I would think the key to a recovery in home building would be controlling inventory, but it seems individual builders have a lot of incentives to keep building. - Bob in MA

That's the key indeed. But from CRs Hovnanian link earlier we read...

"In the fourth quarter, we decided to walk away from $141 million in land deposits and predevelopment costs and took impairment charges of $174 million," said J. Larry Sorsby, Executive Vice President and Chief Financial Officer.

The thing that's most telling to me is that they not only walked away from land but were also willing to scrap some of their 'work in process'... the 'predevelopments'.

But my guess is the jump in permits coupled to slow sales indicates most builders believe the only way out of the swamp is to build their way out... prices, cancellations and weak margins be damned.

They are probably right that it is their best shot currently available to them but that doesn't mean it will work.

Watch their cash flows & bankable equity. It's like watching the gas tank needle while driving a very long stretch of barren desert highway. They better have a light foot & well maintained engine.

The WSJ take on this today is surprisingly bearish:

The government's measure of building permits isn't as closely watched by investors as housing starts, but some economists consider it a better measure of the outlook for construction. The number of permits that were issued for future construction projects fell by 31% between September 2005 and October 2006, to levels seen back in 2000. For November, economists think they were little changed. That's not very encouraging.

Meantime, the number of homes on the market remains a concern. Although the inventory of new homes for sale has fallen slightly since the summer, J.P. Morgan economists note that inventory of existing homes (that is, used) continues to rise. A growing number of homes on the market are vacant, which in many cases probably means they were bought speculatively.

False Start

dryfly -- "Watch their cash flows & bankable equity. It's like watching the gas tank needle while driving a very long stretch of barren desert highway."

I agree with you dryfly. I've been reading that a lot of these homebuilders are new to the being a public company game. They are also just off an incredible run where they were the darling of every stockpicker's eye. (Which brings up shades of the dotcom companies to me) To keep their Wallstreet analysts happy, and probably buying into the management credo of profit maximization through leverage, they were probably busy running these companies hot and lean. This would have allowed them to jack the earnings per share and drain as much profits from the company as they could (as the analysts and consultants were probably telling them to do; greed is good right?). Well, as you implied, I think it's about to come back to bite them in the arse as we will see who had the foresight and has the financial reserves to outlast the dry spell. I've heard various people referring to the housing downturn as the equivalent to a localized depression in the economy as far as homebuilders are concerned.

I'm sure CR could tell us more about the dangers of leveraging a company to the hilt and planning where you only expect the best possible scenarios.

symptom:

just had a client call me and tell me he was refi'ing his house. i asked him what the LTV's and the value was. it was an inflated appraisal value and 100% LTV with a cash out. i asked him how were they ever going to get that value on the home.

he said his mortgage broker had a guy that would hit any number they needed.

Commercial construction even moreso. A lot of the jobs lost this cycle will never come back as the recession will drive automation in search of lower labor costs.

Funny you should say that... sitting next to me right now is a gear set one of the companies I work for is designing to be part of a 'portable crane'.

Think of it as the construction equivalent of the lift auto mechanics use to pull engines... only this sucker will be light & portable enough construction crews can use it to move and place bathtubs, toilets, granite counters, etc.

Instead of busting a team of workers backs & knees & fingers... strap in whatever needs to be moved & carefully placed and then start hitting the buttons.

They will still need people to do the fine adjustment required for final positioning - but at least the weight will be carried by the crane.

There are products out there like this now but the costs are dropping so fast damn near every small sub will be able to own them - almost throw away cheap like air compressors.

There will be WAY more of this kind of stuff coming on stream.

CR, have you looked at vacancy rates  lately?

For homeowners the rate is 2.5%, the highest ever and still rising. It last peaked at 1.9 in the '89-91 period.

Rental vacancy rates are now rising again, after falling in 2005 and the beginning of this year. They are near their record 2004 levels, ca. 10%. In the '89-91 period they were ca. 4%.

Part of the increase in homeowner vacancy could be an increase in the number of second/vacation homes (they do count those as vacant.) But it has gone from 1.9% to 2.5% in one year, so it would seem resonable to guess there are 500,000 or so units that are unoccupied due to the glut.

The 10% rate for rentals seems to make any big increase in rents is likely, which some people were expecting.

This cannot last. Can it?

I don't know - I'd think there will be an eventual 'market split' between tools people buy so they can say they bought a tool (but never really use - parks them in the garage) and those that get really used and used and used.

The hoist I described won't be made in China and won't be THAT cheap... just the part I'm looking at cost something like $15-$20 each and is only one part of many - some much more expensive.

But it won't be long until there are Chinese knock off's I'm sure. Except I doubt pro's will want to lift & position a $3,000 granite counter top trusting it to a $100 Chinese hoist made from poor materials with sloppy tolerances. Though the salesman selling them the granite would wish they would try.

On the socket sets & such - some of the offshore sets are pretty damned good (forged or cold forged from quality tool steel). But they aren't that cheap then either.

Then again some are terrible - bad steel & heat treat and cast, not even forged. These are frequently VERY cheap.

Usually pretty easy to tell the cast from forged but not easy to tell if the steel & heat treat is right without a met lab... looking at them carefully it is almost impossible to tell. Heck even I get fooled sometimes & I do this stuff for a living (look at parts & try to guess how they were made, suggest alternatives to lower cost, improve performance or better yet - do both simultaneously).

Yup a tool shed with granite.

Think of it as a 2x8 granite 'flat plate'... then it makes sense.

The deflationary benefits you all are enjoying with tools and such can last for a long, long time. My business has been in deflation for decades, which is how I came to study the subject so closely.

What you are enjoying is simply the benefits of ongoing productivity improvements. We see the productivity numbers go up and up - think those are just dry academic statistics? No way, that increased productivity is supposed to mean that stuff gets cheaper and better all the time. Toss in countries which wish to become industrialized themselves and it gets even better.

Energy shipping costs? Piffle, productivity improvements are just as much in energy efficiency as anything else. A shipping line can move a LOT of material for very low costs these days. I just read a story where some Japanese engineers have discovered a process where you can shoot a layer of air bubbles under a ship and improve it's gas usage by, I forget 30% or something. All it takes is a compressor and some pipes.

At any rate, people seem to have an inflationary bias built in somehow, it must be evolutionary. Be wary of scaricity because it might happen. Fact is the world is highly deflationary right now, and we should enjoy it.