Sure, the cancellation rate might be falling, but one could logically assume that there are fewer and fewer contracts, regardless of the cancellation rate. Am I wrong?
Net proceeds from these offerings of approximately $705 million were
used to pay off outstandings under the corporate credit facility and
the excess will be used for general corporate purposes. After giving
effect to these transactions, the Company would have had approximately
$500 million in homebuilding cash and no borrowings on its revolving
credit agreement as of April 30, 2008.
-- In addition, during May 2008, the Company amended its revolving credit
agreement to substantially eliminate financial maintenance covenants
and reduced total commitments to $300 million from $900 million,
leaving the facility in place largely for the issuance of letters of
credit, which at April 30, 2008 were $219.3 million. The maturity of
the credit facility remains unchanged at May 2011.
Someone asked this evening about where glod might be heading. My ff: sentiment wise, there's ridiculous bullishness for something that's declined by 15% from peak (no fear); technical wise, all the volume on a daily/weekly is pushing lower, meaning the bears are in control of price; secondarily, there may be an H&S forming projecting to ~$800, where there's plenty of support for an ST bounce. Thus, don't buy glod until it tests (and rejects) that #.
Since I'm just shooting my text off here, for all those fellow EEV (2x inverse EEM) owners, your ticket is in. EEM H&S projects another 7.5% decline baked in (hell, could happen tomorrow) heading for the lows (if LEH blows up, will happen tomorrow. Major markets have confirmed their toasting by breaking swing points w/ quality of volume. EOM.
A cursory look painted a similar story regarding sales and cancelation rates (see page 2). In contrast, there is talk of ongoing investigations and settlements with the goverment.
I'd love to completely read it, but have to get back to work.
This reminds me of the movie "The Outlaw Josey Wales" starring Clint Eastwood.
Anyway, IIRC, his Native American acquaintance recalls how he and his men went to war after the local government agent told them to "endeavor to persevere".
I wonder if Mr. Hovnanian's scalp will be sought after by his shareholders soon.
Does anyone see any parallel here to the automakers in the 1920's. There used to be hundreds of automakers in the 1920's after the the War and he depression that sank to less than a dozen. CR do you else think that there will be only a few national homebuilders who can pull resources and workers for fewer projects.
I vote for ignoring the cancellation rate. You have to remember that people cancel at different points in time, they do so with different levels of information, and different reasons. Eventually, you could be sitting here saying, hey, look, cancellations are down to 5%, yay! But that might just be because only 1 in 20 cancelled, and there are almost no sales to report. The issue here is that these builders are screwed, independent of what is happening to the cancellation rate. I dont care if it goes to zero tomorrow, makes no difference. That would just make it clear that the entire market has figured out that we really are in a bust. The more that number falls to me, is more of a reading of the generalized understanding that more people have woken up to the fact that it ain't going to be so easy to get a mortgage anymore, or buy a new home before you sell your old one. Anyway, go ahead and track it for purposes of census reporting, but for builder profit/loss, it doesnt tell me much.
Geoff, the point on cancellations isn't about the builder - it's about the numbers from the Census Bureau.
We can't ignore the cancellation rate because it's helpful. When I first pointed out that the Census Bureu was OVERstating sales and UNDERstating inventory - that was shocking to some - and proved to be correct.
Now that the opposite is happening, this helps us realize the Census Bureau is probably understating sales. Nice to know - something you'll never get in the MSM!
Erstwhile and hitherto, I shall refer to homebuilders as nobuilders and Michael Jackson as The Guy From Dubai. And the Colorado Rockies as the Calculated Risk. And Gravy Train as Dinner.
I must ask CR. You state that since cancellations are declining then the Census Bureau will be underestimating sales.
But, how can that be when cancellations are inherently going against the numbers. The Census Bureau will update cancellations as long as the home isn't built. So, if a builder reports a sale and the sale falls through, the home no longer counts. That will reduce sales when the Bureau revises.
But, the Census Bureau as far as I know, doesn't adjust on perceived cancellation rates. AFAIK the Bureau doesn't consider cancellation rate changes into their published numbers.
All that could happen would be that the revised numbers are revised down LESS than before. How could it be any other way?
I would like to add. How could they UNDERstate sales? The numbers were previously revised to take off homes during the building phase that were sold, but fell through. Homes that were built and reported as sold, but fell through, are never revised, so that could definitely OVERstate during a boom and UNDERstate if they finally sell during the bust. I suppose, since we are sitting on a ton of inventory that if those homes were counted as sales at one point then now we may get UNDERstatements of sales, but there is no way to verify that those homes were counted as sales after completion.
The way I see it, the Census Bureau can only OVERstate and rarely UNDERstate considering their method of getting numbers and no longer tracking homes once they are completed and reported as sold. Even if there is UNDERstatements we would need far more evidence than cancellation rates to make any informed decision.
CR, my beef on this isn't with the impact on Census reporting. We've been through that over and over. What you mentioned as good news was the lower cancellation rate for THIS builder. And basically, it isn't going to save them from going BK even if it goes to zero. That's my point.
If I'm reading the financial table correctly, if HOV kept everything equal they'd be out of cash in 2 quarters, 3 if the builder tax credit happens(I can't remember if it passed.) If they sold everything it'd be a year and a half.
$500mm cash on hand currently, $800mm by Oct. 31, burn rate of $$650mm per Q.
Is this even remotely correct? Their 8k at the website is a PITA to read due to wacky formatting(something done on purpose, I'm sure.)
It makes sense that the cancellation rate is coming down. Bigger deposits, only qualified borrowers, backlogs shrinking. No surprise there.
With the second leg of the credit crunch kicking in right now, and the recession just getting started, I don't think we're even close to a bottom in new home sales. Just clearing out the knife catchers right now.
As a result of our methodology, if conditions are worsening in the marketplace and cancellations are high, sales would be temporarily overestimated. When conditions improve and these cancelled sales materialize as actual sales, our sales would then be underestimated since we did not allow the cases with cancelled sales to re-enter the survey.
My approach isn't perfect (there isn't a perfect adjustment), but it's probably close.
Geoff, OK, I would say this is a "little bit of good news". Yes, I've pounded the cancellations into the ground - and I've apparently done a poor job of explaining it.
I believe a number of builders will go under. They are hoping to survive until the market recovers - they will be disappointed. I have no position in HOV.
How much are you suggesting the Census Bureau is underestimating? From what I can gather, most people would be canceling out on properties that were being built, not those already built. Because, there is a waiting period for your property to be built, so you have to time to think and watch the market. I would highly suspect that there is a much higher cancellation rate on properties being built than those already built.
I have spent a bit of time analyzing both HOV and BZH earnings. I haven't had time to digest this latest report, but my knee jerk reaction is this is worse than I would have expected.
Hovnanian was down to 73 million in cash before they chose to raise more money by going to the capital markets. The fact that they were able to get any funding at all probably means they won't go bankrupt this year at least. However, they have chosen to stay afloat by taking on more long term debt. Last quarter their debt-to-capital ratio was 64.6%, and this has no doubt gotten worse since they've taken on more debt. Their gross margins were down to 6.7% in the prior quarter, and with the average home price falling again in this latest report, it is safe to assume that this number shrank as well.
Some of their competitors in stronger financial shape (think TOLL, Ryland) will be able to survive, but I think Hovnanian will not.
As far as Beazer goes, they have chosen to try and weather the storm by exiting markets and selling off anything they can. They may be limited in their ability to raise capital by some of the ongoing investigations. I almost feel sorry for them, because in a sense their only sin was getting caught. No doubt many other builders were committing mortgage fraud via their financing operations; in fact I read a story just the other day that Hovnanian was offering funny money 100% financing through their mortgage unit. Ryland also is doing this. This may also explain the lower cancellation rates ... maybe somebody can explain to me how this works, if a builder uses their own mortgage unit to finance a sale, and no third party will touch the loan, do they get to book it as a sale? In fact I would think this is really a liability on the books until they can find a sucker to buy the loan.
Here's Robert Toll (CEO of builder Toll Bros.) on their earnings conference call yesterday:
Thanks, Joel. Now let me turn to my lobbying efforts. As we all know, Congress is considering many iterations of a housing stimulus and economy stimulus bill. We believe Congress should try and jump-start demand for new homes with an initiative that will bring buyers off the sidelines and into the market, and thereby stop the downward spiral of home prices. As we have said before, we favor a tax incentive for all those who buy homes within nine months of the Bills passage. The reason for the nine months is that we think its important to create a sense of urgency.
You read that right, people. Robert Toll is lobbying for taxpayers to subsidize his profit margins. Try this on for size, Bob: reduce the price of your McMansions. The downward "spiral" you worrying about is a necessary return to historical affordability.
Been through this whole cycle in another industry. Expenses will drop drastically because:
-Contracts that force them to take supplies are running out.
-Contract or off-the-books employees will be moving on.
-Salaried employees are already looking for their next stop on Monster.com et. al.
-Hiring freeze
Much too late:
-Big Layoffs.
It takes time for these things to show up on the income statement.
I don't understand how you get to that conclusion. The shadow inventories will continue to build as long as more homes are added to it than are sold out of it. How does the cancellation rate directly effect that?
It may well be true, but I don't believe you've ever really shown us how you arrive at that conclusion.
Main thing is that inventory is rising.
Second main thing is that sub-prime foreclosures are still rising and option arms are waiting in the wings for their reset dates to q them in.
IMO more interesting than modest changes in cancellation rates is a discussion of ultimate houses foreclosed in markets where price declines 40%.
They will fail. Not that this bit of anecdotal evidence should prove this, but they have a sea of twin homes I've never seen the likes before. All not selling.
Out of pure spite buyers should hold off until these firms go bankrupt to ensure such shenanigans never happens again.
No "going concern" language?
The stock should rocket up tomorrow..."the worst is behind us, party on dudes!"
CR shilling for the homebuilders, again.
seems like there's some seasonality to HOV's cancellation rate.
most years 2Q has the lowest rate.
I wonder what Ron Burgundy thinks about this?
Sure, the cancellation rate might be falling, but one could logically assume that there are fewer and fewer contracts, regardless of the cancellation rate. Am I wrong?
Of note:
Net proceeds from these offerings of approximately $705 million were
used to pay off outstandings under the corporate credit facility and
the excess will be used for general corporate purposes. After giving
effect to these transactions, the Company would have had approximately
$500 million in homebuilding cash and no borrowings on its revolving
credit agreement as of April 30, 2008.
-- In addition, during May 2008, the Company amended its revolving credit
agreement to substantially eliminate financial maintenance covenants
and reduced total commitments to $300 million from $900 million,
leaving the facility in place largely for the issuance of letters of
credit, which at April 30, 2008 were $219.3 million. The maturity of
the credit facility remains unchanged at May 2011.
The cancellation rate tends to be builder specific because of different down payment and pre-qualification requirements.
I'm sure they preferred the good old days when those things weren't necessary.
OT (clears throat) -
Someone asked this evening about where glod might be heading. My ff: sentiment wise, there's ridiculous bullishness for something that's declined by 15% from peak (no fear); technical wise, all the volume on a daily/weekly is pushing lower, meaning the bears are in control of price; secondarily, there may be an H&S forming projecting to ~$800, where there's plenty of support for an ST bounce. Thus, don't buy glod until it tests (and rejects) that #.
Since I'm just shooting my text off here, for all those fellow EEV (2x inverse EEM) owners, your ticket is in. EEM H&S projects another 7.5% decline baked in (hell, could happen tomorrow) heading for the lows (if LEH blows up, will happen tomorrow. Major markets have confirmed their toasting by breaking swing points w/ quality of volume. EOM.
Seriously now, this post prompted me to search BZH news to see if they have recently filed financials. BZH hasn't filed since June of last year. Stunning to see it's there. A transcript of their conference call is posted at seeking alpha:
Beazer Homes USA, Inc. F1Q08 (Qtr End 12/31/07) & F2Q08 (Qtr End 3/31/08) Earnings Call Transcript -- Seeking Alpha
try here if that didn't work:
Beazer Homes USA, Inc. F1Q08 (Qtr End 12/31/07) & F2Q08 (Qtr End 3/31/08) Earnings Call Transcript -- Seeking Alpha
A cursory look painted a similar story regarding sales and cancelation rates (see page 2). In contrast, there is talk of ongoing investigations and settlements with the goverment.
I'd love to completely read it, but have to get back to work.
Best,
This reminds me of the movie "The Outlaw Josey Wales" starring Clint Eastwood.
Anyway, IIRC, his Native American acquaintance recalls how he and his men went to war after the local government agent told them to "endeavor to persevere".
I wonder if Mr. Hovnanian's scalp will be sought after by his shareholders soon.
Reminds me of Dead Man Walking. HOV should change its ticker to HIV, because it is really sick and will die in this bust.
Japan capital spending falls 4.9% in quarter
Japan capital spending falls 4.9% in quarter - MarketWatch
Does anyone see any parallel here to the automakers in the 1920's. There used to be hundreds of automakers in the 1920's after the the War and he depression that sank to less than a dozen. CR do you else think that there will be only a few national homebuilders who can pull resources and workers for fewer projects.
(Sorry, more OT) -
Fun political trivia: no candidate has ever won the W.H. whose slogan was a dangling preposition...in.
I vote for ignoring the cancellation rate. You have to remember that people cancel at different points in time, they do so with different levels of information, and different reasons. Eventually, you could be sitting here saying, hey, look, cancellations are down to 5%, yay! But that might just be because only 1 in 20 cancelled, and there are almost no sales to report. The issue here is that these builders are screwed, independent of what is happening to the cancellation rate. I dont care if it goes to zero tomorrow, makes no difference. That would just make it clear that the entire market has figured out that we really are in a bust. The more that number falls to me, is more of a reading of the generalized understanding that more people have woken up to the fact that it ain't going to be so easy to get a mortgage anymore, or buy a new home before you sell your old one. Anyway, go ahead and track it for purposes of census reporting, but for builder profit/loss, it doesnt tell me much.
I think Magic Johnson should be the spokesman for Hovnanian.
And I also think 7-11 should change its name to All The Fu&%ing Time.
Geoff, the point on cancellations isn't about the builder - it's about the numbers from the Census Bureau.
We can't ignore the cancellation rate because it's helpful. When I first pointed out that the Census Bureu was OVERstating sales and UNDERstating inventory - that was shocking to some - and proved to be correct.
Now that the opposite is happening, this helps us realize the Census Bureau is probably understating sales. Nice to know - something you'll never get in the MSM!
Best Wishes.
Erstwhile and hitherto, I shall refer to homebuilders as nobuilders and Michael Jackson as The Guy From Dubai. And the Colorado Rockies as the Calculated Risk. And Gravy Train as Dinner.
I must ask CR. You state that since cancellations are declining then the Census Bureau will be underestimating sales.
But, how can that be when cancellations are inherently going against the numbers. The Census Bureau will update cancellations as long as the home isn't built. So, if a builder reports a sale and the sale falls through, the home no longer counts. That will reduce sales when the Bureau revises.
But, the Census Bureau as far as I know, doesn't adjust on perceived cancellation rates. AFAIK the Bureau doesn't consider cancellation rate changes into their published numbers.
All that could happen would be that the revised numbers are revised down LESS than before. How could it be any other way?
I would like to add. How could they UNDERstate sales? The numbers were previously revised to take off homes during the building phase that were sold, but fell through. Homes that were built and reported as sold, but fell through, are never revised, so that could definitely OVERstate during a boom and UNDERstate if they finally sell during the bust. I suppose, since we are sitting on a ton of inventory that if those homes were counted as sales at one point then now we may get UNDERstatements of sales, but there is no way to verify that those homes were counted as sales after completion.
The way I see it, the Census Bureau can only OVERstate and rarely UNDERstate considering their method of getting numbers and no longer tracking homes once they are completed and reported as sold. Even if there is UNDERstatements we would need far more evidence than cancellation rates to make any informed decision.
CR, my beef on this isn't with the impact on Census reporting. We've been through that over and over. What you mentioned as good news was the lower cancellation rate for THIS builder. And basically, it isn't going to save them from going BK even if it goes to zero. That's my point.
If I'm reading the financial table correctly, if HOV kept everything equal they'd be out of cash in 2 quarters, 3 if the builder tax credit happens(I can't remember if it passed.) If they sold everything it'd be a year and a half.
$500mm cash on hand currently, $800mm by Oct. 31, burn rate of $$650mm per Q.
Is this even remotely correct? Their 8k at the website is a PITA to read due to wacky formatting(something done on purpose, I'm sure.)
It makes sense that the cancellation rate is coming down. Bigger deposits, only qualified borrowers, backlogs shrinking. No surprise there.
With the second leg of the credit crunch kicking in right now, and the recession just getting started, I don't think we're even close to a bottom in new home sales. Just clearing out the knife catchers right now.
Erik, here is the discusson from the Census Bureau
As a result of our methodology, if conditions are worsening in the marketplace and cancellations are high, sales would be temporarily overestimated. When conditions improve and these cancelled sales materialize as actual sales, our sales would then be underestimated since we did not allow the cases with cancelled sales to re-enter the survey.
My approach isn't perfect (there isn't a perfect adjustment), but it's probably close.
Geoff, OK, I would say this is a "little bit of good news". Yes, I've pounded the cancellations into the ground - and I've apparently done a poor job of explaining it.
I believe a number of builders will go under. They are hoping to survive until the market recovers - they will be disappointed. I have no position in HOV.
Best to all.
CR,
How much are you suggesting the Census Bureau is underestimating? From what I can gather, most people would be canceling out on properties that were being built, not those already built. Because, there is a waiting period for your property to be built, so you have to time to think and watch the market. I would highly suspect that there is a much higher cancellation rate on properties being built than those already built.
OK, haloscan is in scorched earth mode I guess. My comments are being torched. Anyway...I'll see if it magically appears before reposting.
totally agree with Barley. stock will rally bigtime today! this is definitely the bottom. only one way to go so load up with both fists!
I have spent a bit of time analyzing both HOV and BZH earnings. I haven't had time to digest this latest report, but my knee jerk reaction is this is worse than I would have expected.
Hovnanian was down to 73 million in cash before they chose to raise more money by going to the capital markets. The fact that they were able to get any funding at all probably means they won't go bankrupt this year at least. However, they have chosen to stay afloat by taking on more long term debt. Last quarter their debt-to-capital ratio was 64.6%, and this has no doubt gotten worse since they've taken on more debt. Their gross margins were down to 6.7% in the prior quarter, and with the average home price falling again in this latest report, it is safe to assume that this number shrank as well.
Some of their competitors in stronger financial shape (think TOLL, Ryland) will be able to survive, but I think Hovnanian will not.
As far as Beazer goes, they have chosen to try and weather the storm by exiting markets and selling off anything they can. They may be limited in their ability to raise capital by some of the ongoing investigations. I almost feel sorry for them, because in a sense their only sin was getting caught. No doubt many other builders were committing mortgage fraud via their financing operations; in fact I read a story just the other day that Hovnanian was offering funny money 100% financing through their mortgage unit. Ryland also is doing this. This may also explain the lower cancellation rates ... maybe somebody can explain to me how this works, if a builder uses their own mortgage unit to finance a sale, and no third party will touch the loan, do they get to book it as a sale? In fact I would think this is really a liability on the books until they can find a sucker to buy the loan.
These kids build a home in eight days.
Solar Decathlon '07 // Current
Here's Robert Toll (CEO of builder Toll Bros.) on their earnings conference call yesterday:
Thanks, Joel. Now let me turn to my lobbying efforts. As we all know, Congress is considering many iterations of a housing stimulus and economy stimulus bill. We believe Congress should try and jump-start demand for new homes with an initiative that will bring buyers off the sidelines and into the market, and thereby stop the downward spiral of home prices. As we have said before, we favor a tax incentive for all those who buy homes within nine months of the Bills passage. The reason for the nine months is that we think its important to create a sense of urgency.
You read that right, people. Robert Toll is lobbying for taxpayers to subsidize his profit margins. Try this on for size, Bob: reduce the price of your McMansions. The downward "spiral" you worrying about is a necessary return to historical affordability.
Toll is absolutely a despicable human being. He and Mozilo belong in a jail cell with Skillings and other crooks from Enron.
The Spring that did not spring will finally do in a few of the homebuilder hopefuls. They could drag through one year, but not through two.
Been through this whole cycle in another industry. Expenses will drop drastically because:
-Contracts that force them to take supplies are running out.
-Contract or off-the-books employees will be moving on.
-Salaried employees are already looking for their next stop on Monster.com et. al.
-Hiring freeze
Much too late:
-Big Layoffs.
It takes time for these things to show up on the income statement.
"We expect to persevere" means "we expect to keep trying." I'd be more impressed if they'd said, "We expect to endure."
hiker90 --
BZH hasn't filed since June of last year.
Your information is out of date. BZH has caught up on its filings. The 10-Qs for Dec 31 and Mar 31 were filed on May 15.
CR,
I don't understand how you get to that conclusion. The shadow inventories will continue to build as long as more homes are added to it than are sold out of it. How does the cancellation rate directly effect that?
It may well be true, but I don't believe you've ever really shown us how you arrive at that conclusion.
"We expect to persevere" means "we expect to keep trying." I'd be more impressed if they'd said, "We expect to endure."
kurtyboy | 06.04.08 - 9:34 am
My thoughts exactly, Kurtyboy. Did the lawyers tell him he couldn't say "we will persevere"?!
Imagine if MacArthur had said, "I expect that I will return."
Main thing is that inventory is rising.
Second main thing is that sub-prime foreclosures are still rising and option arms are waiting in the wings for their reset dates to q them in.
IMO more interesting than modest changes in cancellation rates is a discussion of ultimate houses foreclosed in markets where price declines 40%.
They will fail. Not that this bit of anecdotal evidence should prove this, but they have a sea of twin homes I've never seen the likes before. All not selling.
Out of pure spite buyers should hold off until these firms go bankrupt to ensure such shenanigans never happens again.