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

[Castanza]

12 minutes ago, Gregmal said:

Everything is about the flow of convenience here. Next move is for rates to come down a little and then the builders exchange some margin for volume. This has all been very predictable, making and befuddlement of the "experts" even more bewildering. 

 

Rates dropping would definitely help but it doesn't seem like it's in the cards right now.

[Spekulatius]

I think consumer and business confidence drops faster than rates.

[Spekulatius]

Inthink there are quite some bearish forces at work here:

 

1) low affordability while tariffs (Aluminum, lumber) will add ten thousands of $ to build costs per SFH

2) less immigrant Labour means higher Labour costs especially for homebuilders.

3) lower consumer confidence ( which likely impacts housing demands)

4) interest rates in the long end moving higher due to Trump policies (weak USD etc)

 

It looks like builder still have above baseline margins but those have been coming down and I think they continue to do so. On the flip side, the valuation based on some metrics like P/B are quite moderate. I think we are going lower from here.

 

FWIW, many other cyclicals are in the same boat.

Edited May 7, 2025 by Spekulatius

[Castanza]

11 minutes ago, Spekulatius said:

Inthink there are quite some bearish forces at work here:

 

1) low affordability while tariffs (Aluminum, lumber) will add ten thousands of $ to build costs per SFH

2) less immigrant Labour means higher Labour costs especially for homebuilders.

3) lower consumer confidence ( which likely impacts housing demands)

4) interest rates in the long end moving higher due to Trump policies (weak USD etc)

 

It looks like builder still have above baseline margins but those have been coming down and I think they continue to do so. On the flip side, the valuation based on some metrics like P/B are quite moderate. I think we are going lower from here.

 

FWIW, many other cyclicals are in the same boat.

Seems like a lot of mixed data out there. Supply is outpacing demand this Spring. The demand base is one of the largest ever, but supply is mainly limited to new supply but existing supply is getting better. Back to pre-covid levels. 
 

DHI lowered guidance recently but between buybacks and dividends is expected to return about 10% of its market cap to shareholders. Also interesting is they said tariffs should impact their margins on the low end of the spectrum

 

New build 375k avg sale price

Margins 22%

Cost 295k

Estimated tariff impact is 10k.
 

10k is not an issue whether the buyer or DHI eats those costs. Scale is an advantage for supply procurement and also labor procurement. Plus there has been some tariff exclusions on building materials. Big guys will easily outcompete any of the smaller players in rough waters. 
 

DHI and TOL are top of my list right now. Quality and well run builders with good supplier relationships and pretty savvy management teams that have navigated worse environments before. But near term we could definitely see more downside. Numbers will probably look worse the next few months since the spring numbers are really from agreements signed prior to the tariff news. 

[Spekulatius]

Well DHI EBIT margin is ~15.5% run rate, so $10k/$375k house is a 2.7% margin hit and means  more than 15% lower earnings and an even larger hit to FCF just from tariffs, if they eat the costs.

 

It’s not the end of the world but it’s substantial. Now add higher labor costs and more competition and I can see margins going back to ~11-12% EBIT margins or ~25% lower fairly easily. Then you are buying a homebuilders for 13x forward earnings, which does not look that cheap. 
 

DHI is better than most others as they seem to be low cost producers, so they will probably gain market share in a downturn.

[handycap5]

16 hours ago, Spekulatius said:

Inthink there are quite some bearish forces at work here:

 

1) low affordability while tariffs (Aluminum, lumber) will add ten thousands of $ to build costs per SFH

2) less immigrant Labour means higher Labour costs especially for homebuilders.

3) lower consumer confidence ( which likely impacts housing demands)

4) interest rates in the long end moving higher due to Trump policies (weak USD etc)

 

It looks like builder still have above baseline margins but those have been coming down and I think they continue to do so. On the flip side, the valuation based on some metrics like P/B are quite moderate. I think we are going lower from here.

 

FWIW, many other cyclicals are in the same boat.

 

Good conversation. Thank you for keeping it analytical and quantitative. A few points I might add:

 

1) Sheryl on CNBC said 1.0-1.5% tariff impact in 2025. More in 2026 if stay in place. Lumber is wild card. Of all the things to think about, I don't think this will be what determines if I am happy or sad owning DHI 2-3 years from now. Sheryl brought up consumer sentiment twice in her comments. 

2) estimates by others is maybe 20% of residential labor pool is undocumented. But this will skew lower for the big publics, and they will be advantaged versus their smaller competitors in tighter labor market. 

3) consumer confidence is a big deal, but much more in the short-term. Sheryl I think said April was "bumpy." But if you have a kid, it is hard to live with your mother-in-law. I tried.

4) interest rates are important, particularly first-time, because it comes down to affordability. But with time, everything adjusts: demand, costs (land taking the longest), product, etc. The average 30-year from 1980-1999 was 10.4% and average annual housing completions were above 1.5 million (excluding manufactured housing), compared to ~1.3 million from 2010-2024 (with a higher population). 

 

Be careful with gross margins. Just slightly muddy because ASP is net of mortgage subsidies, which were not a thing before COVID. DHI averaged $35K a unit in 2016-2019, when they were delivering less than 50,000 units on average. I guess blue collar wages are up 35% today from pre-COVID ~2017 average (using the hourly wage rate change from Atlanta Fed of 3.3, 3.5, 3.6, 4.6, 6.0, 5.2, 3.8). A "real" op profit per unit would be $47K. I believe normal is actually higher at $55-60K given scale advantages, weaker competition (S&L crisis, GFC, and SVB et al has killed off some smaller builders) lower interest costs (they used to have net debt and this was in COGS), relative attractiveness of single-family new home (with a subsidized mortgage) post-COVID, and the fundamental underbuilding in the industry over the last two decades. 

 

I think you have a good chance of being proven right that stock prices may go lower from here. 

[changegonnacome]

Homebuilders pretty beat up here.......starting to get interesting....Lennar, LGIH etc.

 

Really dont know the space super well but I've got the following view - 

 

(1) 10yr rates are coming down (by hook or by crook) and so affordability is going to markedly increase

(2) I think tariffs and kicking out homebuilding labor is going to add a few hundred bps to the price of homes it seems so some affordabilty slippage occuring here

 

If it was just (1) I would be getting long LGIH in spades they seem the most levered to interest rates with their entry level, ex-burbs FHA customer base.....but that customer group is price sensitive and so underlying build cost inflation might really squeeze LGIH's margins (albeit one can argue that low end workers might experience strong wage growth in a tightening labor market so swings and roundabouts).

 

Any homebuilder aficionados.......point me to a player that serves the customer perhaps a rung or two above LGIH but still has a big FHA cohort and so high beta to interest rates?

 

 

[thepupil]

1 minute ago, changegonnacome said:

Homebuilders pretty beat up here.......starting to get interesting....Lennar, LGIH etc.

 

Really dont know the space super well but I've got the following view - 

 

(1) 10yr rates are coming down (by hook or by crook) and so affordability is going to markedly increase

(2) I think tariffs and kicking out homebuilding labor is going to add a few hundred bps to the price of homes it seems so some affordabilty slippage occuring here

 

If it was just (1) I would be getting long LGIH in spades they seem the most levered to interest rates with their entry level, ex-burbs FHA customer base.....but that customer group is price sensitive and so underlying build cost inflation might really squeeze LGIH's margins (albeit one can argue that low end workers might experience strong wage growth in a tightening labor market so swings and roundabouts).

 

Any homebuilder aficionados.......point me to a player that serves the customer perhaps a rung or two above LGIH but still has a big FHA cohort and so high beta to interest rates?

 

 

 

wouldn't the ten year coming down potentially hurt homebuilders? 

 

It would remove their ability to offer way > existing home sales incentives like rate buydowns. 

 

i feel like rates coming down would lead to greater price discovery / home supply / unfreeze the market and see prices overall drop and homebuilders market share decline...while input costs rise because of our dear leader...perhaps that's all in the prices though. 

[changegonnacome]

3 minutes ago, thepupil said:

i feel like rates coming down would lead to greater price discovery / home supply / unfreeze the market and see prices overall drop and homebuilders market share decline...while input costs rise because of our dear leader...perhaps that's all in the prices though. 

 

I guess its a question of at least three things (1) scale of the fall in mortgage rates (2) the level of pent-up demand (& pent up supply) (3) build cost inflation.......the locked-in effect is real.....but there is a rate sweet spot where builders continue to win and the locked-in effect persists ......for example mortgage rates coming down to 5 or 5.5% expands new build TAM without unlocking the locked-in used inventory folks....indeed at 5 or 5.5%, homebuilders can buy rates down further to move product and maintain a spread versus elevated used home inventory.

 

Big picture - I think the most important thing is the demand dynamics......and I suspect that the Trump admin having seen the power of withholding federal dollars from University's......will attempt, under its main street agenda, to do something to force state and local governments to dial down NIMBYISM....democrats are now squarely focused on this new abundance pillar as their new value prop.....it would be smart politics and the right thing to do try to take that away from them with a deep reform agenda on deregulating housing.

[thepupil]

fair enough. I don't have any real strong view here...am just kind of spitballing that if rising rates caused homebuilders to gain share then perhaps the opposite would be true. 

 

[changegonnacome]

1 hour ago, thepupil said:

fair enough. I don't have any real strong view here...am just kind of spitballing that if rising rates caused homebuilders to gain share then perhaps the opposite would be true. 

 

Yeah I think what happened is that the contestable market for home transaction shrunk with rates.......used inventory collapsed due to lock-in and buyer demand under the affordability pillar also collapsed but not by as much......and so marketshare rose for new home builders(inside an overall smaller transaction pool).

 

Seems to me that in a falling rate environment an inverse of the above will occur.......that there is an asymmetry in today's housing market due to supply-demand imbalances and rate lock-in depressing moves........so the elasticity of demand (buyer pool) to interest rate changes is significantly higher than the elasticity of supply (existing-home inventory).

 

Buyers are high beta to interest rates

Because of ultra low lock-in - movers/sellers are now unusually low beta to interest rates

 

Which is to say its possible that new home builders marketshare falls but their volumes actually still go up.

 

I'm a housing market tourist - so take with a pinch of salt.

 

Edited July 18, 2025 by changegonnacome

[Spekulatius]

Net immigration going negative should be a big concern too. We are going to have shrinking population pretty soon. This alone could reduce demand by a few hundred thousand homes a year.

[handycap5]

On 7/18/2025 at 8:13 PM, Spekulatius said:

Net immigration going negative should be a big concern too. We are going to have shrinking population pretty soon. This alone could reduce demand by a few hundred thousand homes a year.

 

Housing is a business fundamentally driven by boxes and heads, so immigration is of course important to the long-term supply demand dynamics. But I would be careful over-emphasizing short-term immigration statistics, partially because recent immigrants are not usually a substantial portion of the home buyer pool (outside of IT jobs). Other important considerations are boomer-millennial demographic structure (i.e. boomers aren't selling but millennials need to buy) and the structural underproduction of the last decade. And I'm happy to see births (school decisions are a major consideration for first time buyers) returning to normal....

 

 

Edited July 24, 2025 by handycap5
recent immigrants who work in tech are sometimes new home buyers. I corrected.

[Spekulatius]

I had to laugh when I looked at JHX valuation (4.4x EV/revenues, 30x earnings) and their 35% drop today.

 

What were people thinking paying up for this cement board siding business?

 

Maybe I am missing something too but for sure the longs who owned this yesterday did.

 

Edited August 20, 2025 by Spekulatius

[Gregmal]

2 hours ago, Spekulatius said:

I had to laugh when I looked at JHX valuation (4.4x EV/revenues, 30x earnings) and their 35% drop today.

 

What were people thinking paying up for this cement board siding business?

 

Maybe I am missing something too but for sure the longs who owned this yesterday did.

 

I’ve never followed it that closely but my understanding is that JHX was a premium business that definitely deworsified with a bigger than necessary low moat acquisition and without reading the report from today….would imagine that acquisition now ain’t integrating as smoothly as hoped for. Classic growth chasing horror story 

[Spekulatius]

JHX - I went through the presentations and some of the filing and the numbers are insane.

 

JHX acquired AZEK which makes deck related products and while that seems a great business also, they paid 21x adjusted EBITDA EBITDA. AZEK made $390M at $1.5B in revenue at a 26- EBITDA margins - not bad. They claimed to hieve ~500M in commercial synergies down the road, which would be 1/3 of Szek revenue base. How is this even remotely possible.

 

Then 3 month  later AZEK EBITDA now went to $250-$265M per Q1 2026. How is such a deterioration in such a short period of time possible?

 

Besides that JHX cement board siding business has similar problems with rapidly shrinking re neues. looks to me like both AZEK and JHX were stuffing channels last and now have inventory coming out their ears. It’s really quite something.

 

The most interring thing I learned is that the cement board business is insanely profitable, hence the former high valuation. Their EBIT margins were exceeding 32% in NA for cement board siding which is a product that has been around forever. They also disclose the margin for similar European business (gypsum is used in Europe, but otherwise similar ) and their EBIT margins were barely scratching 10%, which is what you expect in a competitive business.

 

How can a commodity profit command 32% margins in one market and <10% in another. It’s not like cement where transportation costs dominate. While they play a role, the transportation costs  are not that high. My guess is that this is one of those market where capitalism is broken and the industry managed to avoid competing with each other. I think it would be an interesting job for antitrust and FTC to find out how this happens, because you can tell by the results that there is something fishy going on.

 

Its one of those things that makes building homes more expensive than it should so every homeowner, home renovators and by extension renter pays these guys a tribute in some way.

I am sure there is an investment angle to all this but not sure why it is at this point . It’s not shorting homebuilders for sure. I put JHX on a watchlist but it’s not actionable at this point. LOX may be an interring one to watch as they transform  from a lumber business into a siding business.

 

[Mephistopheles]

Been casually following homebuilders in the past year after listening to the DHI podcast on Business Breakdowns. The gist I get is that we are long term undersupplied, the major builders have all been more conservative post GFC, and are generating excellent returns on capital. But we have seen over the past 1-2 years the housing market cooling 2/higher rates and home prices. Why is that?

 

If we are undersupplied, but the market is still cooling, is it possible the long term homeownership rates of 66% readjust downwards assuming affordability doesn't change?

 

Just musing here. Trying to understand why the builders are not an obvious investment over the next decade.

[Red Lion]

9 hours ago, Mephistopheles said:

If we are undersupplied, but the market is still cooling, is it possible the long term homeownership rates of 66% readjust downwards assuming affordability doesn't change?

I’m certainly no expert but this seems highly probable right now. Anecdotally it seems that many of the mid 30s-40s crowds, even the higher earners with higher net worths seem much less likely to want to own a house. 
 

But there’s still a shortage, and even if we have a generation that doesn’t want to own a house, they’ll still want somewhere nice to live. So it seems like one way or the other we need more houses, maybe it’s just the investors that build to rent. 

 

[Spekulatius]

I suspect homeownership will  trend down from 65% if current lack of affordability persists. People will rent or live in condos. It seems that many prefer urban living with access to amenities within walking distance (if possible) over suburban single family homes. 

[Spekulatius]

On 5/6/2025 at 10:46 PM, Spekulatius said:

Well DHI EBIT margin is ~15.5% run rate, so $10k/$375k house is a 2.7% margin hit and means  more than 15% lower earnings and an even larger hit to FCF just from tariffs, if they eat the costs.

 

It’s not the end of the world but it’s substantial. Now add higher labor costs and more competition and I can see margins going back to ~11-12% EBIT margins or ~25% lower fairly easily. Then you are buying a homebuilders for 13x forward earnings, which does not look that cheap. 
 

DHI is better than most others as they seem to be low cost producers, so they will probably gain market share in a downturn.

Looks like DHI forecast now for 2026 is for ~12% EBIT margins with falling revenues , so not too far off my ~11% “normalized” or through earnings estimate, depending on where we are in the cycle (I have personally no clue).

 

Due to the recent decline in housing stocks some interring opportunists are propping up in terms of valuation:

 

FBIN (locks, water fixtures). Management seems ho hum. They are building a subscription business with water sensor that could be high margin and interesting long term.

 

MAS - similar to FBIN but management  seems better. More buybacks. Some family control still.

 

FBIN and MAS are fairly capital light.

 

DFH - supposedly capital light and fast growing homebuilders. no trading below tangible book. Seems cheap. 
 

LEN B - a large home builder trading for around book value (small premium to tangible book). Family controlled. Solidly profitable.
 

AOS - strong position in water heaters and heat pumps. Less cyclical than most other business  and long term tailwinds.

 

BLDR - wood framing and whole sales business supplying builders. Very cyclical. Does not look cheap yet to me because normalized earnings are unclear.

Edited March 22 by Spekulatius

[EgonKuhn]

We are back to mid 2022 valuation and short levels in this sector. Maybe it's just me but I don't hear much about the demise of homebuilders this time. Sentiment wise it looks like there is still some room for more doom and gloom?

[Gregmal]

We ve seen on several occasions how activity spikes big when mortgage rates come down. Unfortunately Powell is a piece of shit who’s been playing politics for years and unlikely to budge. As we have seen, he’s always taking a “wait and see” approach on anything that can be manufactured. There was no inflation but rate induced housing inflation for two years…he’s monitoring it. Then the fake “tariff inflation” that never showed up but was a “cause for concern” for the past year. Now it’s the same “energy inflation” rhetoric we got throughout 2022/3….which again, is also dumb because high energy prices are themselves economically restrictive…

 

Once this loser gets replaced or hopefully sent to jail housing is gonna roar again. 
 

Full disclosure I do believe the Trump/DOJ investigation is bullshit and politically motivated, but it’s about time some of these hacks face some hardship for their actions because it’s nonsense that only the American people suffer for their arrogance.

[Spekulatius]

Was looking at DFH as sort of a deep value play since it’s now at ~90% of tangible book. Their inventory turnover is indeed higher (indicating efficient use of capital) than DHI and LN B with gross margins improving. This does not look like a business that should trade below book.

 

 

 

[EgonKuhn]

During the GFC I experienced a real rollercoaster ride with British home builders and since then I've been extremely careful about free cash flow and debt levels in this sector.

 

Whenever I've looked at DFH in the past, I've always been disappointed by the lack of actual free cash flow. Both in mid-2022 and now I found something like PHM or LEN.B to be significantly better in that regard.

[Spekulatius]

DFH almost 4x their revenues since 2020 without much dilution.  Homebuilding is a business that does require capital to grow. To quadruple a business without increasing the sharecount is quite an accomplishment.

Edited March 22 by Spekulatius