One of the most infuriorating (of many infuriorating) comments I had to endure during the bubble was "the builders learned from last time... if they're building, it must be due to fundamentals!"
the builders learned nothing, in fact, they un-learned if anything.
they learned how to game the stock option system if anything... borrow money to buyback stock so that insiders could sell stock at inflated prices
the companies will burn in hell (deservedly) while the execs get platinum mansions
Just think what would/will happen if/when this slowdown spreads outside housing to the rest of the economy, and general consumer spending drops off a cliff.
The Chinese, like the homebuilders, can't afford to stop producing; they'd slash prices flood foreign markets to survive. It'd get ugly.
REBear, the table of revisions only goes back to '97. It appears that negative revisions occur during periods of economic weakness (like now) - other than that I don't think we have enough data.
Didn't GM post-9/11 subscribe to the philosophy that they would lose less money by selling cars at a loss (due to their high overhead) than not selling a car at all? The homebuilders selling at a loss to liquidate landholdings seems predicated on a similar type of business strategy.
yearning: What I remember hearing was that what they'd learned was to option land for future building rather than buying it. That way they wouldn't be stuck holding land when the bubble ended. That at least seems to be partly true. Their first step in this contraction seems to have been abandoning their options and taking writeoffs on them.
"What I remember hearing was that what they'd learned was to option land for future building rather than buying it. That way they wouldn't be stuck holding land when the bubble ended."
It is true that builders bought options. I do not think it is true that they used options effectively to hedge pipeline risk.
If you take the money you were planning to put into an investment and you buy options on it instead of actually buying the underlying investment, you lose 100% of your money when the price goes down. If you borrowed the money for the options you lose 200%.
The way options were used in the late stages of this market, they really just represented more leverage.
In the history of our country, we've never before had a situation where so many starts are in the pipeline at the same time so many foreclosures are coming. I have a hard time seeing how today's inventory of 7-8 million homes for sale will be reduced 12-18 months from now.
When the large homebuilders run out of credit/cash, their businesses will nearly stop. It's hard to see where they will get the financing to rebuild. It will be the smaller local builders who lead the rebound in 2010 or so.
It takes access to financing to run a big builder, and it won't be there. Some banks will be ruinied by builder defaults.
Any thoughts on what banks will do regarding the HBs' requests for relaxed credit? Seems to me that if they refuse, then the HBs are almost guaranteed to go BK, resulting in almost guaranteed losses to the banks; if they agree, then HBs either have a chance to survive (with no loss to the bank) or they still go BK (with a larger loss to the bank - assuming here that the HBs borrow additional funds). Not great choices for the banks.
Am I missing anything, or is this basically what the banks are faced with?
Had lunch with a home builder friend of mine here in Cape Coral, Florida and he mentioned he had one project in the works which will keep him busy for a couple of month. After that, he really doesn't know.
In September of this year Cape Coral had 29 sf home permits issued. Last year at this time it was over 600 per my buddy.
For HBs, the big risk is that the houses don't sell, and/or at a high enough price to cover the cost of liquidating lands. While it may be in the individual HBs interest to continuing building in hopes of liquidating lands, collectively it would seem they are raising the bar, making it all the more difficult for each of them should prices plunge or the newly built homes simply don't sell.
iceman: it is rather like a hotel. it is better to rent a room for any price than not to rent it at all. (you might make an argument about prestige, etc., but economically this is true).
If the homebuilders had realized in 2004 that most of the financially sound buyers who could afford homes at historically low interest rates had already bought, and had then used the lenders foolishness to unload their remaining inventory at record prices, they (the homebuilders) would be on the golf course laughing right now. Instead, they believed their own lies and doubled down. It is amazing to me how, regardless of how much they make during a boom, and knowing that they are in a cyclical industry, they never are able to get up from the table. Of course, the same could be said of the lenders, especially those financing construction. Amazing.
it is rather like a hotel. it is better to rent a room for any price than not to rent it at all.
Not true on a number of fronts James. There are direct additional costs arising from renting the room rather than leaving it empty, think cleaning it for one.
It takes access to financing to run a big builder, and it won't be there. Some banks will be ruined by builder defaults.
Oh yes. In my career, most of the time involved in remodeling, replacement of housing systems, evaluating existing systems, I always laughed when someone told me he was/is a builder of houses. To me that meant he played golf and signed checks.
I loved to say: the builder never kills the family cat, but the remodeler lives in fear of doing so.
they (the homebuilders) would be on the golf course laughing right now.
there are in fact plenty of developers even in CA, AZ, NV and FL who are doing this right now. Do not confuse the public homebuilders with all builders. Yes, the publics are headed to BK. And yes, many, many privates are as well.
But there are still plenty of developers who were smart enough to cash out and wait things out, and they are literally circling the failed projects making bids at 20-40 cents on the dollar. There are no takers currently but there will be in good time. One friend developed and sold finished lots to a Public, who built phase 1 and then sold the whole thing back to him for less than prior transaction, so my friend got the land back at a lower basis and 50 houses to boot! Just as the publics were taking a Mexican who'd been in the country hammering away for 5 months and calling him a Master Framer, they were taking morons who'd never run anything and asked them to run incredibly large projects. Ridiculously bad business model, and if you pull any analyst report on HBs from 2004 you'll definitely be treated to "they've all learned from the past and are keeping inventories in check..."
Still, plenty of rich developers and staying plenty rich!
First: from a lucrative investment to a durable consumer good -
Business: You're at the mall, so why not buy a house?
CR,
About Aug payroll revision. Are big revisions common during certain phases of an economic cycle?
One of the most infuriorating (of many infuriorating) comments I had to endure during the bubble was "the builders learned from last time... if they're building, it must be due to fundamentals!"
the builders learned nothing, in fact, they un-learned if anything.
they learned how to game the stock option system if anything... borrow money to buyback stock so that insiders could sell stock at inflated prices
the companies will burn in hell (deservedly) while the execs get platinum mansions
Just think what would/will happen if/when this slowdown spreads outside housing to the rest of the economy, and general consumer spending drops off a cliff.
The Chinese, like the homebuilders, can't afford to stop producing; they'd slash prices flood foreign markets to survive. It'd get ugly.
REBear, the table of revisions only goes back to '97. It appears that negative revisions occur during periods of economic weakness (like now) - other than that I don't think we have enough data.
Best Wishes.
Didn't Citigroup call the bottom and upgrade all of them?
Didn't GM post-9/11 subscribe to the philosophy that they would lose less money by selling cars at a loss (due to their high overhead) than not selling a car at all? The homebuilders selling at a loss to liquidate landholdings seems predicated on a similar type of business strategy.
With agriculture commodities so high, they should farm their land.
Green Acres is the place to be
Yet, today, Citi upgraded the homebuilders to a buy. Next on the chopping block: Stephen Kim, the analyst responsible.
Classic race to the bottom last one there wins. I can't wait to buy a lot for 75% off then build with 75% off labor and materials.
yearning: What I remember hearing was that what they'd learned was to option land for future building rather than buying it. That way they wouldn't be stuck holding land when the bubble ended. That at least seems to be partly true. Their first step in this contraction seems to have been abandoning their options and taking writeoffs on them.
"What I remember hearing was that what they'd learned was to option land for future building rather than buying it. That way they wouldn't be stuck holding land when the bubble ended."
It is true that builders bought options. I do not think it is true that they used options effectively to hedge pipeline risk.
If you take the money you were planning to put into an investment and you buy options on it instead of actually buying the underlying investment, you lose 100% of your money when the price goes down. If you borrowed the money for the options you lose 200%.
The way options were used in the late stages of this market, they really just represented more leverage.
In the history of our country, we've never before had a situation where so many starts are in the pipeline at the same time so many foreclosures are coming. I have a hard time seeing how today's inventory of 7-8 million homes for sale will be reduced 12-18 months from now.
When the large homebuilders run out of credit/cash, their businesses will nearly stop. It's hard to see where they will get the financing to rebuild. It will be the smaller local builders who lead the rebound in 2010 or so.
It takes access to financing to run a big builder, and it won't be there. Some banks will be ruinied by builder defaults.
These fools are playing a game of chicken with a brick wall.
Any thoughts on what banks will do regarding the HBs' requests for relaxed credit? Seems to me that if they refuse, then the HBs are almost guaranteed to go BK, resulting in almost guaranteed losses to the banks; if they agree, then HBs either have a chance to survive (with no loss to the bank) or they still go BK (with a larger loss to the bank - assuming here that the HBs borrow additional funds). Not great choices for the banks.
Am I missing anything, or is this basically what the banks are faced with?
Had lunch with a home builder friend of mine here in Cape Coral, Florida and he mentioned he had one project in the works which will keep him busy for a couple of month. After that, he really doesn't know.
In September of this year Cape Coral had 29 sf home permits issued. Last year at this time it was over 600 per my buddy.
The Housing Bubble Blog » Upgrades Now Merely The Price Of Admission In Florida
He really doesn't know what his company will do in a couple of months.
For HBs, the big risk is that the houses don't sell, and/or at a high enough price to cover the cost of liquidating lands. While it may be in the individual HBs interest to continuing building in hopes of liquidating lands, collectively it would seem they are raising the bar, making it all the more difficult for each of them should prices plunge or the newly built homes simply don't sell.
iceman: it is rather like a hotel. it is better to rent a room for any price than not to rent it at all. (you might make an argument about prestige, etc., but economically this is true).
If the homebuilders had realized in 2004 that most of the financially sound buyers who could afford homes at historically low interest rates had already bought, and had then used the lenders foolishness to unload their remaining inventory at record prices, they (the homebuilders) would be on the golf course laughing right now. Instead, they believed their own lies and doubled down. It is amazing to me how, regardless of how much they make during a boom, and knowing that they are in a cyclical industry, they never are able to get up from the table. Of course, the same could be said of the lenders, especially those financing construction. Amazing.
it is rather like a hotel. it is better to rent a room for any price than not to rent it at all.
Not true on a number of fronts James. There are direct additional costs arising from renting the room rather than leaving it empty, think cleaning it for one.
It takes access to financing to run a big builder, and it won't be there. Some banks will be ruined by builder defaults.
Oh yes. In my career, most of the time involved in remodeling, replacement of housing systems, evaluating existing systems, I always laughed when someone told me he was/is a builder of houses. To me that meant he played golf and signed checks.
I loved to say: the builder never kills the family cat, but the remodeler lives in fear of doing so.
they (the homebuilders) would be on the golf course laughing right now.
there are in fact plenty of developers even in CA, AZ, NV and FL who are doing this right now. Do not confuse the public homebuilders with all builders. Yes, the publics are headed to BK. And yes, many, many privates are as well.
But there are still plenty of developers who were smart enough to cash out and wait things out, and they are literally circling the failed projects making bids at 20-40 cents on the dollar. There are no takers currently but there will be in good time. One friend developed and sold finished lots to a Public, who built phase 1 and then sold the whole thing back to him for less than prior transaction, so my friend got the land back at a lower basis and 50 houses to boot! Just as the publics were taking a Mexican who'd been in the country hammering away for 5 months and calling him a Master Framer, they were taking morons who'd never run anything and asked them to run incredibly large projects. Ridiculously bad business model, and if you pull any analyst report on HBs from 2004 you'll definitely be treated to "they've all learned from the past and are keeping inventories in check..."
Still, plenty of rich developers and staying plenty rich!