So What Exactly Is The "Short Homebuilders" Thesis At This Point

[Gregmal]

So TOL reported yesterday and crushed all the estimates by a country mile or two. Guidance calls for expected declines but still healthy profit margins which should probably even improve/offset price declines as inputs on the commodity side see the futures market declines start reaching the end user. Several other key takeaways from their call include subjects that simply get ignored but are standard base info for folks who follow real estate....housing is regional....West Coast is bad, but Florida, Atlanta, Carolinas, Virgina and NY/NJ/CT/MA areas all remain strong. 55+ robust everywhere. Lots of stuff that simply flies in the face of the stuff being peddled by the doom and gloom crowd.

 

There was basically a brief several week period in January where the market dumped these but ever since they've more or less been shitty shorts. Partially IMO because, as a lot of us talked about last year, the whole volume drying up issue was already prevalent for much of 2021 due to inventory issues. So while 2022 has seen that accelerate, its hardly out of left field. Yet, the earnings from last few years plus the pieces of the backlog that are making it to the finish line have more or less put the tier one guys like NVR or TOL and DHI in remarkable shape financially. They're buying back tons of stock, many have what I'd call adequate land holding, although that varies. They're healthier than they've probably ever been. 

 

So whats the short angle? Everything Ive been hearing for the past 2-3 years is basically the typical "next years gonna be awful" short sighted fear pump bs short sellers are known for. If folks recall, in March 2020 we had our first cry of housing is collapsing because I guess folks thought there'd never be another open house or something and like today, transactions dried up for a bit. The only real angle is operating leverage and its well known negative impact however again, if we look at this, profit margins and balance sheets are currently nowhere near this even factoring in forward guidance being given. Even if it occurs, whats 1-2 years of earnings worth? 20-25% in some very severe cases? Seems like a waste of time.

 

I try to keep an open eye to opportunities but it just seems the whole short homebuilder thing is a pee-wee hedge fund trade mainly by guys thinking one day they'll be starring in the Big Short part 2 or something...oblivious to the fact that today is nothing comparable to GFC. There still remains robust demand for housing, rising rates have simply, gasp....done what they were supposed to do and slowed things down. In a world where theres so many really good, shitty company shorts, whats the point in trying to squeeze the last drop of blood from a stone with blue chip homebuilders trading at single digit multiples, on whats basically a next years gonna be bad thesis that gets chased in perpetuity?

 

Im not long any at the moment, outside of a tracker in NVR and some short put positions I've been rolling for the last few months, but think that if we're in a forward looking market, sometime over the next 2-3 quarters we should see that point of inflection where the market realizes we're not having 7%+ mortgages in perpetuity. So perhaps theres a trade setup in the making? 

[CorpRaider]

[Gregmal]

Lennar expecting rate of build to drop from 1.5m annualized to 1m. There goes the overbuilding leg of the GFC 2.0 housing crash short thesis. 

Edited December 15, 2022 by Gregmal

[dealraker]

On 12/7/2022 at 9:44 AM, Gregmal said:

So TOL reported yesterday and crushed all the estimates by a country mile or two. Guidance calls for expected declines but still healthy profit margins which should probably even improve/offset price declines as inputs on the commodity side see the futures market declines start reaching the end user. Several other key takeaways from their call include subjects that simply get ignored but are standard base info for folks who follow real estate....housing is regional....West Coast is bad, but Florida, Atlanta, Carolinas, Virgina and NY/NJ/CT/MA areas all remain strong. 55+ robust everywhere. Lots of stuff that simply flies in the face of the stuff being peddled by the doom and gloom crowd.

 

There was basically a brief several week period in January where the market dumped these but ever since they've more or less been shitty shorts. Partially IMO because, as a lot of us talked about last year, the whole volume drying up issue was already prevalent for much of 2021 due to inventory issues. So while 2022 has seen that accelerate, its hardly out of left field. Yet, the earnings from last few years plus the pieces of the backlog that are making it to the finish line have more or less put the tier one guys like NVR or TOL and DHI in remarkable shape financially. They're buying back tons of stock, many have what I'd call adequate land holding, although that varies. They're healthier than they've probably ever been. 

 

So whats the short angle? Everything Ive been hearing for the past 2-3 years is basically the typical "next years gonna be awful" short sighted fear pump bs short sellers are known for. If folks recall, in March 2020 we had our first cry of housing is collapsing because I guess folks thought there'd never be another open house or something and like today, transactions dried up for a bit. The only real angle is operating leverage and its well known negative impact however again, if we look at this, profit margins and balance sheets are currently nowhere near this even factoring in forward guidance being given. Even if it occurs, whats 1-2 years of earnings worth? 20-25% in some very severe cases? Seems like a waste of time.

 

I try to keep an open eye to opportunities but it just seems the whole short homebuilder thing is a pee-wee hedge fund trade mainly by guys thinking one day they'll be starring in the Big Short part 2 or something...oblivious to the fact that today is nothing comparable to GFC. There still remains robust demand for housing, rising rates have simply, gasp....done what they were supposed to do and slowed things down. In a world where theres so many really good, shitty company shorts, whats the point in trying to squeeze the last drop of blood from a stone with blue chip homebuilders trading at single digit multiples, on whats basically a next years gonna be bad thesis that gets chased in perpetuity?

 

Im not long any at the moment, outside of a tracker in NVR and some short put positions I've been rolling for the last few months, but think that if we're in a forward looking market, sometime over the next 2-3 quarters we should see that point of inflection where the market realizes we're not having 7%+ mortgages in perpetuity. So perhaps theres a trade setup in the making? 

Agree.

[Gregmal]

https://therealdeal.com/2022/12/23/wall-street-has-110b-for-homebuying-spree/
 

Ain’t it funny how amongst all the noise and commotion, homebuilders stealthily cranked out some pretty solid returns in H2 of 2022? 
 

As part of my multi year housing super cycle thesis I often wondered how we got to that next level. You always need skeptics and ideally short sellers too. Especially after last year. Last year was just too easy. Nothing does a straight line….

 

Well, we found our patsies this year. Welcome aboard skeptics. Glad you’ve chose to take the other side here. Especially when there was just oh so much other easy low hanging fruit to short. Better hope there’s KY in your stockings this year. 

[ValueArb]

I'm not shorting home builders, but my ex worked for two of the largest home builders in the country this year, and both had major layoffs and both are slashing acquisition and construction budgets to near zero. I'm thinking its primarily linked to which markets a builder is most heavily involved in.

[crs223]

Have home builder stock prices ever dropped?  If so, under what conditions?

 

[gfp]

7 hours ago, crs223 said:

Have home builder stock prices ever dropped?  If so, under what conditions?

 

I remember 2006 very well.  Homebuilder stocks were "cheap" with single digit P/E ratios and growing earnings.  Classic cyclical low-PE value trap.  The stocks declined throughout 2006 and continued weak until the stock market bottomed in 2009.  Of course companies like NVR, with a better model, fared better than the average homebuilder.

[Gregmal]

Yea homebuilders are less than perfect investments. Talked a lot about them with a bunch of folks H2 last year about it and it was fairly clear if volume stopped there’d be better investments.
 

But now? Thanks to the pissants rushing in on a busted GFC 2.0 thesis, the price and expectations got reset to a very favorable level. The CLF 2021 trade is money here. Just short slightly OTM near dated puts and buy longer dated calls is how I’d approach it.

[Red Lion]

It seems like this time around (compared to GFC) a lot of the mom and pop home builders and contractors completely exited the market after GFC. 
 
This is anecdotal, and maybe just because I’m living in California which has got to be one of the worst markets to build, but it costs ~$1 million to build (not including land) a nice 2,000-2,500 square foot custom house in California, but you can buy a decent looking brand new home in one of these cookie cutter subdivisions for close to half the price. 
 

Given the demographics and housing shortage, and the seeming inability for small contractors to even come close to competing price, and the existing affordability crisis, it just seems hard to see the home builders performing poorly over let’s say the next 10 years. 
 

I would consider investing here, but I’m looking at putting most of my liquidity into a cash real estate purchase that I plan to remodel, and hopefully cash out refinance in a year or two when rates are lower. Probably not the highest returning option, but I want to sleep well at night and ditch the current neighbors in the cookie cutter subdivision I currently live in. 

[Gregmal]

The funniest part of it all is that 2000s housing bubble and GFC was built upon 6-7% mortgages and subprime. And today we have 6-7% mortgages and 700 FICOs but for some reason folks are asking Michael Lewis to follow em around in anticipation of starring in the Big Short 2.0…..

[ValueArb]

8 minutes ago, Gregmal said:

The funniest part of it all is that 2000s housing bubble and GFC was built upon 6-7% mortgages and subprime. And today we have 6-7% mortgages and 700 FICOs but for some reason folks are asking Michael Lewis to follow em around in anticipation of starring in the Big Short 2.0…..

 

30 year rates had declined from double digits in the 80s to 5.5% in mid 2000s. So spiking at 6.5% was a mild effect, the bigger problem was that 35% of loans were ARMs, so they were resetting at much high rates than when they were taken out, and obviously the average FICO score was also bad.

 

Our swing from 3% up to 6-7%+ is a much bigger move that happened way faster, but ARMs are only 5% of current loans so resets are going to be a much smaller effect. People who are living in their dream homes at 3% 30 year loans are already set, as long as they don't have to sell they will be fine. Right now it looks like the market is a standoff between people who refuse to sell much below peak prices and buyers who want a bargain. I'm assuming in January the log jam breaks.

[ValueArb]

Maybe prices are coming down. There were two identical floor plans that were remodeled similarly for sale in my neighborhood, 2,000 SF, small lots. The second one put on the market is in better location, maybe a little nicer remodel, and it has a pool.

 

The first went up for sale at $1,050,000 in late summer/early fall. The second went out for sale in early November and IIRC both were in the high $900s. Now it appears the first one has been taken off the market, and the second one is now listed at $929k.  I feel really bad for the realtor who is flipping the second one, nice guy did an amazing job on the remodel and I think he ran into numerous problems he didn't anticipate, and now he might taking a loss.

[Gregmal]

Prices can and in many places will come down. But the effects of this are negligible/overblown. Homes aren’t a day trading vehicles and every sale is a one and done. No one gets a margin call cuz the Z estimate went down 10%. Most people buy them to live in. New build is really the only variable and between the backlogs and advance notice given to pretty much everyone on rates, the idea that anyone is gonna get caught with the pants down is silly. On top of this, institutional SFH rental is just getting started. The “big payoff” on this iteration of the “the big short” isn’t to the downside.

[Ulti]

1 hour ago, Gregmal said:

Prices can and in many places will come down. But the effects of this are negligible/overblown

https://calculatedrisk.substack.com/p/case-shiller-national-house-price-f18

Go Miami... And a good read on housing.

Miami, Tampa, and Charlotte reported the highest year-over-year gains among the 20 cities in October. Miami led the way with a 21% year-over-year price increase, followed by Tampa in second with a 20.5% increase, and Charlotte in third with a 15% increase. All 20 cities reported lower price increases in the year ending October 2022 versus the year ending September 2022.

[UK]

https://www.bloomberg.com/opinion/articles/2022-12-30/manufactured-housing-revival-could-help-the-us-build-its-way-out-of-crisis

 

For all its complexities, America’s nationwide housing crisis boils down to a problem of supply and demand: The country needs a lot more homes than it has, yet even ambitious reforms won’t provide developers with enough incentive to bridge the gap. Addressing this dilemma could well be the defining public-policy challenge of the next few decades. The problem is enormous: To close an accumulated shortfall estimated at 3.8 million units, the pace of housing construction would need to be about 50% higher over the next decade. 

[Dinar]

I would say that the healthcare problem in the US is much much bigger issue and harder to solve than the real estate issue.  It is a cancer on American society.

[Spekulatius]

On 12/27/2022 at 1:49 PM, ValueArb said:

 

30 year rates had declined from double digits in the 80s to 5.5% in mid 2000s. So spiking at 6.5% was a mild effect, the bigger problem was that 35% of loans were ARMs, so they were resetting at much high rates than when they were taken out, and obviously the average FICO score was also bad.

 

Our swing from 3% up to 6-7%+ is a much bigger move that happened way faster, but ARMs are only 5% of current loans so resets are going to be a much smaller effect. People who are living in their dream homes at 3% 30 year loans are already set, as long as they don't have to sell they will be fine. Right now it looks like the market is a standoff between people who refuse to sell much below peak prices and buyers who want a bargain. I'm assuming in January the log jam breaks.

A lot of ARM’s from 2003-2006 had teaser rates that would reset two years later. The plan was to refinance, which of course was only possible as long as home prices were rising.

 

I don’t  see GFC 2.0 happening this time. I do think we are looking at a garden variety recession type of situation.

 

I am not sure that the logjam that @ValueArb is talking about will break anytime soon. I think people with low cost mortgage will just stay put for a long time generally unless something forces their hand. So transaction volume may go way down, but prices not so much.

Edited December 31, 2022 by Spekulatius

[Gregmal]

Look at November and December new listing of existing inventory. Pretty much nothing came to market anywhere, even on a seasonally comparable basis. 

[ValueArb]

5 hours ago, UK said:

https://www.bloomberg.com/opinion/articles/2022-12-30/manufactured-housing-revival-could-help-the-us-build-its-way-out-of-crisis

 

For all its complexities, America’s nationwide housing crisis boils down to a problem of supply and demand: The country needs a lot more homes than it has, yet even ambitious reforms won’t provide developers with enough incentive to bridge the gap. Addressing this dilemma could well be the defining public-policy challenge of the next few decades. The problem is enormous: To close an accumulated shortfall estimated at 3.8 million units, the pace of housing construction would need to be about 50% higher over the next decade. 

I keep hearing this but employees at large housing developers keep telling me they’ve slashed development budgets to the bone. Even with prices still far higher than three years ago. 
 

Do you know why? I certainly don’t. 

[Gregmal]

There’s no way out and the Fed is just making it worse. There’s a building shortage. We need builders to build. Lowering rates massively so demand stays crazy and builders pump out 2m a year is how it gets fixed. And with the actions being taken by the Fed homebuilders just sit on their cash hauls from the last few years and play the price/waiting game. Existing home owners ain’t selling unless they absolutely have to, and even there they’ll likely just rent it.
 

So if you’re an owner of these sorts of assets it’s almost impossible to lose here. Lower rates equal higher prices and higher rates are translating to higher rents and more future demand. The key metric to look at this year was the average monthly payments. Records highs. That whole equation just keeps bursting higher.

[Gregmal]

Also totally unaccounted for are all the mom and dads house dwellers and pandemic stunted 20/30 year olds. And guess what, they don’t want boomers McMansion or 1950s colonial. They want an all white, 1800 sq/ft 3/2 with 11 Ft ceilings and a crazy kitchen. It’s gonna be fun.

[LC]

57 minutes ago, Gregmal said:

The key metric to look at this year was the average monthly payments. Records highs. That whole equation just keeps bursting higher.

that’s exactly right. I bought a condo 1.5 years ago - financed at 2.75%.

 

mirror unit just sold a few months ago at my purchase price. Except this was when the 30 year is pushing 6 or 7%
 

All else equal that owner is paying quite a bit more per month. So I’m either sitting on a position where: I rent out at 40% profits, or if rates go down my equity skyrockets. 
 

I do great but the first time buyer trying to get a place? Maybe to raise a family or whatnot? They are fucked.

[Spekulatius]

10 hours ago, Gregmal said:

Also totally unaccounted for are all the mom and dads house dwellers and pandemic stunted 20/30 year olds. And guess what, they don’t want boomers McMansion or 1950s colonial. They want an all white, 1800 sq/ft 3/2 with 11 Ft ceilings and a crazy kitchen. It’s gonna be fun.

My guess is that living spaces are going to be smaller (which makes sense because families are getting smaller) and we trend from single family detached homes to multi family condo units.

[Red Lion]

14 hours ago, LC said:

that’s exactly right. I bought a condo 1.5 years ago - financed at 2.75%.

 

mirror unit just sold a few months ago at my purchase price. Except this was when the 30 year is pushing 6 or 7%
 

All else equal that owner is paying quite a bit more per month. So I’m either sitting on a position where: I rent out at 40% profits, or if rates go down my equity skyrockets. 
 

I do great but the first time buyer trying to get a place? Maybe to raise a family or whatnot? They are fucked.

 

I'm a first time homebuyer right now. I waited way the hell too long to buy a house due to a lot of personal reasons and some just plain stupid debt aversion at better times to buy. 

 

I'm under contract in my inspection window on a place for all cash at 35% less than last year's Zestimate. I do think this can be a good time for first time buyers, but only if they have a big slug of cash and can shrug off these interest rates for a few years until an opportune refinance zone materializes. I think buyers need to look long and hard for a good realtor to accommodate making low offers. I fired the first several I worked with because they would all just say to pay asking or close to asking price. It's crazy how much things have changed in just a few months in the housing market.