Tag Archives: LEN

ZIRP Is Not Stimulating Home Sales

The homebuilders bounced today along with just about everything other financial investment under the sun after the Fed forgot to put the word “patient” in its FOMC policy statement but indicated that it’s no hurry to raised interest rates even a fraction from zero percent.

Perhaps once again the “tell tale” about housing from the market was the fact that lumber – after dead-cat bounce yesterday – was the only commodity besides the U.S. dollar that fell in price.

Even more telling is the fact that Lennar, the biggest homebuilder by market cap, has announced that it is going to try and turn its slower selling inventory into rentals – LINK.

Lennar’s inventory has jumped 54% in the last two years. For it’s fiscal year that ended in November, its operations generated negative $788 million cash flow. Lennar focuses on the “move up” and retirement markets. The move-up market is freezing up because the first-time buyer is becoming a dinosaur and the move-up seller can’t sell to extinct buyers.

I’ll have more to say about Lennar down the road. But today’s dead-cat bounce in the homebuilders – which was not confirmed by the action in lumber – is a great opportunity to start shorting the sector. My homebuilder reports will help you get started: Homebuilder Research.

ZIRP has not stimulated home sales. The dead-cat bounce in the sector was primarily fueled by the big investment buyers. They are now looking to unload their unleased holdings. Lennar is late to a game (single family rentals) that is quickly becoming overloaded with inventory. SFR is a relatively popular investment that property owners like to make as it has a lot of benefits for both owners and tenants. For tenants, it allows them the added privacy that they desire and for owners, it produces more cash flow. That is why many people prefer to invest in sfr real estate so they can get the most out of their investment.

P.S.: the big institutions and hedge funds have already placed their bets in the homebuilding sector. Just like the big funds that are long homes and are looking for buyers, there will be nothing but sellers when the first couple of big hedge funds pull the rip-chord on their positions. You want to be positioned ahead of this dynamic. Any investment manager who does not take a serious look at reducing exposure to this sector – in the face of all the evidence I have been presenting – is breaching its fiduciary duty to its investors.


Desperation Sets In With Homebuilders

Lennar announced that they are going to jump into the home rental business.   This is another way of conveying the fact that they have too much inventory and need to try and “monetize” some of their inventory.   Housing:  Look Out Below.

This is an outright acknowledgement that the market for home sales is deteriorating.  As it is, the big investment firms who loaded on buy-to-rent properties are already looking for exit strategies:

Small batches of investor-owned properties have trickled into public listings, indicating some investors may be gearing up for larger liquidations, according to Daren Blomquist, vice president at the online real estate company RealtyTrac.

More than just “small batches” have already been liquidated.  Big investment companies are finding that its more difficult to achieve acceptable lease yields, especially after expenses, than their junior analysts’ Excel spreadsheet models indicated.


The big investment firms sucked up a lot of the inventory overhang from the big bubble.  Now that there’s been a glut of apartments built and being built, the rental market is going to “soften up” significantly.  It already is in Denver.   Now Lennar is throwing in the towel on frozen inventory and will add even more inventory to rental market.  Eventually there will be a flood of unrented properties hitting the market for sale, as hedge funds rush for the exits.  This is the catalyst that will cut the housing market’s Achilles’ Heel.   It is going to get ugly.

I predicted this would happen about 18 months ago.  It’s been taking a bit longer than I expected, but it’s happening now.

I have documented in detail in my housing research reports that new homebuilders have exceptionally bloated inventories now, especially in relation to their rate of unit sales volume and their debt levels.  Lennar’s announcement confirms my view.

Homebuilders Jump On Lennar’s Highly Managed Earnings Report

For starters, let’s not forget that all indications seem to indicate that the housing market hit a wall in August.   So LEN’s earnings released today are “looking in the rear view mirror” numbers.

But not only that, Lennar has blown smoke across that mirror, making it difficult to determine what’s real and what’s questionable accounting.   In fact, Lennar has not even filed an 8-K SEC disclosure, which companies typically file before they release their earnings report to the public.  I went to look for it after I scanned LEN’s press release and found several troubling aspects to the numbers they reported this morning.

The bottom line is that, despite the large contribution to LEN’s revenues from higher prices,   LEN’s gross margin was barely higher than for the same quarter last year.  Furthermore, they included several accounting “add-backs” to boost their net income.  Finally, like all these homebuilders, LEN has removed a significant portion of its interest expense from its income statement.  I won’t know just how much until they file their 10-Q.

My conclusion is that LEN’s earnings report is product of carefully managed smoke and mirrors.  Most of its gains came from the West region.  If LEN is counting on sales growth from the West going forward, they will be very disappointed because, as I showed with yesterday’s post, the West is crashing.

As existing home sales listings pile onto the market, and sellers continue to cut prices, it will force new homebuilders to compete by lowering prices.  Most of these homebuilders are not generating positive operating cash flow after accounting for the cost of their massive inventory stockpiling.  Lower sale prices will obliterate their operating earnings.

I am reitierating a table-pounding sell or sell-short on the homebuilder stocks.   The LEN report has given us an ideal opportunity to establish or add to short positions.  My Homebuilder Stock Reports go over the misleading accounting techniques thoroughly being used by these unscrupulous homebuilders.  I also provide ideas for capital management techniques given that this sector is highly volatile.  And I include a section that discusses call and put option strategies.

I have been clear about advising traders to make sure they save plenty of capital in order to take advantage of days like today, as this can be a very volatile sector.  But the downside volatility will be spectacular once the stock market finally rolls over…

P.S. – my firm participated several junk bond deals for Lennar back in the 1990’s.  This management team loves to pile on debt and engage in misleading accounting techniques. I remember after sitting through a dry-run investor presentation that they reminded me of stereotypical South Florida boiler-room operators.  I really wanted to run home and shower off…