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

[Castanza]

On 4/13/2022 at 7:54 PM, Ulti said:

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.

 

Listened to this on my morning jog

 

Quick notes

- Pent-up demand doesn't have to be realized

- Rent up 17% Mortgage cost up 33%

- Housing hasn't really ever been cheap

- Renovation segment is the highest demand segment for dimensional lumber (400b out of 1t)

- Lumber prices are primarily high due to logistics (flatbed trucks are in short supply) 

- Finishing product supply constraints will last longer than lumber constraints (HVAC, Plumbing, Garage Doors, Windows, Paint)

 

Most interesting part was the discussion on Book Value to Home Builders. KBH was used as an example. The conclusion was pretty binary. Either home builders will miss projections on the next few quarters and write down land/homes under construction and that the economy is way worse than we think...or this is a major over reaction. I don't have a good view on the reality of the market. Many of my peers are looking for homes but availability is low and prices are high. Now that interest rates are going up, that affordability is really getting stretched. But rent prices are also climbing at about 50% of mortgage costs and the idea of locking in long-term expenditures is attractive even if a premium is paid now. It has me thinking whether home builders are the best play?

 

Starting to think that already built/rental segment is looking better because it has some downside protection (got to live somewhere) in the event that you can't find (due to supply) or afford (due to rates) a house. 

 

Mortgage rates are the kingpin to this trade imo. If they go up to 7-8% I think there would be a big curtail on demand. 

 

[Gregmal]

8 minutes ago, Castanza said:

 

Listened to this on my morning jog

 

Quick notes

- Pent-up demand doesn't have to be realized

- Rent up 17% Mortgage cost up 33%

- Housing hasn't really ever been cheap

- Renovation segment is the highest demand segment for dimensional lumber (400b out of 1t)

- Lumber prices are primarily high due to logistics (flatbed trucks are in short supply) 

- Finishing product supply constraints will last longer than lumber constraints (HVAC, Plumbing, Garage Doors, Windows, Paint)

 

Most interesting part was the discussion on Book Value to Home Builders. KBH was used as an example. The conclusion was pretty binary. Either home builders will miss projections on the next few quarters and write down land/homes under construction and that the economy is way worse than we think...or this is a major over reaction. I don't have a good view on the reality of the market. Many of my peers are looking for homes but availability is low and prices are high. Now that interest rates are going up, that affordability is really getting stretched. But rent prices are also climbing at about 50% of mortgage costs and the idea of locking in long-term expenditures is attractive even if a premium is paid now. It has me thinking whether home builders are the best play?

 

Starting to think that already built/rental segment is looking better because it has some downside protection (got to live somewhere) in the event that you can't find (due to supply) or afford (due to rates) a house. 

 

Mortgage rates are the kingpin to this trade imo. If they go up to 7-8% I think there would be a big curtail on demand. 

 

Yup. Home builders are interesting for sure. But there’s much better ways to play this from a risk perspective. 

[Castanza]

46 minutes ago, Gregmal said:

Yup. Home builders are interesting for sure. But there’s much better ways to play this from a risk perspective. 

 

Don't get me wrong, you can definitely probably make out well either way. I just think there is some handicap that comes with regionality and rates that make builders less attractive. The higher the probability inflation persists and rates continue to climb the more discount to book these things deserver. I'm not super confident in a re-rate to NAV play. We may all be a bit late to this trade? 

 

The reno market might be worth a look though. Owens Corning could be somewhat interesting. I got two quotes for a roof on a property I own. Kicking myself for not pulling the trigger last summer. Price jumped from 14k-19k from June-March....same roofer, same shingle....could be some room to run with high oil, low supply, high demand, all packaged in a gotta have it when you need it product. 

Edited April 15, 2022 by Castanza

[Gregmal]

12 minutes ago, Castanza said:

We may all be a bit late to this trade? 

It’s a long term tailwind play. No need to raise the alarm every time a shadow emerges. Been that way for a while. Won’t just stop because costs go up. Nothing has really changed. We heard all last year how 3 caps were impossible. We hear now how cap rates must go up because treasuries are. But that’s not happening either. Go try to find a Chick-fil-A ground lease over a 4.5 in a decent area. Sunbelt MF is still transacting in the same ranges. I said a year ago I have no clue why people with a choice would own a treasury or a bond over a multifamily complex. Now you’re seeing that play out too. Markets rarely go up in straight lines. You need these sort of wash out scare periods to keep people honest every now and again. Let folks sell their stocks because in their heads things are changing that in the real world are staying the same or going the other way. A buddy sent me an email this morning with a Twitter link to a guy pitching a short on JOE. Basically said he thinks JOE is no different than it was in 2005 and he’s looking for a levered way to play inflation and rates. Somehow settled on shorting an unlevered land company…..LOL people do and believe dumb shit all the time. Who cares. If you control your own destiny and have a handle on the supply you’re going to make money. Which is why I’m not super excited about jumping into the home builders who kind of need to keep pumping out homes to meet those 5x PEs everyone is so excited about. Many of them are healthy but still, if you’ve got debt to roll, you need certain things to break your way. But if you are JOE, or a PCYO, you control the resources and play at your own pace. Balance sheets are indestructible. Same with ALCO. Good bid on your land? Take it. If not sell oranges and make money that way.
 

Home builders rights now remind me a bit of CLF a year or two ago. Even prior, it was well thought that CLF needed $600 HRC to really “work”. This is when it was at $400 or so. Then you get the big move. The market still sits on its ass talking about this time not being different. You wait around for a year or so while people short it because the know for sure this is the cycle top. Or “it’s just supply and demand that is unsustainable at these prices”. And then they’re wrong again and the stock goes up 50%+ in short order. 

[Broeb22]

Hey, it's anyone's guess but these charts tell me 1) that rates are playing catch up because the blue line has never exceeded the green line in the entire data series, and 2) that housing starts and home prices seem to be inversely correlated with interest rates.

 

I guess I'm not buying the argument that interest rates won't dent housing demand....

 

[Castanza]

2 hours ago, Gregmal said:

It’s a long term tailwind play. No need to raise the alarm every time a shadow emerges. Been that way for a while. Won’t just stop because costs go up. Nothing has really changed. We heard all last year how 3 caps were impossible. We hear now how cap rates must go up because treasuries are. But that’s not happening either. Go try to find a Chick-fil-A ground lease over a 4.5 in a decent area. Sunbelt MF is still transacting in the same ranges. I said a year ago I have no clue why people with a choice would own a treasury or a bond over a multifamily complex. Now you’re seeing that play out too. Markets rarely go up in straight lines. You need these sort of wash out scare periods to keep people honest every now and again. Let folks sell their stocks because in their heads things are changing that in the real world are staying the same or going the other way. A buddy sent me an email this morning with a Twitter link to a guy pitching a short on JOE. Basically said he thinks JOE is no different than it was in 2005 and he’s looking for a levered way to play inflation and rates. Somehow settled on shorting an unlevered land company…..LOL people do and believe dumb shit all the time. Who cares. If you control your own destiny and have a handle on the supply you’re going to make money. Which is why I’m not super excited about jumping into the home builders who kind of need to keep pumping out homes to meet those 5x PEs everyone is so excited about. Many of them are healthy but still, if you’ve got debt to roll, you need certain things to break your way. But if you are JOE, or a PCYO, you control the resources and play at your own pace. Balance sheets are indestructible. Same with ALCO. Good bid on your land? Take it. If not sell oranges and make money that way.
 

Home builders rights now remind me a bit of CLF a year or two ago. Even prior, it was well thought that CLF needed $600 HRC to really “work”. This is when it was at $400 or so. Then you get the big move. The market still sits on its ass talking about this time not being different. You wait around for a year or so while people short it because the know for sure this is the cycle top. Or “it’s just supply and demand that is unsustainable at these prices”. And then they’re wrong again and the stock goes up 50%+ in short order. 

 

Sure and that makes sense. I mean you have a whole bunch of moving parts that are generally slow as shit to move. It's not too often the stars align where you have low mortgage rates, high wages, abundant properties, low inflation rates, with low consumer debt and near perfect demographics for the "perfect time to buy a home". 

[Gregmal]

The other thing that makes it really easy for me to continue just hanging out in the housing ecosystem is this. Maybe home transaction volume slows a bit….maybe it’s because folks are getting priced out. Well….then it’s good to be a landlord or own apartment reits bc rents will continue to soar. If you have exposure to both…win/win.

[Gregmal]

The “experts” and overpaid analysts said this was going to stop. Sunbelt specifically, no way it could keep printing these rent growth figures. Yea, that was about a year ago….

 

https://seekingalpha.com/news/3823528-us-residential-rental-rates-scale-higher-in-march-notching-20-gain-over-2-years

 

Still going. Do people have any idea just how strong housing demand in decent areas is? Even if half the demand falls off, so what? You have 10 people bidding all cash, at or over asking price, instead of the current 20?

[crs223]

 

10 hours ago, Gregmal said:

Even if half the demand falls off, so what? You have 10 people bidding all cash, at or over asking price, instead of the current 20?

i disagree with the logic on this particular point.

 

Before the housing bubble popped, people were lined up down the street - camping out - for a chance to buy Florida condos.  When the bubble popped, the lines didn’t drop from 20 tents down to 10 tents.  The lines disappeared.

 

The current boom is at least partially driven by FOMO.  If the demand ever slows down, the FOMO buyers will go away.

 

To your point on “desirable areas”, I agree.  I suspect that COVID, work-from-home, and defund-the-police may have “triggered” (pun intended) a permanent increase in demand for lower density further-out residential property.

[Gregmal]

2 hours ago, crs223 said:

 

i disagree with the logic on this particular point.

 

Before the housing bubble popped, people were lined up down the street - camping out - for a chance to buy Florida condos.  When the bubble popped, the lines didn’t drop from 20 tents down to 10 tents.  The lines disappeared.

 

The current boom is at least partially driven by FOMO.  If the demand ever slows down, the FOMO buyers will go away.

 

To your point on “desirable areas”, I agree.  I suspect that COVID, work-from-home, and defund-the-police may have “triggered” (pun intended) a permanent increase in demand for lower density further-out residential property.

Anything is possible I just don’t see any remote comp to suggest this is near 2005 levels. What tipped that mess was the large pools of teaser rates expiring. Adjustable or teaser intro loans were 1/3 or 1/4 if originated mortgages back then. Now they’re 1 in 20. 
 

Additionally, you can’t have the type of rental demand we currently see while simultaneously having no demand for the purchasing of homes. I forget where we discussed this but it was about a year ago; basically, home buying and rentals will ebb and flow but broadly act as supporting mechanisms for each other. Rental rates will become relatively attractive and housing demand will ease somewhat. Then rentals get expensive and housing kicks back up. 
 

Nothing is crashing because everyone who is “in” right now can afford it and has a stellar rate locked in. For new supply, there’s a massive wave of demand. If and when that passes, it will be interesting to see what occurs then but if I had to guess it’s similar to most housing slowdowns. Same prices. +\- like 10% just lower transaction volume.

[Spekulatius]

The 2005-2009 crash was unique in terms of this being exaggerated by a full blown financial crisis. This was also really the first time that housing prices went down nationwide. Prior real estate crashes were all more or less regional affairs.

Earlier housing declined may be a better indicator what should happen with respect to housing. CA had one in the early to mid 90‘s which was a decline of 10-15% followed by stable prices for a couple of years. 2001 was a short crash in CA that was caused by rising interest rates and a tech crash. It was very short lived and shallow because tech came back quickly.

 

Looking at the above , none seem to match what we likely going to see in the future. We may have seen decades of low interest rates reversing, or maybe not. We might see permanently higher inflation or maybe not.

 

One things do know is that affordability is declining rapidly. The last chart does not have the recent increases in interest rates baked in so the March and April numbers will be much lower:

https://fred.stlouisfed.org/series/FIXHAI

Edited April 16, 2022 by Spekulatius

[Gregmal]

https://seekingalpha.com/news/3824196-blackstone-said-to-agree-to-buy-american-campus-communities-in-13b-deal
 

I wonder if halfway through the negotiations they were like “yo we need to lower bc rates soared 1-2% recently”…. 

[Gregmal]

• "Even with rising interest rates and ongoing issues surrounding geopolitical stability, supply chain issues, and inflation, the overall lack of inventory over the past year has continued to drive demand for more housing starts as builders continue to try to push inventory to market," said Kelly Mangold of RCLCO Real Estate Consulting. "While rising interest rates are likely to temper demand somewhat, the housing market still has strong underlying fundamentals."

https://seekingalpha.com/news/3824247-housing-starts-and-permits-unexpectedly-rise-in-march

[thepupil]

Well I guess this means I’ll have to sell my starter position…

[Gregmal]

LOL. Yea, makes me uncomfortable for sure. Although the environment guys like him have been thinking they are investing in for the past decade may finally be here. He hits all the valid points though. Folks are reading out of text books and trying to apply that crap to a real world situation thats entirely different. Thats generally the wall of skepticism and ignorance thats needed to go from 4th inning of a boom to 5/6.  

[thepupil]

3 minutes ago, Gregmal said:

LOL. Yea, makes me uncomfortable for sure. Although the environment guys like him have been thinking they are investing in for the past decade may finally be here. He hits all the valid points though. Folks are reading out of text books and trying to apply that crap to a real world situation thats entirely different. Thats generally the wall of skepticism and ignorance thats needed to go from 4th inning of a boom to 5/6.  

I pretty much agree with every word he said, but not y et with high conviction. 

Edited April 20, 2022 by thepupil

[CorpRaider]

In fairness he has crushed it with Greenbrick as far as I know.

[Gregmal]

2 minutes ago, CorpRaider said:

In fairness he has crushed it with Greenbrick as far as I know.

IIRC, GRBK was originally a shitty green energy play he and Loeb(I think it was Leob but may have been someone else) went in on. The thing went south in a huge way. In order to preserve the NOL they converted it to a homebuilder and then recapitalized it and stocked it up with sun belt inventory bought right after the financial crisis. I have no clue what the IRR is, and while its been a home run from certain points in its history, I dont know how clear it is what he's made over the long haul. The execution though has been superb. 

[CorpRaider]

Ahh ok, yeah I've just noted it in his top performers list a bunch, but IDK about the IRRs either.  I still rank him among the best of these guys as far as his individual/company ideas (not shorting meme stocks or thematic, macro/gold stuff).  

[aceskc]

GRBK: Selling at 4x EPS; bought back 5% of float YTD, approved another 10% in buybacks. ..Guided to acceleration in Q2, after a 68% rev growth, and 135% EPS growth. Owns decent chunks of undeveloped raw land- which in today's Dallas/Atlanta markets is a competitive edge. Rising rates offset by essentially zero inventory. 

 

Home Closings Revenue of $363.1 Million, Up 68.0%
Record Income Before Income Taxes of $82.6 Million, Up 134.3%
Home Building Gross Margin Up 240 Bps to 27.8%
Lots Owned and Controlled Up 42.5% 

Q1 2022 return on equity of 28.8%,

diluted EPS at $1.20 per share which was up 135% from Q1 2021.

"we expect home closings revenue and EPS to accelerate into Q2 2022,” - CEO