Tag Archives: Lennar

The Housing Market Is Heading South

A subscriber from Canada emailed me last night about the Canadian housing market: “Toronto and Vancouver sales down 40% and 30% YoY respectively. Prices are still up in Vancouver but down 14% in Toronto. I don’t know how prices stay up if the volume continues to trend down. Canadians are even more levered than Americans I believe. This is going to get ugly before it’s all over.”

The only part I disagree is Canadians being more levered than Americans. The average first time buyer in the U.S. can buy a Fannie/Freddie guaranteed mortgage financed home with zero down as long as the credit score is north of 570. “Zero down?” you ask. Yes zero down. Now included in the down payment is any amount of concessions tossed in by the seller. Soft dollars. Fannie and Freddie are already asking for “bail out” money from the Government after posting big losses. Fannie posted a $6.5 billion loss in Q4. How is that possible if the housing market is healthy? It’s the sign that the average homebuyer is overleveraged.

Now I’m hearing ads all-day long (sports radio) for 100% cash-out refis, home equity loans, purchase and refi mortgages for buyers who don’t even have FICO ratings. “Past bankruptcy” is okay. “Simon Black” (his nom de plume) wrote a piece the other day accusing the bankers of being idiots for letting the subprime debt issuance get out of control again. He’s wrong. It’s the Taxpayers who are idiots for rolling over every time the Government bails out the bankers. Quite frankly, if I lacked morals and ethics, I’d rather be on the bankers’ side of this trade. They make massive bonuses underwriting all of the nuclear waste and then pay themselves even bigger bonuses when the debt blows up and the Taxpayers bail them out. Who’s the “dumb-ass,” Simon?

Homebuilder stocks are a low-risk shorting proposition.
A subscriber asked me about the 10yr Treasury yield, which for now appears to be headed lower, and if a significant drop in the 10yr yield would stimulate home sales.

That’s a great question. Mortgage rates are a function, generally, of the 10yr Treasury yield and risk premium. As the risk of repayment increases, mortgage spreads increase. The LIBOR-OIS spread reflects the market’s rising fear of repayment risk.  I just noticed that the 30-yr mortgage rate at Wells Fargo – 2nd largest mortgage lender – has not changed much in the last few weeks despite the decline in the 10yr yield.

Part of my argument is that the general credit quality, and ability to make any down payment, in the remaining pool of potential first time buyers is dwindling. In other words a large portion of under 35’s, who make up most of the 1st time buyer cohort and who are in the “pool” of potential homebuyers, do not have the ability financially to support home ownership. In the last 2 months, the percentage of 1st time buyers in the NAR’s existing home sales report has started to decline.

New homes on average are more expensive than existing home resales. This fact makes my argument even more compelling. We saw this in KBH’s FY Q1 2018 numbers, which showed flat home deliveries vs Q1 2017. Homebuilders are also getting squeezed by commodity inflation (lumber and other materials), which lowers gross margins.

I saw a study that showed the annual rate of change in real wages, where “real wages” is calculated using a “real” inflation rate, is declining. Furthermore, most of the nominal wage gains are concentrated in the upper 20% of the workforce. The lower 80% of wage-earners are experiencing year over year declining wage growth.

The conclusion here is that a majority of those in the labor that would like to buy a home can not afford to make the purchase. In fact, a study by ATTOM (a leading housing market data aggregator) showed that the average worker can not afford the median-priced home in 70% of U.S. counties. The relative cost of mortgage interest is only part of this equation, which means lower mortgage rates based on a falling 10yr yield would likely not stimulate home buying at this point.

I think the only factors that can possibly stimulate home sales would be if the Government takes the FNM/FRE down payment requirement to zero and directly subsidizes the interest rate paid. I’d be surprised if either of those two events occur.

P.S. – just for the record, Lennar’s real earnings yesterday were substantially worse than the headline GAAP-manipulated EPS that ignited the rally in the homebuilder sector. I’ll be reviewing LEN’s numbers in Sunday’s Short Seller’s Journal and showing why the reported GAAP numbers were highly deceptive. I’ll also suggest ideas to take advantage of this knowledge.

Philly Fed Index Shows The Economy Is Tanking

Construction spending, retail sales, housing starts, Empire Fed Index, durable goods orders, factor orders…and now the Philly Fed:

 Philly Fed Suffers Worst Run In 3 Years, All Sub-Indices Collapse:   Philly Fed hasn’t missed for 4 months in a row since Feb 2012. Printing at 5 (against expectations of 7) the March Philly Fed data is the weakest since Feb 2014. Under the covers it was even uglier… Employees, Average Workweek, New Orders, Prices Received, and Shipments all plunged (Zerohedge)

The sub-indices collapsed:   Prices paid, prices received, shipments, unfilled orders, delivery time, inventories and average workweek – all ranged from negative 2.3  to negative 13.8.

Oh and guess what?   After jumping 5 points in response to Lennar’s highly misleading earnings report, the Dow Jones Home Construction Index is now red  down 1.2% for the day.   Lennar’s earnings “beat” was entirely a function of the Company moving interest expense incurred (i.e. paid with cash during the quarter) off the income statement and on to the balance sheet (which our corrupt accounting oversight agency – FASB – allows them to do).

If you looked at LEN’s income statement in its 8-k, you wouldn’t even know they have debt because they don’t show a line item for interest expense.  And yet, it’s debt outstanding went up from $4.6 billion at the end of November 2014 to $5.1 billion at the end of February.  In three months LEN’s debt increased by over 10%.   If LEN had been forced to account for all of its interest paid during its fiscal Q1 2015, it would have missed estimates by country mile.

You can ignore reality, but you can’t ignore the consequences of reality…

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…