer to this as the “Wile E. Coyote” economy; if the ‘experts’ at Bear Stearns didn’t see the cliff ahead, what hope does ‘Joe Six-Pack’ have?

    To quote Marvin the Paranoid Android: “This will all end in tears, I know it.

  26. Pool Shark commented on Aug 8


    My brother-in-law sold his former home some months ago at a tidy profit, and is currently renting in anticipation of scooping up a bargain as the market slumps. Lately he has been making some offers on ‘distressed’ properties, but I have continued to tell him he’s crazy. Whatever the seller is asking today, it will be significantly less in 6 months.

    I can’t speak for the NYC market, but here in central California, property values have only just begun to fall. The true panic selling has yet to be seen.

    The longer you can wait, the better deal you will likely get.

  27. michael schumacher commented on Aug 8


    This is not a stock analysis blog….I was merely providing an example of the bullshit that has been prevalent in home builder stocks. I am not short the XHB and I’ve cleaned out all the puts I had on HB’s as of last Friday/monday.

    You need to understand that people can have an opinion about the market and act differently than that opinion in order to not be “taken out in a box” as you so put it.

    It is possible to have a bearish view but still profit from the stupidity of all of this…….and it is stupid.

    We are now on the 10th month of yet another bottom…..

    That says it all


  28. Estragon commented on Aug 8

    Sven – FWIW, I think NYC area housing market will be more sensitive to changes in local employment, especially in the financial sector, than to broader housing market trends. Personally, I think there’s a lot of bloodletting to come in the finance sector, so I’d try hanging in there with the rental. More so if you’re employed in the financial sector.

  29. Sven commented on Aug 8


    Good point about the local employment. I hadn’t thought of that even when I heard a report about no bonuses and/or job cuts coming to Wall Street.

    We’re definitely being patient and trying to be smart. I was kind of smiling about everything until the Jumbo rates jumped–so I am counting on Ben to cut to 1% when things get real bad :) j/k

  30. michael schumacher commented on Aug 8


    “The most important piece of new information that is driving the stocks is Senator Dodd pushing OFEHO to allow FNM and FRE to expand their balance sheets.”

    Why that sounds like a bail out to me…..

    One has to wonder why all of the “bad” information is only coming from BSC…and it’s taken an act of god it seems to get any of it. Would this have any ramifications of the LTCM “issue” that they choose to not participate in?-LOL..methinks that they will also be frozen out of any bailout to come.

    i wonder if all these HB’s shut down there Stock option programmed selling? Do they have any left at this point-LOL!


  31. michael schumacher commented on Aug 8

    200 point days are now becoming the 100pt days we used to get and people went nuts then.

    You see by having these wild up and down days they are just putting more distance between themselves and the retail slobs, sorry, INVESTORS that they are trying so hard to hand this off to.

    The powers that be are breaking rule #1….
    and they do not even realize it……

    Trying to settle this market has the wrong outcome….it’s gone done each time it tries to stabilize…only to be rescued by (insert whatever you like as it will be just about as relevant as anything I can put in).

    Remember the analogy of an engine and nitrous oxide.


  32. Bob A commented on Aug 8

    Those who are forced to sell include Homebuilders who are overextended and have to pay the bank. Two new homes in my neighborhood originally priced at $3m now repriced down to $2.5m and still sitting. There’s still a healthy profit in them at that price. Meanwhile subs file liens for unpaid work. And the bank repo’s the builder’s wife’s luxury SUV. Yet he continues to start new homes. Is it over? I think not. But wudooI know…

  33. Kp commented on Aug 8

    Deflation, not just in the realm of housing, but across the board is coming. The concentration of wealth in this country has been building(Hyperinflation) for decades and the arrival of globalization is going to redistribute that wealth and deflation will occur with it.

  34. techy2468 commented on Aug 8

    did anyone looked at homebuilder’s stocks….

    BZH is up 25% …looks like people think its bottom of housing.

  35. whipsaw commented on Aug 8

    I don’t know if I’d go long on an individual homebuilder stock, but it may not be a bad time to buy a few March XHB calls. My reasoning is that even if this is not “the bottom,” we will soon be treated to a backdoor bailout of the lenders along with rate cuts heading into an election year and the builders have been beat up so badly already they don’t have enough downleg left as a group to offer a favorable risk/reward entry point on the short side now.

    This “stimuli” may not prove to be any more than window dressing (in fact I am pretty sure that is all it will amount to in the long run), but long the builders and short the dollar generally looks like a pretty good profile over the next 12 months, so I am looking closely but have not placed my bets yet.

    I have tremendous faith in the ability and the willingness of the Manipulati (Bernanke and Paulson) to create gold out of lead regardless of the ultimate consequences. It does not pay to duel with warlocks and conjurers.


  36. wally commented on Aug 8

    Tightened mortgage standards have not yet even rippled through the industry.
    They will have a bigger effect than what has happened so far.

  37. whipsaw commented on Aug 8

    per wally:
    “Tightened mortgage standards have not yet even rippled through the industry.
    They will have a bigger effect than what has happened so far.”

    True dat, but it probably doesn’t matter for trading purposes. The future losses are probably already baked in the cake and the odds are much greater that Wall Street will view any homie news as positive rather than negative at this point regardless of what makes common sense.


  38. Jason M commented on Aug 9

    BR —

    I read both you and CR almost every day and enjoy both. If the situation was reversed I would have posted the same thing on CR.


  39. The Big Picture commented on Oct 2

    Pending home sales index drop to lowest level ever

    Ouch!The battered housing sector took another blow Tuesday, with an industry group reporting that a gauge of pending home sales tumbled to its lowest level ever as the credit crunch restrains purchases. The National Association of Realtors’ index for p…

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