First out this morning (Tuesday) was this:   “Oil crash may whack earnings of top U.S. homebuilders in Texas”  (Article Link).  Well that’s obvious.  I wrote a post a few weeks ago in which I surmised that the crashing price of oil was likely the U.S. economy’s “black swan.”   Sorry, it doesn’t take Einstein to figure that out.  In my year-end investor letter I stated that the housing markets in States like Texas and Colorado were going to get hammered hard.  I’m already seeing high-end housing inventory all around Denver pile up like litter in a junkyard.

THEN, KB Home (KBH) reported its fourth quarter (fiscal) ending November:

  • *KBH SEES 1Q BOTTOM LINE ABOUT BREAK-EVEN (against expectations of a 17c rise!)

Hmmm…the stock was annihilated today, down 16.3%.  But guess what?  45% of KBH’s sales revenue is derived from the West Coast – primarily California.  Yes, the Company reported “impressive” year over year revenue and backlog gains, but guess what?  That’s rear view mirror stuff.  You can completely ignore its reported GAAP net income number because 90% of it was from a NON-CASH massive income tax benefit it accrued into earnings.

KBH is a viper’s nest of accounting gimmicks and questionable use of capitalized interest, which also serves to inflate its GAAP earnings.  Oh, by the way, did anyone notice that KBH’s Q4 cancellation rate was 37%?   That means you can slash their new order and backlog report by at least 37%.

KBH’s debt/equity is 167%.  Once KBH is forced to start writing down the value of massively bloated inventory, it’s book equity to hit zero or go negative.   It’s inventory value is more than 200% of its book equity.  This stock is going to hit the wall eventually.

You can ignore reality but you can’t ignore the consequences of reality (Ayn Rand).  The reality is that my assessment of the housing market is correct.

29 thoughts on “Housing: LOOK OUT BELOOOOW….

  1. You were the early one and most pessimistic and you might not be pessimistic enough.

    From a macro economic perspective, without new construction and sales, i guess we will see another few qtrs of 5% growth.

    Actually how much gdp can we get if deficits ramp up even more?

    (It’s late and i can’t see anyway out of this bottomless economic pit we are digging- but it should be a spectacular crash).

  2. Thanks Dave. Anyone who has followed your early call on this one, is in the long green! Clean the table Momma, cause Dad’s bringin home steak! Time to re-load.

  3. the problem with being early is that it sometimes does not work out right initially.

    Metals for example–I think we are going to be big time right. (unfortunately for things like society) . This 3 year selloff is going tobe a huge opportunity for people who missed the ramp from 08 to 11. I wonder how many will see it.

    1. You can’t time markets perfectly. You aim to get at least 60% of a move when you make a fundamental position. My original call to short the DJUSHB was at 515. It’s been up 550 twice since then and below 400 once. I believe it’s going to end up below 150. Was I early?

      1. Being early can hurt especially if your over leveraged.
        Jim Rodgers always claims to be a terrible market timer.
        Based on his track record his timing has been good because
        of superior analysis.

  4. Early is fine. Early is the best. And for all the lovers out there… too early only matters in the short term. In the long term all that matters is the long term…

    Beep beep

  5. KBH sold new homes near my house like crazy last 2 years matching the level of 2005-2006 before everything went to hell. I can’t believe how many people buying new houses these days. A whole new community with 300+ SFH and townhouses came out of no where in 2 yrs. Never seen anything like this since 2005.

    Dave, you might be right about KBH going forward since their selling is now slowing down and everything is on-sale now in that new neighborhood.

  6. Have you seen this Dave? Do you think it’s possible these people
    are not being truthful? Surely they wouldn’t lie. I mean 49% is a big increase.

    United States MBA Mortgage Applications 2007-2015 | Data | Chart
    Mortgage applications, increased 49.1 percent in the week ended January 10th from the previous week as consumers took advantage of decline in mortgage rates and after adjusting for New Year’s holidays. The refinance share of mortgage activity increased to 71% of total applications from 65% the previous week. Mortgage Applications in the United States averaged 0.41 percent from 2007 until 2014, reaching an all time high of 48.10 percent in March of 2008 and a record low of -38.80 percent in January of 2009. Mortgage Applications in the United States is reported by the Mortgage Bankers Association of America.
    United States MBA Mortgage Applications

    1. Holiday noise. Go look at the post on Zerohedge that shows Wells Fargo’s mortgage origination numbers. WFC is the largest underwriter of mortgages in the country.

  7. Dave:
    Just had a very interesting talk with a builder in the Denver area. Discussed the cost against the value of house construction out there as I am looking at an option to build. Seems that the builders want to continue to talk up the market while what I am seeing across many economic and housing blogs is something that portends of an big price drop in the near term. Land prices are insane in ‘preferred’ areas – over 250k an acre with an addition of at least 35 k in sewer and water tap fees. Something has to give as it appears in my on going search that much of the land available is sitting and sitting and sitting. Appears that demand has dropped for land and therefore a house on which to build it.
    So….my question – builders seem to ‘know’ their market but feet on the ground seem to say something completely different. Who to believe?

  8. The home builders are not building a huge number of houses, certainly not compared with the size of the millenial demographic bulge. Profits = price x volume, if price stabilizes, volume is likely to increase. Buyers will emerge when prices stabilize and supply emerges. I’m a buyer in DC/Nova right now and there is no inventory but prices aren’t rising. Flat prices and more inventory would draw out many of the shadow buyers. You’re doom and gloom is misplaced. WS is wrong about the homebuilders, all I see is pessimism but XHB is at new highs and USG is poised to break out. When housing gets moving the momentum will be unstoppable.

    1. You have no CLUE what you are talking about. I have shown hard data in previous blogs demonstrating how overbuilt with single family homes this market is. See several previous posts. Where is your HARD data? DC? HAAHAHAHAHHA. I just go color from a title attorney in DC just YESTERDAY that DC sales are imploding. I’ve had several other readers email with accounts of huge inventory of homes there.


      1. So how do you explain XHB hitting a new high this month, going all the way back to 2007? That’s the only data that matters. Don’t fight the trend my friend.

        1. XHB is rerived from stocks. The stock market overall is the most overvalued that it’s been in history. Hell, the DJUSHB which is a better proxy for housing than XHB – AS I’VE DETAILED IN THE PAST – is not even at 50% of its all time high. Explain that? You look at home sales data? It’s falling. You look at homebuilder inventory? It’s higher now than in 2005.

          Just the facts on fundamentals. NOT the stock market fraudulent fairytale

          1. Demographics swamps all the other data. There is a huge population of buyers out there that have price fatigue after 5 years of nothing but higher prices. I’ve seen it in DC, sellers keep jacking up prices and now the homes are sitting, that’s true, but there is no new inventory in my neighborhoods. Once prices plateau buyers and sellers will mentally adjust to the new reality of stable prices and come off the sidelines and we’ll see huge increases in starts and the banks will start to release the shadow inventory.

            Here is some data about the approaching tsunami of buyers:

            The number of housing starts pPer population strongly relates to the average of renter/homeowner occupancy. Moreover, average occupancy statistically leads starts, with a peak correlation at 20 months of 62.5%. This means the present occupancy rates explain nearly two-thirds of housing construction 20 months out . . . [which]
            leaves us with a present estimate of 1.7 million starts in two years, 70% higher than the present rate.


            Now I don’t understand all that math, but I do understand that housing starts cannot stay at these levels much longer.

          2. You. Are. Completely. Clueless. You better buy up all the homebuilder stocks you can right now, while you can!!!

          3. Dave – here is the latest as of yesterday.
            I agree – these returns are just way out of wack relative to a ‘normal’ economy. We don’t live in normal times at all and these figures point this out.
            Granted KBH – Krap Built Homes – is a bit loser yet the returns on the other production builders below show a market return that is just all wrong.
            Your commnets?

            As of 1.14.2015 – UBS Stock index ticker for housing in percent gain or loss
            1 yr 2yr 5yr
            KBH -24.78 -17.24 -13.68
            LEN +19.70 +11.75 +179.88
            PULT +13.88 +14.54 +97.95
            DRH +16.44 +20.00 +105.22

        2. Hey, bjdumbs, here’s a hot tip since you’re a big DC buyer/player. There might be an unusual foreclosure listing for a McMansion coming onto the market, after the global financial collapse/currency reset occurs, with the USA being located at ground zero. Its located at 1 6 0 0 P-e-n-n-sylvania Avenue NW – it comes furnished. Although, it’s present squatters might have to be forcibly removed.

  9. One other thing – as I have been looking about in the market in the Denver area one has to come to the conclusion that purchasing a home (a nonrecoverable ‘asset’) is a huge risk right now and in other areas of the country.
    I had to laugh as I saw a home – a rancher with walkout in a nice area just east of Greenwood Village in an area called Orchard Hills that is advertised as a fixer / flipper with a price tag of 600K!!!! Mr. Banker is laughing all the way to the bank on this one – the house needs a ton of work and looking at the exterior – there are no interior shots for a reason I think – the thing looks like a grow house. Just amazing. This home would just looking at it needs in excess of 250,000 or work just to get it livable. What a friggin joke – 600k for a fixer upper.
    Market there is nuts!!

  10. I just walked around key Biscayne which is the heart of condo heaven in Miami. Today being Jan-15. The temperature is a humid 80, and the rest of the nation is freezing. The area I am observing is right next to The Mandarin Hotel in Miami. What is weird is how few people I see, and how many condos don’t have lights. This should be prime season for visitors. I counted several condos most ranging from 40 to 50 floors. It was 7:15 eastern and very dark. I would say there were roughly 25 to 35% occupancy on average. I read an article about 1 year ago stating there were an additional 57 thousand new condos in various stages of construction being built in Miami. I can attest to seeing various skyline condos in advanced stages of construction. There are also quite a few for sale even now. I’ve seen the same story unfold in 2008. I see the same thing playing out again. I’d say the big investors are about to be taught a very hard lesson about Miami real estate.

  11. Hi Dave, found you through PCR and am glad. Can you direct me to step by step instructions on how to short the housing market? Thank you. I have an options account.

    1. Hey thanks for the feedback. If you buy one of the housing market reports on my blog I have a section that discusses how to replicated shorting the stock using options. I would go for one of the two latest reports posted. If you do that and read thru the report, I would be happy to update option strike price suggestions.

  12. OK let’s make a gentleman’s bet: XBH higher or lower in six months. I say higher. Let’s see who’s the dumbass. If I’m right, you post a post acknowledging that you were very, very wrong and enumerating all the reasons why. And if you’re wrong, you get to gloat over what a dumbass I am, which you seem to enjoy.

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