Consolidated Home builders thread PHM, LEN, KBH, DHI, LGHI , TOL, NVR

[ValueArb]

22 hours ago, thepupil said:

If you think mtg rates should be that high you’re effectively saying where the 10yshould trade(5-7% to get mtg’s of 7-9%) and taking a  low probability view thereon. 

id recommend futures options or bond etf options to express this view.

 

I’m not trying to dismiss the risk just saying that mtg’s and tsy’s are inextricably linked and that fixed income investors are not entitled to a real return 
 

 

 

I don't think mortgage rates should be that high.  I do think that mortgage rates may get that high, or higher if inflation persists at current levels.

 

The market is saying that inflation is temporary, so interest rates are only up a little bit. Treasuries up from 1.2% to 2.8% and 30 year mortgages from 2.8% to 4.9% since July). But if inflation does not start to decline, rates will continue to rise. If 7% inflation ever becomes the expectation (after a few years) treasuries will be higher than that and mortgages higher still.

 

What percentage of the time inflation subsides and what percentage it continues is not something thats in my circle of competence to gamble on. I do bet that inflation continuing or accelerating happens more than 10% of the time.

 

Fixed income investors aren't entitled to a real return, but they also aren't likely to take duration risk during inflationary times without being heartily compensated for it. Anyone buying 10 years to get a 1% higher yield than 1 year treasuries offer is taking a huge risk at the moment. If inflation is still 7% a year from now they'll likely be looking at losses approaching 30%.

[CorpRaider]

4 hours ago, thepupil said:

i'll am i the only nut job who likes the idea of owning all this land?  at least to start. like I'd rather go from land rich , asset heavy to asset lite than to buy the asset lite. 

 

 

I do see the banking your own land side of the argument.  When they (NVR DFH and converts) talk about not owning the land "in a public vehicle" and highlighting more predictable earnings through the cycle (even including GFC) that doesn't scream out 100% rational to me.  I would rather have the lumpy 15% than the smooth 8% or whatever.  It also kind of reminds me of an off balance sheet financing or other more opaque structure, like if the economics of the land portion don't work it's not sustainable just because you shifted it off your balance sheet into a fund you manage or to partners, but I suppose the land bankers could have lower return requirements (not sure how that makes sense if it's so risky).  I guess building vertical is higher skill than assembling land in most circumstances and perhaps returns should follow.  The problem is probably the mentality and empire building that comes with banking your own land, when you're talking about a developer/builder, often just keep rolling the dice until they blow up.

Edited April 12, 2022 by CorpRaider

[ValueArb]

https://www.cnbc.com/2022/04/12/stock-market-futures-open-to-close-news.html

 

8.5% inflation. Doesn't look like the Fed is even close to having a handle on inflation.

 

One worry is that federal interest costs will continue to increase, and eat up the federal budget. The CBO estimated 10 year treasuries wouldn't reach 3.4% until 2031, and they look to hit that by Fall now. The treasury's weighted average duration is under 6 years, it's going to have to roll over a lot of its debt in the next few years at much higher rates.  Why weren't they moving to 10 years and longer when rates were at all time lows?

[Ulti]

https://podcasts.apple.com/us/podcast/this-is-what-5-mortgage-rates-mean-now-for-the-housing-market/id1056200096?i=1000557071031

 

we speak with Conor Sen, a Bloomberg Opinion contributor and the founder of Peachtree Creek Investments as well as Dustin Jalbert a senior economist at Fastmarkets, with a specialty on the lumber market. We examine housing from both the macro perspective as well as the supply chain.

[Broeb22]

It's interesting, just looking at most of the homebuilders, they seem reasonably healthy. The one that perhaps seems a touch over-extended would be LGIH with 60% Debt/Equity. At the same time I think they have one of the best business models in the industry by (as others have pointed out) targeting first-time home buyers and actually "solving" the affordable housing deficit in this country. They have some ability to weather a homebuilding recession reasonably well because they can sell to SFH rental companies too, which didn't exist last cycle. Either way, owning suburban land positions could become challenging for them liquidity-wise because I'm not sure their land is as marketable as that of other major homebuilders. Could be a nice setup for a great buying opportunity down the road, although of course I always tend to think there is going to be a "better time" to buy. They're the only homebuilder that's cash-flow break-even or worse (COVID 2020 results notwithstanding) so they have very little buffer if things go sideways for them.

 

Is there any logic to looking at LGIH as the canary in the coal mine for the cycle? I would think the entry-level home buyer would be the first to put off buying a house, and other buyers may not trade down to LGIH homes even if interest rates dent their ability to afford anything nicer. Similarly, I would expect LGIH to start growing first coming out of a cycle because their buyers are most sensitive to unemployment improvement (and less exposed to capital market fluctuations/the wealth effect). Please poke holes in that logic. 

[Gregmal]

I don’t think there’s much to read from entry level stuff. In addition to what’s already been discussed, it’s the perfect price point and market for investors. Is it not essentially what rentals are? Throw a cap rate on most 1-2 bedrooms and they’re in that 280-500k range. Many of those buyers(investors) are all cash. I would actually probably look at the 500-800k price point if that’s possible. I dont think mortgages are relevant as a look through either. I see a lot of folks making stupid assumptions based off newly released mortgage data the past 4-6 weeks but really that’s simple. 1) what idiot is refinancing now? No one. So that activity should be down huge. 2) in order to generate a mortgage you need to buy a property. Inventory is at record lows. Even compared to this time last year. So is it entirely logical for mortgage volume to plummet with zero relevance to housing slowing down? But I guess I’m the only one who sees those dots connecting as obvious and “duh” stuff .

[changegonnacome]

1 hour ago, Broeb22 said:

Is there any logic to looking at LGIH as the canary in the coal mine for the cycle? I would think the entry-level home buyer would be the first to put off buying a house, and other buyers may not trade down to LGIH homes even if interest rates dent their ability to afford anything nicer.

 

Yes and No........selling to 'real' people who are buying a house cause they need a house (age, kids etc.) in a world where household formation & demographics are meeting severe decade long undersupply should be a winning formula.......& where LGIH is the lowest cost supplier of those homes while maintaining industry leading gross margins points to a business that has leaned into its niche in a meaningful way & has built genuine economies of scale from what I can see........there is something going on at LGIH that I like....I won't go as far to say that LGIH is the Costco of homebuilders but I sure as hell like the idea of how they take folks out of rentals & deliver home ownership that in the main reduces peoples monthly housing cost outgoings signficantly while giving them equity ownership. I'm a big believer in a home owning democracy & how it builds communities/societies (but that's for another thread).

 

It was mentioned previously that LGIH speculates on land in the outer suburbs / ex-burbs of urban areas.....and in the past this would mean its products would be the most sensitive to declining house prices & then LGIH itself would come under more severe pressure than other builders as people substituted for more centrally located product in a declining market......put another way LGIH's inventory land & WIP had a high beta......and this was true....back before C19........building on the edges of cities where folks used to reach for 'value' in exchange for tougher commutes used to display this high beta characteristic as when they could people dumped LGIH solutions for more central commutable solutions......I'd posit that post-COVID & remote/hybrid becoming the norm the high beta on outer burbs / ex-burbs in major cities has changed completley.....sludging into wherever 5 days a week on a horrible 2-3 hour commute was/is soul destroying, end of story...........3 days a week in the office with a bunch of PTO & sick days taking that average down to 2.x a week.......well what's just happened to major cities outer burbs & ex-burbs is their TAM just increased significantly & therefore I believe LGIH's historical inventory & WIP beta just dropped a bunch. While their potential customer base just went up a hell of lot, cause it isn't the burden it was being a little further away from Downtown.

 

I need to do way more work on this but this is my initial thoughts on why LGIH's model might actually be the most anti-fragile of all the builders, when outwardly it may appear to be the opposite. 

[Spekulatius]

@changegonnacome I disagree that working from home is a gamechanger for LGIH. While WFH shifted demand, it probably isn’t something permanent especially with the kind of jobs that first time home buyer are having. I think there is a pent up demand for the homes that LGIH offers right now, but once that demand surge from this pool of buyers is satisfied, it’s probably very cyclical again.

[KJP]

Here's part 2 in a series from Voss Capital sharing their view on the future of US new housing construction:  https://vosscapital.substack.com/p/the-big-long-a-deep-dive-on-us-housing-755?s=r

 

Based on their latest 13-F, Voss appears to be implementing their bullish take primarily through building products distributors/suppliers (BlueLinx, Griffon, Huttig), though they do have smaller long positions in a few homebuilders:  https://www.sec.gov/Archives/edgar/data/1730145/000139834422003244/xslForm13F_X01/fp0072899_13fhr-table.xml

 

A service, rather than product-supply, company with shareholder-aligned corporate governance and some exposure to Sunbelt new home construction (among other things) is IES Holdings:  https://investors.ies-corporate.com/static-files/9ce45dda-60c5-4683-90fe-a72d59265b04

[Spekulatius]

There are a lot of ways to play a boom on housing, besides home builders. The distributors are one way - they have benefited from higher demand but also structural changes (consolidation). Then there are material suppliers like OC, which basically doubled their margins on top  of a demand increase. is this margin boost permanent - that's the big question here. I do like OC and the stock is cheap (~12%+ FCF yield) . It's also a green play in the way that insulation products help with energy conservation. I think most of their revenues go into building updates not new construction, so probably much steadier than a homebuilders business.

 

https://investor.owenscorning.com/investors/overview/default.aspx

[thepupil]

11 hours ago, Gregmal said:

I don’t think there’s much to read from entry level stuff. In addition to what’s already been discussed, it’s the perfect price point and market for investors. Is it not essentially what rentals are? Throw a cap rate on most 1-2 bedrooms and they’re in that 280-500k range. Many of those buyers(investors) are all cash. I would actually probably look at the 500-800k price point if that’s possible. I dont think mortgages are relevant as a look through either. I see a lot of folks making stupid assumptions based off newly released mortgage data the past 4-6 weeks but really that’s simple. 1) what idiot is refinancing now? No one. So that activity should be down huge. 2) in order to generate a mortgage you need to buy a property. Inventory is at record lows. Even compared to this time last year. So is it entirely logical for mortgage volume to plummet with zero relevance to housing slowing down? But I guess I’m the only one who sees those dots connecting as obvious and “duh” stuff .

 

same energy

 

https://twitter.com/thepupil11/status/1514236607771164678?s=20&t=1Pox0DOvxOOdItFIRXZG4Q

[Gregmal]

28 minutes ago, thepupil said:

 

same energy

 

https://twitter.com/thepupil11/status/1514236607771164678?s=20&t=1Pox0DOvxOOdItFIRXZG4Q

+1. Its one of the more bizarre current phenomenon to me. To normal people, the home buying process isnt all that different than buying a car. What's the max we can buy. Ok, lets find something. Mortgage people too know how to make shit work. 1-2% bumps in rates arent going to even remotely deter folks interest in purchasing, IMO. 

 

The other angle is all the "supply" coming on line, otherwise known as "overbuilding". Which short term, 1-3 years IMO, doesnt really solve the shortage. And 2)...the supply chain problems and business gurus cant even efficiently get portable AC units or chips for heated car seats squared away in any sort of reasonable period of time. But we're just gonna "overbuild" our way out of a housing shortage?......LOL ok. 

[changegonnacome]

4 hours ago, Spekulatius said:

it probably isn’t something permanent especially with the kind of jobs that first time home buyer are having

 

Maybe my sample size is too small........but from all the employers I know in terms of their RTO plans even those that are historically conservative with a strong preference for an office based culture, its going to be very unusual, in a two person working family, not to have at least one of those two people in situation where they are doing 3/2 pattern in the future IMO.....3 days in the office, 2 Remote.......this will be the norm I think....and in this scenario the outer burbs/ex-burbs are less of comprise product than they were in the past.......layer on top of this millennial's expressed preference for being less indebted than previous generations & I think LGIH has a product thats way less likely to be substituted for as it was in the past. Complex equation to figure out but thats my feeling at the moment re: outer burbs/ex-burbs.

[zzzyx]

Probably the wrong place for this....would have liked to see VWTR get a higher price.

--------------------------------

 

Vidler Water Resources: D.R. Horton (DHI) will acquire Vidler for $15.75 per share in an all-cash transaction

8:36 AM ET 4/14/22 | Briefing.com

Under the terms of the merger agreement, D.R. Horton, through its directly owned acquisition subsidiary, will commence a tender offer to acquire all outstanding shares of Vidler for $15.75 per share. Upon the successful completion of the tender offer, D.R. Horton's acquisition subsidiary will be merged into Vidler, and any remaining shares of Vidler will be canceled and converted into the right to receive the same consideration payable pursuant to the tender offer. Following completion of the merger, the common stock of Vidler will no longer be listed for trading on the Nasdaq. The total equity value of the transaction is approximately $291 million, and the transaction is expected to close during the second calendar quarter of 2022 subject to customary closing conditions.

[Ross812]

13 hours ago, Gregmal said:

I don’t think there’s much to read from entry level stuff. In addition to what’s already been discussed, it’s the perfect price point and market for investors. Is it not essentially what rentals are? Throw a cap rate on most 1-2 bedrooms and they’re in that 280-500k range. Many of those buyers(investors) are all cash. I would actually probably look at the 500-800k price point if that’s possible. I dont think mortgages are relevant as a look through either. I see a lot of folks making stupid assumptions based off newly released mortgage data the past 4-6 weeks but really that’s simple. 1) what idiot is refinancing now? No one. So that activity should be down huge. 2) in order to generate a mortgage you need to buy a property. Inventory is at record lows. Even compared to this time last year. So is it entirely logical for mortgage volume to plummet with zero relevance to housing slowing down? But I guess I’m the only one who sees those dots connecting as obvious and “duh” stuff .

I would be careful with the assumption that no one is refinancing right now. I have a friend who is a mortgage broker that brought up that a significant amount of refinancing he does is for the purpose of consolidating high interest debt or to make large purchases. Refinancing is sensitive to the rate and home value meaning they are not going to dry up until the massive increases in home value slow down.  

 

 

[Broeb22]

I've struggled with the building products distributors because, while they would like you to believe they are consolidating, if you look at their market share graphs, nowhere do they show Home Depot or Lowe's. Yes, they may now be 20% players in the wholesale building products market, but I just have a sneaking suspicion that Home Depot and Lowe's are more competitive with parts of these businesses than they want you to believe. 

1 hour ago, Ross812 said:

I would be careful with the assumption that no one is refinancing right now. I have a friend who is a mortgage broker that brought up that a significant amount of refinancing he does is for the purpose of consolidating high interest debt or to make large purchases. Refinancing is sensitive to the rate and home value meaning they are not going to dry up until the massive increases in home value slow down.  

 

 

Gosh, I hope not that many people are consolidating high interest debt by refinancing. Not that its a bad idea, just that I hope not that many people need to do it after getting flooded with cash the last few years. Although, at the same time I have a good friend who shared his financials with me at one point (we were looking at getting a loan for a potential business venture) and his personal financial statement he sent to the bank was ugly. Tens of thousands of credit card debt, nearly $80,000 auto debt at a 6%+ rate, and he just refinanced most of that away with a refi. Maybe this message board or FinTwit is not a good barometer for how average non-financial people live their lives. 

[gfp]

1 hour ago, Broeb22 said:

I've struggled with the building products distributors because, while they would like you to believe they are consolidating, if you look at their market share graphs, nowhere do they show Home Depot or Lowe's. Yes, they may now be 20% players in the wholesale building products market, but I just have a sneaking suspicion that Home Depot and Lowe's are more competitive with parts of these businesses than they want you to believe. 

 

I think this is spot on.  I got a call yesterday from an inside sales rep at HD Pro, which she said had merged with HD Supply and they are going really hard trying to continue growing in the professional market.  This lady was expecting me to have 50-100 unit apartment buildings when she called (we don't have anything close to that).

 

I know Lowes has tried to expand in this market as well, although Home Depot has the lead from an earlier start.  HD is very well run and will fight hard to get these accounts. There is a large Professional Inside Sales operation at these companies now, not just the "Pro Desk" in the corner of the store.

[Broeb22]

10 hours ago, Gregmal said:

+1. Its one of the more bizarre current phenomenon to me. To normal people, the home buying process isnt all that different than buying a car. What's the max we can buy. Ok, lets find something. Mortgage people too know how to make shit work. 1-2% bumps in rates arent going to even remotely deter folks interest in purchasing, IMO. 

 

How can you say that people buy the max they can afford but also believe that a 1-2% change in rates won't deter people from buying? So people are just going to accept being able to get significantly less house than they could have just 6 months ago? 

 

People also don't understand convexity either and if interest rates stay at these levels, everyone is going to get a real painful lesson in what that means, because its easy to say a 1-2 point move in rates "doesn't matter" but when you're starting from 2.5-3%, you just experienced a 40-80% increase in the discount rate being used to value your house. The real estate market moves slow, so this won't show up tomorrow, but if interest rates stay here, there are going to be some people in pain when they inevitably move for a new job or get closer to home or any of those life events that cause us to move. 

[Gregmal]

7 minutes ago, Broeb22 said:

10 hours ago, Gregmal said:

How can you say that people buy the max they can afford but also believe that a 1-2% change in rates won't deter people from buying? So people are just going to accept being able to get significantly less house than they could have just 6 months ago? 

Because you can’t get homes. Good homes in good areas have off the charts demand against near zero supply. It’s like asking why WM or COST trade at 30-40x. Does it make sense? Not at first glance. Does it matter? Nope. 
 

In certain markets, simply being able to buy a house is not just something you can do. It’s considered getting lucky and winning a kind of mini lottery. 
 

As I’ve said before, look at Canada.

you can’t really justify it on numbers but you can justify it in real life. Folks wanna live where life is good. It’s hard to put a precise cap rate or PE on that. 

[Spekulatius]

56 minutes ago, Gregmal said:

Because you can’t get homes. Good homes in good areas have off the charts demand against near zero supply. It’s like asking why WM or COST trade at 30-40x. Does it make sense? Not at first glance. Does it matter? Nope. 
 

In certain markets, simply being able to buy a house is not just something you can do. It’s considered getting lucky and winning a kind of mini lottery. 
 

As I’ve said before, look at Canada.

you can’t really justify it on numbers but you can justify it in real life. Folks wanna live where life is good. It’s hard to put a precise cap rate or PE on that. 

You can’t buy homes partly because sellers are reluctant to put them on the market, because they see prices going up quickly. For the same reason, buyers are getting into the buying panic.  Both are sort of psychological and reflexive in nature and can quickly disappear. Supply and demand both have lot of elasticity.

I don’t think that looking at supply and demand or days on the market tells you much about the health of the housing market, except for the very short term. I think affordability metrics are a way better measure for the long term health and for these, the metrics don’t look great on that end.

 

We have seen the interest rate for mortgages almost double in a brief period of time and this comes on top of record increased in housing cost, which also increase the mortgage size needed to purchase homes, the taxes to be paid for houses, as well as increased insurance and heating costs. At some point, this cumulative increase in cost is going to hurt demand, I have no question about this. I just don’t know if we are at the point yet, where both home buyers and renters need to scale back their demand for space or move to cheaper alternatives. We know it can’t go for ever, or even for and extended period of time at the rates we have seen in the past.

Edited April 15, 2022 by Spekulatius

[Gregmal]

Think about it on a rational, normal person level. Take the price of renting. Call it a 4 cap on financial terms. What would you pay to have that option for 30 years at a relatively fixed cost? It’s definitely a premium to the rental rate. 
 

After last years rip, I think you need this year’s skeptics and uncertainty to set the stage for the next leg up. But it’s coming. 
 

Another way to look at it: I consider myself an above average personal in terms of financial awareness. When I was looking to buy a home, it was simple. Find a home I like and work out a deal to acquire it. Very different from the approach as an investor where I’ve literally lost units over a $1500 difference in price.

 

[Gregmal]

7 minutes ago, Spekulatius said:

You can’t buy homes partly because sellers are reluctant to put them on the market, because they see prices going up quickly. For the same reason, buyers are getting into the buying panic.  Both are sort of psychological and reflexive in nature and can quickly disappear. Supply and demand both have lot of elasticity.

I don’t think that looking at supply and demand or days on the market tells you much about the health of the housing market, except for the very short term. I think affordability metrics are a way better measure for the long term health and for these, the metrics don’t look great on that end.

 

We have seen the interest rate for mortgages almost double in a brief period of time and this comes on top of record increased in housing cost, which also increase the mortgage size needed to purchase homes, the taxes to be paid for houses, as well as increased insurance and heating costs. At some point, this cumulative increase in cost is going to hurt demand, I have no question about this. I just don’t know if we are at the point yet, where both home buyers and renters need to scale back their demand for space or move to cheaper alternatives. We know it can’t go for ever, or even for and extended period of time at the rates we have seen in the past.

Sellers sell because prices wow them. Then those sellers are removed from the market. Same as those who sold quality stocks when they thought they were “expensive”. Then years later it was a dumb move. The rest realize they have a good deal and it doesn’t make sense to transact. 
 

As I’ve said before, the housing bubble in 2007 was based on a foundation of 6-7% mortgages. It’s purely excel sheet nonsense to assume a 5% mortgage will stop people from buying a home. Wage inflation is driving the market. That bodes well for housing.

Edited April 15, 2022 by Gregmal

[Spekulatius]

I actually think that one catalyst that cracked the housing bubble in 2007 was a rise in interest rates. Interest rates went from 5.5% to almost 7%. It wasn’t enough to crack housing on its own, there was the subprime component to it, but it certainly worked against it.

 

4 cap really doesn’t work any more with 5% mortgages. 5% mortgages and the property taxes means that cost of capital for housing went to 6% +. It was 4% just 6 month ago. I think the housing market is in for a breather at least, because the cost of housing (purchase price and cost to finance the purchase) has increased much faster than the income.  None of these trends bode well for housing.

 

Also, Wage growth has not been the driver of inflation, in fact it looks like wage growth has been less than inflation since the pandemic, except for jobs around the minimum wage.

 

This does not mean housing needs to crash, but I could see housing prices stall out and buyers getting choosier, getting concessions or going on buyers strike. This happened in California in my area (where I lived back then) in late 2005. Then housing sat there slightly skitting  down until late 2007 when the bottom fell out due to the subprime crisis. I don’t expect an exact repeat, but I have seen housing markets with very tight inventory turn on a dime within a few month and it was kind of hard to tell just based on the overall numbers, but when you closely watched the market or knew some realtors, you would know that the market has shifted.

 

Edited April 15, 2022 by Spekulatius

[Gregmal]

The biggest contribution to the crisis IMO was loose lending and adjustable rate mortgages. I do not think the average home buyer today is any smarter than the ones in 2000-2007, but lending standards are significantly tighter and 19 out of 20 mortgages are fixed rate. As rates rise you also have the think fewer and fewer people are going to be looking to sell their homes.

 

Local realtors I speak with regularly kind of hit on one of the things I think is fueling the low inventory numbers right now. They said prices were so strong that you had people willing to list and sell during the typically slow winter season. So when spring rolled in, a lot of that inventory folks were expecting simply wasn't there. 

 

For sure theres areas where you can overbuild, but if you stay in desirable locations I cant see anything stopping this anytime soon. During the GFC the NYC suburbs barely budged on price, at least the ones I was living in at the time(Bergen County). 

[SharperDingaan]

Just to stir the pot ...

 

New home buyers are just trying to get on the property ladder. They know squat, parrot phrases, and have inflated expectations. They just need a roof over their head, Rent until you can afford to buy, lower your expectations if you want to buy earlier - it's that simple. I DON'T WANNAH!!, vs I don't give a sh1t! 

 

If you went to a college/university you lived in a dorm or shared a house - you got your first job in a NY. Chicago, London, Paris, etc. and you did the same - for YEARS. You wanted to hook up with someone, you RENTED a house together. Then you decided on kids, and SUDDENLY renting became unacceptable ??? All that has really happened is that you have discovered how poor you are actually are. WTF!

 

The reality is that if you can't afford a new build, you cant afford a house - period.

Despite the builder doing everything he/should could to move that new product (condo or house) - if you still couldn't afford it, it's really on you. If builders thought there was more money in starter homes, they would build them. If they aren't building what you can afford, either come up with a bigger deposit, or look elsewhere. BWAAAH! 

 

So what? New build starter-home activity is driven primarily by speculation on how much mom/dad, gran/grandpa are going to contribute to the deposit/down payment. Interest rates go up in a big way, contributions can be higher - but until then new build starters don't get built.

 

Downside possibilities around the shares of the more 'frothy' homebuilders 

 

SD

 

Edited April 15, 2022 by SharperDingaan