Another Analyst Explains Why Housing Is In Trouble

This guy explains why the decline in foreclosures and distressed sales is a big negative for the housing market.   While counter-intuitive, his explanation is clear – crystal clear:

In summary, the halting of foreclosures and short sales due to can-kicking — and to a larger extent exotic mortgage mods — has caused serious structural damage to the demand equation of the macro housing market, which amazingly hasn’t not dawned on many yet.

Here’s the full article link:   Headwind For Housing

My first homebuilder short-sell is performing well so far – it has at least $10 of easy downside in it from here, with patience.   This stock traded below $5 in the 1990’s and I expect it go below $5 eventually once again:    Homebuilder Stock Short-Sell Idea

As the overall stock market begins to price in reality and sell-off quickly, it will exert particularly heavy downside force on the homebuilder stocks.

 

4 thoughts on “Another Analyst Explains Why Housing Is In Trouble

  1. homebuilders were a great short a year ago when rates rose. But, if you are right about a broad market sell off — if rates drop– homebuilders could perform well on a relative basis. Especially small cal builders like KBH and HOV. If I were shorting builders I would probably stick with builders who build expensive houses like TOL, which have outperformed in the past year.

    1. They’re all great shorts. Low rates are not driving sales. The middle class is mired in debt and declining real income. Homebuilders are insanely overvalued. As an example, KBH currently trades at 23 p/e on TTM net income (notwithstanding the problematic aspects of their GAAP net income manipulation). This p/e is on TTM base of less than 8k home delivered. At the peak of the Primary Bubble, KBH had a peak p/e of 8.8x (2006) on base of over 32k homes delivered. KBH has $3 billion in debt right now vs. $2.9 billion back in 2005/6.

      The truth is, on an intrinsic basis, assuming I’m right about the direction of the housing market, and I probably am, KBH equity is worth zero. In fact, the debt is worth less than face value.

      If KBH goes back to negative operating income – it swung from $1.2 billion in operating income in 2005 to negative $1.9 operating income in 2007, the only value for the debtholders is the value of the inventory. Currently KBH values its inventory at $3 billion. Assume liquidation is, at most, 50 cents on the dollar. The means the debt is worth 50 cents on the dollar.

      Every publicly traded homebuilder has similar metrics. I’m working on another homebuilder short report in which I found even bigger GAAP accounting exploitation than KBH is using.

      1. Several of the homebuilders that are publicly traded should have gone through chapter 11 restructuring in 2008. But massive bailouts of the big banks, combined with the Fed’s printing money and buying mortgage paper combined with the numerous Government subsidies of the housing market – of which HARP/HAMP was only a minor portion – is what saved several homebuilders from going bankrupt. They won’t be so lucky this time around.

        Just wait until a lot of big investment funds look to unload big blocks of homes they can’t rent out or are not producing the types of returns their spreadsheet robots modeled in to the strategy.

    2. FYI – HOV is an absolute financial abortion. But shorting a $4 stock is stupid unless you’re short already at higher levels. HOV debt is a great short.

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