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).