Homebuilder Stocks: Look Out Below!

“Mortgage applications to purchase a newly built home dropped dramatically in November, signaling a slowdown in sales for the nation’s builders. ‘There was less urgency in the last quarter,’ Ara Hovnanian, CEO of K Hovnanian Homes, told analysts. ‘Given the gains we’ve seen in 2014 in employment, we would have expected housing demand to be stronger then the low levels we are currently experiencing.’”

You can lead a horse to water…Every single homebuilder stock I look has insane levels of debt.   The company in my latest report has 22x EBITDA to Cash Flow.   I had to rub  my eyes and re-calculate the numbers when I first looked at that ratio.   This is a hallucinogenic level of debt at a time when the housing market is headed south.  This company will hit the wall within two years and anyone short the stock will be able to cover close to zero.

But  ALL of these companies have record or near-record levels of debt and inventory. Their debt/inventory  as a whole is higher than it was at the housing bubble peak in 2005 – on unit volume sales that is less than one-third of the bubble peak volume.   The seasonally manipulated adjusted, annualized sales rate for home sales being fed to us by the industry organizations and the Government are fraudulent.  Witness that fact that the Census Bureau imposed the 3rd largest seasonal adjustment on record to yesterday’s November retail sales report.   It’s all a fabrication, like most of everything else in our system.   Click to enlarge:

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Shorting the homebuilders now is one of the easiest short-sell bets since the peak of the housing bubble or the internet  bubble.  The Fed is no longer buying mortgages and near-record low mortgage rates are not stimulating sales.  My research reports are unique in their insight and detail, showing exactly why the reported GAAP numbers are misleading, if not outright fraudulent, and why these companies are in worse shape now than in 2005, the last time they crashed:    Sell-Short The Homebuilders.

6 thoughts on “Homebuilder Stocks: Look Out Below!

  1. YoY Nov. new house purch. appl., NSA:

    “Application volume fell 22 percent from October, according to the Mortgage Bankers Association. The change does not include any seasonal adjustments, but when compared to one year ago, these applications are down 11.9 percent.”

    “”There was less urgency in the last quarter,” Ara Hovnanian, CEO of New Jersey-based K Hovnanian Homes, [non-luxury house builder] told analysts Wednesday, after the company reported quarterly earnings. “Given the gains we’ve seen in 2014 in employment, we would have expected housing demand to be stronger then the low levels we are currently experiencing.””

    “The builders confirm they are not raising prices, but instead are seeing far more interest from wealthier buyers looking at larger homes.”

    “”As we look at 2015, the house we sell today is going to struggle to be marginally accretive. We just don’t have the pricing power to improve the margin,” Toll [luxury house builder] CEO Douglas Yearley Jr. said.”

    If any doubts as to US RRE trend, the Spring ’15 numbers come out in a few months. It should be very clear then that the trend is down again as US housing bubble 2.0 continues to mean-revert. Kicking the can policies can only delay, but not postpone the inevitable.

    If everything is so great w/ US econ. why then the following?:
    > 40% Americans living paycheck to paycheck
    > 46M Americans receiving SNAP (food stamp) transfer payments
    > U6 Underemployment rate > 11%
    > Labor participation rate 63% (93M not in labor force)
    > Real wage growth (for 99%) declining

    Note that “gains in 2014 employment” are reflected in the U3 unemployment number, which doesn’t include U6, or participation rate. It’s a statistical, but not realistic indicator. As US wealth tends to be concentrated (i.e. 1%), there is less available for Main St. and so we are experiencing stagflation (i.e. rising prices + stagnant growth). There has been no real, organic, housing recovery since 2007-2009, only an echo bounce over the last couple of yrs. due to interventions/speculators/foreign investors/flippers. Prices are now too high for the investor cohort and so there is a vacuum in demand forming. Next Spring should be telling. 3% down mortgages won’t help since rates will be required to be higher for the sub-prime cohort. Stick a fork in it, IMHO.

    Diana Olick @ CNBC article link:

    http://www.cnbc.com/id/102260507?trknav=homestack:topnews:17

  2. OK, not trying to hog the comments here, but the following two links are directly related to the author’s post:

    1) Memo calls out workers for cheating on Census data
    By John Crudele
    December 3, 2014 | 10:52pm

    http://nypost.com/2014/12/03/census-memo-calls-out-workers-for-cheating-on-census-data/

    2) The Census Bureau is cooking the new home sales numbers
    You can’t make bricks with imaginary straw
    Trey Garrison
    November 26, 2014 11:00AM

    http://www.housingwire.com/articles/32185

    My comments:

    The banks still have a lot of zombie loans on their books and want housing prices to (magically) reflate. There is nothing here about helping underwater houseowners. The gov’t.+CBs want to keep the game going as long as possible and are hoping for the miracle of a self-sustaining housing recovery, but this is an illusion. Distorted stats can help to do this, for a while. Unfortunately, just as with US housing bubble 1.0, the end game, and final outcome will be the same. History repeats, and most people don’t really understand (or care about) Keyesian vs. Austrian economics. I don’t think it’s any surprise that Bernanke recently stepped down as Fed chair (just as Greenspan did just before the last meltdown). The Fed knows what’s coming. Rinse and repeat. This is the best fiscal and monetary policy (and gov’t.) that money can buy. What’s good for the banks is not good for America.

    –“The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers’ stone to make it last.” — Ludwig von Mises (1940)

  3. The homebuilders are just one small sliver of the whole rotten corrupt SYSTEM, and it’s obvious these MFers and their bought & paid for whores will blow it all up rather than ever relinquish control to an honestly run system.

    Update Friday, December 12, 2014: On Thursday night, the House passed the spending bill with the Citigroup-written provision. The Senate is expected to approve the legislation.

    http://www.motherjones.com/politics/2014/12/spending-bill-992-derivatives-citigroup-lobbyists

    As I reported last year, the bill eviscerates a section of the 2010 Dodd-Frank financial reform act called the “push-out rule”:

    Banks hate the push-out rule…because this provision will forbid them from trading certain derivatives (which are complicated financial instruments with values derived from underlying variables, such as crop prices or interest rates).

    1. Yep. This is a systemic, non-partisan problem. Both parties are cut from the same cloth when it comes to political campaign funding and corruption. “He that pays the piper calls the tune.”

      The notional value of the derivatives market is estimated to be $600+T, which is several times over the value of global GDP. Read highly leveraged. What could possibly go wrong? Normally I wouldn’t be too concerned, but for two factors: 1) These clowns will bring down the entire financial system and make the 2008-2009 crisis look like a penny ante poker game, and 2) The taxpayer always seems to get stuck with the bill (losses).

      We have maximum moral hazard since the Fed/CBs are the backstop, which apparently means with the taxpayer, and so there is no party/counterparty risk to the players. The taxpayer will (gladly) pick up the tab. See quotes, below. Nothing has really changed over time, and no one has learned the lesson, unfortunately…

      “We’re essentially continuing a system where profits are privatized and…losses socialized,” – Nouriel Roubini

      “I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. … You are a den of vipers and thieves.”
      – Andrew Jackson, 1834, on closing the Second Bank of the United States; (unabridged form, extended citation)

  4. With outright open prep for war against russia in uke endless cargo planes flying in (story ZH Sunday), AND Lord Zero declaring dec 26 a holiday for federal employees, meaning a 4-day+ recess with no one at any of the alphabet agencies, & the omnibus bill passing with details here, things just speeded up a few gears at least.

    Well, the “cromnibus” bill passed in the Dem-controlled senate without a problem and now it heads over to Wall Street’s president to sign it into law. Here’s a little reminder of what’s in it:

    Dodd-Frank, Boob-Schmank.
    Political Contributions from the Super Wealthy
    Billions for Funding Terrorists and Death Squads
    Speaking of Funding Terrorists… Israel Still Gets Their Share of the Loot
    “Severely” Slashing Benefits for Retirees
    EBOLA or.. the Colonization of Africa Project
    And… 1.3 Billion for the Most Brutal Dictatorship in the Middle East – Egypt

    They were supposed to wait until Wednesday, allowing for further debate starting Monday, but I guess they didn’t want several of these issues that I brought up to come to light before it was law, so, they met this weekend and turned the clock back by about 40 years or so (at least in terms of protections for your retirement money)
    http://willyloman.wordpress.com/2014/12/14/cromnibus-rolls-on-senate-held-session-last-night-to-pass-reactionary-bill/

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