Short This Homebuilder Bounce

Last week and the week before, Pulte and Calatlantic (Ryland/Std Pacific merger) reported their latest fiscal quarter.  Both companies reported a decline in homes delivered to buyer (closings).  This was consistent with the new home sales reports, overall, for the 3-month period.  The home builders were hit after both of these reports, taking the DJUSHB from 600 down to 560 – or 6.7% – over the next 13 trading days.  Beazer is still down 20% from when I first posted the original research report.  It’s headed to zero, or close to it.

Yesterday DR Horton reported its Q4/Fiscal yr-end results and Beazer reported the same today.  While DHI “beat” earnings by a penny, it missed on the Street’s revenue estimates. Beazer missed on its revenue estimate.  It’s earnings vs estimates is useless because Beazer decided to dump $323 million – or more than 10x its operating income for the quarter – of non-cash “tax benefits” into its net income calculation.

While both companies, contrary to Pulte and Calatlantic, showed an increase in units delivered/closed, further analysis I’m sure will show some extreme measures were implemented in order to move inventor.  I’ll will have updated research reports on both and special research report offer sometime over the next couple of days.  If you want a head-start, I would suggest taking a look at this report, which will not be part of the research report special:  RED FLAG ALERT FOR THIS HOMEBUILDER

However, interestingly both homebuilders stopped investing in new inventory.  By this I mean on a net basis, they both reduced their inventories quite a bit during their Q4.  If the outlook for the housing market is extremely optimistic – per the NAHB builder “confidence” report – how come these two homebuilders reduced their inventory after building them up to levels that exceeded their 2005/2006 housing bubble peak levels?

On a quick glance at Beazer’s numbers, its margins took a hit during the quarter, which means it was offering its homes at a big discount.  DHI’s cancellation rate during the quarter popped up to 27% vs 23% for all of 2015, which is a huge red flag.  Among other indicators, it means that DHI’s reported order book is highly over-inflated.   BZH’s cancellation rate also increased during Q4.

Furthermore, DHI’s Numbers were not nearly as strong as the headlines in their press release. They “beat” by a penny, but there were several somewhat arbitrary non-cash adjustments that gave them the leeway to engineer a “beat.”  It also looks like like they underwrote the mortgages for a lot of their buyers which means they financed subprime buyers to the hilt. We know this because their “mortgages held for sale” jumped nearly 50% year over year. If these were conventional, non-subprime mortgage, they would be able to off-load onto FNM/FRE and not hold them for sale.   It also means that there will be mortgage loss write-offs in DHI’s future.

It’s highly likely that this quarter will be the “last hurrah” for homebuilder sales volume and rising prices.   Most Americans are sliding into insolvency and it looks like the Fed/Government has saturated the last of the population that makes enough money – for now, anyway – to support the monthly cost of home ownership.  For example, read this report:  Most Americans Are Too Broke To Afford To Buy A Basic Home.

Next Up:   Another bailout of Fannie Mae and Freddie are inevitable and the FHA will require one as well (FHA was 2% of the mortgage market in 2008, it’s 20% now).

7 thoughts on “Short This Homebuilder Bounce

  1. Dave…..this……

    From Westword on Colorado. “By the way the term is being used around this city these days, one would think Denver is the ‘luxury’ capital of America. As new development bullies its way into our neighborhoods, ‘luxury’ is the ubiquitous term used to sell it — ‘luxury apartments,’ ‘luxury high-rises’ and ‘luxury living in the city’ are offered around every corner. With luxury comes a high price tag, of course. I’m beginning to think that in Denver in 2015, ‘luxury’ is just another word for ‘too expensive for most of us.’”

    “Last month, South Park nailed the ‘luxury’ issue with its rollout of SoDoSoPa, in an episode titled ‘The City Part of Town.’ And for those very privileged few, the most private and exclusive ownership opportunity is here,’ the slick male voice proclaimed over a muted soundtrack of sushi-restaurant techno. It sounded just like the real-life marketing campaigns for RiNo and LoHi and SloHi and every other made-up Denver neighborhood that has been Columbused, reclaimed and sold to the highest bidder over the last decade.’”

    “‘Luxury’ doesn’t have to be a bad word in Denver. But until we face the real issues going on in our city, it will continue to be a divisive term separating the haves from the have-nots. And if there’s anything I miss about the idea of a long-dead ‘old Denver,’ it’s that we used to feel like a place where everyone could afford to belong.”

  2. Dave – this as well from HBB – Ben Jones…… I don’t want to clog the comments section but I thought given you drive arounds that you talk about from time to time – this might be worth more investigation.
    My comment – What the hell is going on out there – 250k per unit!!!!?

    Multi Housing News on Colorado. “HFF has recently announced the closing of The Retreat at Park Meadows—a 518-unit, Class A multifamily community in Littleton, Colo.—on behalf of PNC Realty Investors Inc., acting as investment advisor to the AFL-CIO Building Investment Trust. Though the sale price has not been disclosed, data collected by Yardi Matrix shows that the buyer, Invesco Real Estate, paid a whopping $125 million, or an average of $241,313 per unit, to acquire the asset.”

    “‘With its low-density design and large unit sizes, Retreat at Park Meadows is a very unique asset within the Denver market and was highly sought after by investors,’ said Managing Director Jordan Robbins in a statement. ‘The property had not been upgraded since it was built 15 years ago and is prime for a new owner to complete a value-add strategy for additional growth.’”

    1. Every building in central Denver is offering 1-2 months free to move-in and many are now offering a free parking spot. It’s getting even more glutted in the suburban areas, where this apt complex is. Park Meadows is adjacent to Lone Tree, where there’s a serious oversupply of home listings. One particular house a colleague of mine and I watching is on the Lone Tree golf course with no golf ball exposure and sick views of the course. It was listed in late spring for $830k. It was lowered several times and is now sitting at $699k.

      This will greatly affect the amount rent that apt complexes can charge. Invesco Real Estate has big pools of cash to put to work and this is an example of extreme mal-investment.

      1. Thanks.
        Your reports really keep things in perspective.
        The momo types are gonna take a beating like a donkey at some point.

  3. New home sales took a dive in Houston in October. The reason is really simple…prices are still too damn high! What is particularly interesting with our latest figures is that the new home slowdown has expanded beyond the West Houston Energy corridor. Latest Houston area figures from Metrostudy showed new home closings off 27 percent. Here in Katy (West Houston), new home sales were off 37 percent YoY in October!
    http://aaronlayman.com/2015/11/katy-texas-west-houston-real-estate-market-october-2015/

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