KB Home: Persistent Supply Demand Imbalance
Submitted by
CalculatedRisk on Thu, 03/22/2007 - 5:17am (63 comments)
Shopping at Amazon?
Wait! If you click on the Amazon banner link at the top of the page first, HCN will get a percentage of anything you purchase for 24 hours!
Open predictions
Our local book authors
User login
Who's online
There are currently 24 members and 144 guests online.
Recent Recommendations
Check out their balance sheet. Their inventory level is signficantly higher than their stated backlog value. And their accounts payable are nearly $1B.
The also burned through about 1/2 the cash on hand at the start of the quarter.
And they reported no impairments or option writeoffs? Something really stinks here.
--
I don't know of a signal economist, in public or on blogs, who has the correct knowledge of the Fundamental Demand for house-dwellings. No wonder that the builders were misled about the actual demand versus the Speculative Demand. Tells you the level of ignorance in America despite availability of data going back to 1965. Only a dupe, who never read, or understood, Wealth Of Nations, can be made to believe that the home one lives in is an investment.
The best description of Americans on economic matters that I have been able to come up with is:
A nations of Easy-Dupes led by Crooks.
Anyone disagrees? The two biggest bubbles of their kind over the past dozen years are the best proof of that observation.
ALL ECONOMIC AND INVESTMENT COMMENTARIES ARE ABOUT THE BEHAVIOR OF THE PEOPLE INVOLVED -- THE LEADERS AND THE LED.
Jas
umber2son-
I am aware of of numerous properties KB is about to either sell at a loss or see their option expire. They have been delaying the pain hoping for a rebound no such luck. Expect write-offs in the 2 quarters.
The only major homebuilder remaining who has not written off substantial holdings is Lennar. They are moving 10,000's of lots into off balance sheet JVs. It will be very interesting to see how it plays out for Lennar.
Their cash is still 4x one year ago and they have a 1.5 bil line if they need it.
I can't read balance sheets well enough to have an informed opinion, but it looks like they are a reality-based company:
"Having now entered the spring selling season, we continue to observe instability in the marketplace. Moreover, recent problems in the subprime mortgage market combined with tightening credit requirements could exacerbate the already difficult conditions in the homebuilding industry. The rise in delinquency and foreclosure rates may increase the supply of homes on the market, generating additional downward pressure on prices. Under these conditions, it is hard to predict when the housing markets will stabilize."
So they're saying things are bad and could get much worse. And they're currently at 48.22/shr, up .40/shr (.88%). It seems to me that their share price should drop like a stone after that report. Hmmm, just shows that I don't know jack about the stock market.
KB shares are up a small amount today on the news. All is good in the world. I'm going to look at the balance sheet issues because that is one of the rallying cries investors have held their hats on: "Balance sheets are strong so they can weather the storm." I'm itching to look at some deep out of the money puts on these pigs...maybe with strike prices around book value. Maybe I should take out a home equity loan to do it since the economy is so strong according to the Fed. Anyone know where I can get a good IO loane these days?
The idea that the builders are LBO candidates is laughable at this stage.
Seems like an honest assessment of the situation. Beats hell out of dancing along the bottom.
Which home builder you think is a better short ?
LandAcq, thanks very much for the info. I suspected they were up to something like that.
If LandAcq is correct, I'd say Lennar is a better bet on a company going to zero. Off book JV? Did they hire a CFO from Enron? They're gambling it'll get better soon enough(or HeliBent Bernanke will come to the rescue), but the data says the'll probably be wrong.
Persistent Supply Demand Imbalance. I don't think so, just a lower the prices and they will sell. There is never a demand imblance if pricing is allowed to correct. Yes that means selling at a loss. The head line should read "KB Homes builds at a loss". The big problem is how sticky the prices are on homes. Imagine if home prices were as liquid as commodity prices. We would be limit lock down right now.
They can't necessarily just drop the price to sell at this point. First, everybody else is doing it, too, and second, the mortgage tap is shut off for a while - or at least severely throttled down.
When things get tough, they get tough every way you turn.
Off book JVs are fraud, plain and simple. Ditto the Enron comment.
I am a consultant in the CRE world and LandAcq is right on.
So what are you guys saying? LEN's JV partners are related parties?
What are they playing at CC with? Mozart?
FYI, Lennar reports earnings on the 3/27.
"Sell at loss" - the difference between homebuilders is those who can and can't afford to sell at loss. That's the real question.
wally, pick point A at $5, and point b at $495k. Point c is asking of a year ago, at $550k.
Here's the deal. If a builder drops prices to pt A, all of us will come off the sideline and buy. At point B, the 10% discount, we are sitting here laughing.
The problem is, and the one you seem to want to deny, is that the actual price where inventory would move fast enough to get to a more "normal" equilibrium of supply demand, is probably a lot closer to point A.
Until people realize this, you'll have an impasse like you do now. And how will they realize this, well, likely a good while after they realize the 10% drop is useless, and probably after the 20% drop also appears useless and they chase the market down again.
But a better way they will figure it out is when their payment shock comes and they cant pay the mortgage and cant refinance and someone else (the bank) doesnt act like a fool and marks to market, close to perhaps the midpoint of A and B and gets the property off the books.
Inventory down from 6.5 to 6.3 bn
Avoiding building spec homes
Price 5% down y/y, 8% down in US, up in France
Improved cancellations by refusing suspicious buyers
Jas Jain,
While I concur with the heart of your argument, you shouldn't assume it was only Americans who have been suckered into the home investment or dotcom lies. A lot of Euro suckers now own depreciated condos in Florida. And besides Euro banks and their passed-along-suckers, a lot of Asian and Petro dollars are now holding that MBS bag.
The shills have sold this BS throughout the globe to anyone who wanted to believe it. Is it:
A) a sad commentary that the world was so willingly duped?
B) a worse one that the hucksters took advantage of so many who were not aware of the deeper reality?
C) an even worse one that the governments throughout the world are so corrupted by the bankers that they allowed these fleecings to occur?
D) All of the above.
Such a desperate hope from the CEO:
We believe these conditions will likely continue for at least the remainder of 2007, reducing our quarterly and full-year revenues and earnings compared to 2006 results."
Like other CEOs, there is a slight bias in his transparency that conceal his real expectations: no bonus based on share price expectations made in 2006.
So why do we even bother reading these CEO blurbs?
Well for shooting practice, obviously.
But the stock market continues to edge up...just like the housing boom, until it doesn't and then you discover how debt-infested those "investments" really were.
Subprime was very low % of sales before, CFC is the main partner.
It is interesting to watch the market, calmo. Maybe everybody knows something that I don't know, or maybe it is like watching a slo-mo train wreck coming. It is good entertainment, whichever way.
Geoff,
I don't deny that at all! When houses are selling for 5% of construction cost I'll be elbowing my way into line in front of you... but I see that as a long, long, long way off. The housing market adjusts slowly because lots and lots of people all need to individually have their come-to-Jesus moment.
This is a RE site I have followed for several years and has been an excellent data source. This recent article about the Feb sales caught my attention since my son-law purchased a $700K townhouse in this area recently (first time buyer)and bid $25K over the asking price.
A few bits from the Article:
"San Mateo County home sales fell in February, down 3% from January, and off 5.2 % compared to last year.
Nevertheless, the median price for single-family, re-sale homes rose 1.8% from January, up 0.9% year over year.
What's going on? Well-priced homes in move-condition in prime neighborhoods are selling with multiple offers and over asking price. Also selling are fixers and tear-downs with upside potential in prime neighborhoods. Everthing else is sitting there."
Median price in Feb 07: $870,000
San Mateo county is not a cheap area and it is all resale since new building is basically replacement of existing structures.
What is driving the market in this area is employee stock options and large management bonus programs.
Even though the overall housing inventory is high the pool of buyers is small so they pick and choose RE based on location and quality.
This is an indication to me of what we may see in other markets with high inventory levels, a smaller buyer pool based on higher lending standards picking over homes in the traditional better neighborhoods.
They continuously pointing fingers to Countrywide. Essentially "we just build homes, CFC approved loans, if you have more questions - ask them"
While I concur with the heart of your argument, you shouldn't assume it was only Americans who have been suckered into the home investment or dotcom lies. A lot of Euro suckers now own depreciated condos in Florida.
And in Spain too where prices are going parabolic... first up, now down.
Also look closely at the KB supplemental section on CRs link... near the end of the report they breakdown their sales & backlog by region. Last I knew 'France' was not one of the 50 states... But it has seen the largest increase in orders sales & backlog.
Hmmm... looks like the human condition applies to BOTH sides of the big water.
dryfly, can you point me to any indicator of where spanish housing prices are going? I did read on Bloomberg about the coming bust in vacation home prices, but didnt see any data. thx.
Geoff,
As far as I know in Spain, there is some softening and prices increased less but no crash yet. However, some indicators (like decreased mortgage borrowing) suggest that the market will go down soon.
They present less data but they have a nice habit of showing prices per square meter so the variation in the type of homes sold has a smaller effect on the price data.
From Spanish Ministry of Housing
Indicies for the country and the provinces
http://www.mviv.es/es/xls/estadisticas/APLI/igp.XLS
Prices in the capitals of the provinces
http://www.mviv.es/es/xls/estadisticas/APLI/PCP.XLS
I receive solicitations constantly about Spanish properties. Here is the crux of a recent mailing.....
Casares Del Sol
Direct from developer (An Investment No Brainer)
Original Price Purchase 260.000
Developer Dropped to 201.000
Last 3 units Now 193.000
Purchase Price E193,000
Purchase Cost @ 14% = E27,000
Total Cost E220,000
Bank Value E279,000 @ 80% LTV = E223,000
Giving E3,000 Cash back
Countrywide 2006 failed subrime loans could be new worst
Countrywide failed subrime loans could be worst
| Reuters
WASHINGTON (Reuters) - Countrywide's subprime mortgage defaults for 2006 loans may exceed the company's highest on record, a company executive told a government panel examining mortgage lending.
Countrywide's "worst single origination year was 2000, for which the cumulative foreclosure rate was 9.89 percent," Sandor Samuels, the company's executive managing director, said in prepared remarks.
"We believe that declining home prices and other factors ... may produce foreclosures numbers on 2006 originations approaching or exceeding those on loans originated in 2000," Samuels said in remarks.
The company believes that there was overcapacity in the mortgage market in 2004, the company said, and does not agree with federal regulators that borrowers should be approved at the "fully indexed rate" that considers the long-term costs of the loan.
signal economist
Is that one who stands in the road waving a red flag: "Trainwreck Ahead?"
KB says "we continue to observe instability in the marketplace." I call BS. What kind of a word is instability in this context? Either you are selling enough homes or you aren't. It isn't as if there aren't enough words to descibe financial health that they need to make up a new one and assign some random meaning.
Fascinating comments. Absolutely fascinating. What a blog!
Glad to see the word "crooks" once in awhile.
Look, cheap dollars are flowing into this country like the worst of the Indian Ocean tsunami. Floods of dollars.
Goldman Sachs, oh, sorry, the Secretary of the Treasury and the Japanese Finance Ministry, acting in concert against the best interest of the American people, are making sure that the stock market stays up and the yield curve stays inverted.
The American economy is being cored out by crooks.
When Bush leaves office, that's when the carry trade might unwind. In the meantime, there will be plenty of cheap money to boost asset prices. Okay, maybe Irene Pena hasn't profited directly from the carry trade, but the people buying $800,000 houses have.
Woo-hoo! The euro just took a dive. Ben must have said something to the effect of rumors of my demise have been greatly exaggerated.
He ain't lowering rates.
Okay, so a tsunami of dollars is coming- now what can the world buy for those dollars- the answer is in a comment to dryfly that was eaten last night by haloscan- world commodities!!!
The metal shortage dryfly was mentioning is only really in the USA- why? Because we literally have shiploads of scrap metal leaving the USA on a daily basis!!!
Our lovely US Mint has just promulgated a very nice emergency regulation banning the export of our nickels and pennies!!! Why?
Because they are worth more as scrap metal than as money!!!
Want to do very well in the new new new economy? Buy scrap metal- our creditors will have to be paid in something of value in the future!!!
I feel like my entire profession of ecnomists is just sailing along the seas of this fraud and refusing to look behind the scenes.
What we are living in is a learning experience. The specific experience that this blog deals with is an exhilaration experience induced via the injection of a drug. This drug that is injected causes much economic activity, greed, a boom time in planetary activity. The drug is fiat money. A "liquidity injection" is the term used.
Some folks need the particular learning experience, some do not. For varying reasons we all need our particular interaction with the major geopolitical storm that is coming over the next few hundred years.
A funny thought: One of the ultimate drug experiences in this game is playing with Other People's Money (OPM). Is it fortuitous that OPiuM and OPM should be so alike? As the language itself is a tailored power code, I think not.
Looking at the KB report and assuming my arithmetic is correct (big assumption) KB made $4,100 on the sale of the average house or a skoosh over 1%. That doesn't give them much room for further price reductions unless they want to burn even more cash.
they'll burn the cash now, because they'll only have to burn more of it later if they wait and sell at lower prices.
thanks poszi for the spanish housing data links.
g
They can mitigate losses on lower volumes. I don't understand the stock market. The CEO says the future for at least all of 07 looks weak and the shares hold up? It's clear by now that '08 should come in even worse. Luckily I bought puts instead of straight shorts. The towel is being thrown in and the referee is looking the other way. He'll notice sooner or later...
OT but I'll mention it here since this is the current thread. Kash has a very interesting report over at The Street Light called "Can Banks weather the Real Estate Storm". It is worth reading.
OT
Tanta, if you recall a week or two ago, there was a story on CCI/Coast Bank and one of the "victims" who was a mortgage broker. He seemed to have trouble understanding the loan documents. Turns out he worked for New Century! You can't make this stuff up.
Regulators, FBI look into CCI dealings | HeraldTribune.com | Sarasota Florida | Southwest Florida's Information Leader
Nice post from another board:
Congress now wants to 'enact new laws to increase the federal government's oversight over mortgage lending'.
in short, the negative result of previous government interference in the market (GSEs, Fed lowering rates to absurdly low levels), now are deemed to demand an ad hoc response consisting of even more interference (quite typical, actually).
one of the avowed goals is to protect people from their folly (the folly of borrowing more than they could afford, in this case). by this method one soon has a nation full of fools.
nobody is interested in letting the market work - they all think THEY know better. it is one of the measures of how deeply down the path toward socialism Western allegedly 'capitalist' democracies are.
one of the trade-offs one has to accept if one wants liberty is personal responsibility. a willingness to LET the market work, to allow it to punish foolish decisions. this is how the market ensures that capital will be redirected to its most efficient uses. the moment one abandons the concept of personal responsibility, one also abandons liberty. in the process one ensures that overall wealth diminishes, or grows slower than it otherwise would, as misdirection of capital continues to be furthered.
one keeps hearing that 'no-one wants a recession' or 'no-one wants bankruptcies'. if one points out that this makes no economic sense, one is accused of heartlessness. leading people into the slavery of State-dependency is apparently seen as a sign of one's good-heartedness, by contrast.
meanwhile , the imbalances, malinvestments and debts continue to get piled higher and higher. comes the day of reckoning (as has now happened in the sub-prime mortgage lending industry), demands for even more government intervention are immediately raised.
this is what Friedrich Hayek has called 'the road to serfdom'. the bureaucracy has a 'plan' for you - you're not supposed to have too many plans of your own. others must do the thinking (such as it is) for you.
this is also why there can be a war that according to polls practically nobody wants. misery, war, poverty and enslavement are always the end points of this bureaucratic utopia.
The only people who believe markets and people are rational are economists and sociopaths.
The importance of a proper(and enforceable) regulatory framework is A: to keep the gullible from walking out on too thin a limb and B: keeping the avaricous from being reckless and damaging the responsible by their actions.
A bit OT, but it helps explain why the stock market has been doing well in the face of all this news:
The Kingsland Report- Markets, Subprime, Mortgages, Derivatives, Options
I've blogged about this repo activity in recent days as a red flag: billions has been poured in by the Fed to prop up the market. I've discussed how this money flows to primary dealers and how it can then be deployed to trading desks and how it can then be dumped into the futures markets which can magnify moves, though not necessarily trading volume. Voila - instant rally, or rebound.
Check out the graph he has there. $950Billion (with a B) goes a long ways toward propping things up.
There is a great slide from a presentations by Meritage Homes showing the land position of various builders.
http://www.astro.caltech.edu/~davej/blog/mth_land.png
The full presentations (at the Citibank conference) is here
http://ir.meritagehomesinvestor.com/phoenix.zhtml?c=61337&p=irol-irhome
I have some shares of Meritage. I consider them to be the best positioned home builder.
"Hmmm... looks like the human condition applies to BOTH sides of the big water". dryfly
Agreed from the other side.
"can you point me to any indicator of where spanish housing prices are going? I did read on Bloomberg about the coming bust in vacation home prices, but didnt see any data. thx." Geoff
There is evidence that there are locations with price decreases (Data from "Housing Secretary"), but in global terms, it looks like prices are still on the rise. The problem in Spain is that data sets are mostly obtained at close to escrow and in many cases, represent operations which are more than one year old.
Geoff in this table:
http://www.mviv.es/es/xls/estadisticas/APLI/PMF.XLS
You can find last data available about prices in towns with more that 25.000 inhabitants in Spain. On each page you find different quarter data. Notice decreases in coastal "vacational" towns such as Roquetas de Mar.
IOW, it's crashing baby!
Once more. Prices in those tables represent average euros by square meter.
You're seeing their profit per house down due to pricing, incentives and additional carry time (interest).
Acccording to insiders I know and some observations (No CA) pricing is increasing again, incentives are decreasing (net price increase), carry time is decreasing, inventory is decreasing in middle price ranges.
The guys at KB who rode this horse into this bubble, were here during the last one too.
So Sippn, what are you suggesting? Prices increasing here? Are you serious? First, these KBH numbers are not reflecting the new regulatory guidance and recent enforcement activities by the FDIC, or the recent loss of appetitie for the high risk mortgage paper in the securities markets.
KBH buyers are largely either first time or 2nd home buyers. In either case their purchase is tied to first time buyer funding issues. I don't see a lot of upside, especially given the glut of unoccupied housing and the coming surge in REOs to market. Your select No CA market could be a little behind the curve experiencing the downdraft but make no mistake - it's coming in a big way... unless the government pulls a fast one on all of us...
DaveJ, Meritage is NOT the best positioned home builder. They are overexposed in some of the worst markets (AZ and FLA, for example). The fact that they have a relatively small land bank doesn't mitigate the pressures they're under.
But good luck just the same.
The best-positioned builder is MDC. That said, it is still much too early to be investing in this group. Unless you have a very, very, very long time horizon and an appetite for further downside.
The importance of a proper(and enforceable) regulatory framework is A: to keep the gullible from walking out on too thin a limb and B: keeping the avaricous from being reckless and damaging the responsible by their actions.
Exactly.
I tell 'laissez faire libertarians' the first and most critical step in bringing back the Lubyanka & Gulag is to abolish regulation. The only thing more dangerous to capitalism than regulation is NO regulation.
The metal shortage dryfly was mentioning is only really in the USA- why? Because we literally have shiploads of scrap metal leaving the USA on a daily basis!!!
Our lovely US Mint has just promulgated a very nice emergency regulation banning the export of our nickels and pennies!!! Why?
Because they are worth more as scrap metal than as money!!!
The same applies to nearly ALL currencies - you think metal prices are going up in dollars only? Look again... especially in China & Japan.
Nickel is a necessary component of high strength steel, stainless steels & super-alloys. There is nowhere near enough to satisfy global demand as Asia industrializes.
Same story with zinc which is the primary alloy pennies are made of... but more importantly also used in galvanizing (most auto body panels & structurals are galvanized).
Copper is more than plumbing... lotsa new electrical generating & distribution capacity going in worldwide... nowhere near enough copper to meet the demand.
I'm told the future markets expect these prices to back off (heavily backwardized)... but they've been saying that for quite a while and keep rolling out farther... its killing a couple foundries I work with 'cause they need to place 'buys' for alloy and don't want to lock in at these prices if they are going to drop... margins are just too tight to pay that additional premium.
This is NOT a fiat story no matter how much the goldbug press wants to paint it that way. It really is a result of rapid global industrialization. A recession might slow the demand but won't make it go away.
Intersting chart comparing years of land owned by the different builders - there appears to be no simple relationship between extent of land (over)supply and share performance over the last year - TOL which has 8 years is down 11% over the last year while MDC which has 2 years of supply is down 18%
Barely, I'm suggesting that many builders like KB discounted most heavily in the last few quarters to reduce inventory while reducing starts also.
I'm not suggesting , but reporting what I heard from an inside source.
Reading 10K's is fine, but they're history. Compare what he said to what is happening now.
Now prices may still be dropping when you mesure "median" including resale. But some of these builders have reduced inventory to the point where they aren't desparate for a sale in every market.
Most of the repos I've seen so far can't compete with current builder prices.
Cracks in the façade
Here are the 6 steps to financial prosperity as I see it.
Of course, I might be too bearish. One never knows for sure.
As i have said for several weeks now and been ignored by the way, what Sippn is saying is backed up by a friend who works as a book keeper in real estate in ohio. Pre christmas was exstremely bad. Jan they were flooded with listings and by Feb they were having very very good sales volume which has continued into march
There are 4 issues re: the housing market that I don't see being addressed here.
Oh, and don't forget the drastic increases in healthcare costs/insurance. Where does that fit into the average budget? Health ins. can run just as high as mortgage pmts.
The slowdown started before the ARMs reset. The issues go way past subprime into basic affordability, from a combo of factors - for the average wage earner anyway. The feeder fish are in hiding. MHO FWIW.
Worried, we'll see if your friend's information is accurate when the existing sales numbers come out today, but so far there is no indication of a large pick up in sales.
Yesterday builder KB Home refused to disclose how March was going for them. And you can bet they would have said it was good if it were. Same goes for all the other builders who have been reporting results recently. The talk of a bottom last fall was just that, "talk".
Well seems my friend is reliable for that area anyway. So i might have a good leading indicator there
Worried, possibly. On the other side of the coin I've been following sales in my local SF Bay Area community. Over the past month only 2 reported sales (both low end condos).
my friend says that 100k area not selling......but 250k area doing well with people taking opportunity to move up. so obviously we are not talking about million dollar properties here.