Tag Archives: KB Homes

New Home Sales Tank – KBH Claims Its Numbers “Improved”

“We are confident we can produce further improvement in our results in the second half of this year” – KB Homes CEO in reference to its “returns-focused” growth model

“Returns-Focused Growth Model.” Has a nice ring to it, doesn’t it? KBH’s revenues dropped 7.3% YoY for Q2. It’s operating income plunged a healthy 28%. How’s that growth strategy working out for you, Jay?

Of course it produced a headline EPS “beat.” But this is because it implemented a full-blown deep-tissue body massage to GAAP accounting, including capitalizing costs that should have been expensed (interest expense and homebuilding expenses), it recognized a non-cash “income” in off-balance sheet JV’s (a suspiciously round $2.5 million) and slashed its arbitrarily determined book tax rate to 17% from 28%.

Except in certain areas where markets remain hot due to migration patterns (hundreds moving to Denver weekly – please stop), the housing market is contracting despite the lowest mortgage rates since late 2017. The Government has all but made it possible for a barely breathing corpse to take down a tax-payer guaranteed mortgage (there’s even several no-down-payment programs).

The homebuilder sentiment index (formally called the “Housing Market Index”) was released on Monday morning. It fell to an index level of 64 in June from 66 in May. Wall St’s finest were looking for a consensus 67. All three sub-indices declined: current sales conditions, buyer traffic and expectations for the next six months. Buyer traffic has been below 50 for two months in a row. This is despite more than a 1% decline in the average rate on a 30-year fixed rate mortgage during the last 7 months.

At the end of the day, it doesn’t really matter how homebuilders “feel” about the sales  environment now or in six months, declining foot traffic translates into falling sales volume. The quote above reinforces my theory that the “pool” of potential homebuyers, especially first time buyers, who can qualify for a mortgage and afford the monthly cost of home ownership is drying up. Lower interest expense from lower mortgage rates somewhat offsets high prices relative to income. However, the general cost of home ownership other than debt service is rising beyond the spending budgets of many potential home owners.

A long-time subscriber contacted me and was curious about the divergence between my view of the housing market and Josh Steiner’s at Hedge Eye. Here’s my response: “I tried to follow Hedge Eye several years ago. It didn’t take me long to discard them into the rosecolored glasses/perma-bull bucket. Hope and optimism is easier to sell than doom, gloom and reality.  Housing market perma-bulls don’t understand the extent to which easy credit has fueled the housing market since 2010. You can’t necessarily call it a “housing bull market” because the until sales level is not even remotely close to the previous peak in 2005. New single family home sales peaked at a seasonally adjusted annualized rate of 1.39 million in July 2005. The current SAAR is 626,000.

Furthermore, the Government “pulled forward” future demand when it began to lower the bar to qualify for a FNM/FRE mortgage. The demand pool Steiner probably thinks is out there for starter homes has mostly already bought OR can’t qualify. This is why that huge drop in the 10yr has not stimulated housing sales. The rate on a 30yr fixed mortgage has dropped over 100 basis points since November, yet housing sales have been declining. It would be interesting to know to what extent home sales would have have declined over the last few months if rates had not fallen over 1% since November.

Mortgage purchase applications dropped 1% this past week after a reported 4% decline the week before. Mortgage purchase applications have declined 8 of the last 10 weeks. This is despite the stunning drop in the 10yr Treasury yield and the related decline in mortgage rates. Furthermore, June is seasonally a peak month for home sales and thus mortgage purchase applications should be soaring.

KBH’s unit sales were flat but the average selling price plunged 8.5%. The Company had to resort to heavy discounting to move homes while it’s inventory continues to soar. The DJUSHB has been rising despite the fact that falling interest rates are not stimulating housing market activity. I’m certain that hedge fund algos have been programmed to buy homebuilders when the 10yr yield falls.However, at some point the fundamentals will take over and hedge fund algos will be reprogrammed to start selling.

The DJUSHB knifed through it’s 50 dma earlier this week. Despite the overall strength in the index this spring, I recommended two shorts in my Short Seller’s Journal that have been home runs. In mid-April, I recommended shorting Realogy (RLGY) at $12. It’s trading at $7 as I write this. I also recommended shorting HOV at $15. It’s trading at $6.94 today. Realogy is the best bellweather stock indicator for the housing sector because its the largest realtor services company. HOV is just a zombie company with far too much debt and will hit the wall eventually. That’s why indsiders dump their shares continuously.

There’s a lot downside profit opportunities in the housing sector. I review many of them in my Short Seller’s Journal. This includes ideas for using options and trading strategies. To learn more about this follow this link:  Short Seller’s Journal information.

Extreme Disinformation On New Home Sales – Gold/Silver Hang Tough

As I highlighted last week, the Census Bureau/Government monthly report on new home sales was, without a doubt, a statistically manipulated fraud:  New HomeSales Fraud.  Individual companies are now committing the same crime as the Government.  KB Homes reported their 2nd quarter results on Friday.  In their discussion they made the claim that the first-time buyer has returned.   Here’s my quickie analysis of KBH’s results – which, by the way, feature a drop in year over year deliveries AND a whopping 30% cancellation rate:

KBH’s deliveries for the quarter DECLINED year over year. They managed earnings by doubling the amount of interest they capitalized. Cancellation rate is now 30%. 30%!!! Nearly ONE-THIRD of their contracts signed will cancel.

This report is a disaster. Furthermore, they are lying about first-time buyers. 93% of all new home buyers use a mortgage. That means that almost all first time buyers would have used a mortgage to buy a KBH homes – or at least applied for one since the cancellation rate is so high.

To say that first-time buyers returned is a lie because it is completely inconsistent with the data during the time period showing that mortgage purchase applications dropped nearly every week on a week to week basis and double digits percent-wise year over year EVERY SINGLE WEEK THIS YEAR.

Government and corporate blatant fraud is getting tiresome, don’t you think?

Meanwhile, the precious metals are shrugging  off the fears engendered by market analysts – especially technical analysts – from which reports are proliferating that the market is going to get slammed hard for the next few weeks starting today.

In fact, silver was hit hard on Friday after the NYSE closed.  The period between 4:00 p.m. EST on Friday (NYSE close) and the close of the Comex computer Globex system – 6:15 p.m. EST is usually the lowest volume period during the entire trading week.  This is when the manipulation from the big banks kicks into high hear.  They took silver below $21 in the last 35 minutes of the Globex session.  Nice, eh?

If we do get a highly manipulated takedown of the metals/miners over the next few weeks, use this opportunity to buy into or add to your junior mining share positions.  I have four great ideas here:   Research Reports.