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

Spekulatius · June 14, 2023

7 hours ago, Gregmal said:

So the stock peaked at $40, spent tons of time between $10-25, and wouldn’t have been a worthwhile investment? Especially with a common sense DCA strategy?

So did you buy DHI at $10-$15? I didn't. Most things are more obvious in hindsight.

Yes, DHI was a good buy at $10. So were many other things at that time. I know a fellow who bought BAC at $40 in 2007 and then bought another slog of BAC at $4 in 2009. Obviously the first buy was almost a total loss but in total it worked out alright. It's better to buy at $4 after the shytestorm blew over though.

dealraker · June 14, 2023

We have owned DHI within the lumber company builders supply since the 2001 or so period. Way up, way down, way up. Lowe's is by far the largest stock position there. I am part of the investment committee but my first cousin is the major and final say. He's what we here on COBF would consider less aware or less knoweledgable as far as complete financial knowledge. He uses Value Line and Morningstar a lot, but his performance is crazy good. CSX is the 2nd largest holding, he bought when they bought the rail line that the lumber co uses that borders the property, the old Winston-Salem Southbound.

Gregmal · June 14, 2023

19 minutes ago, Spekulatius said:

So did you buy DHI at $10-$15? I didn't. Most things are more obvious in hindsight.

Yes, DHI was a good buy at $10. So were many other things at that time. I know a fellow who bought BAC at $40 in 2007 and then bought another slog of BAC at $4 in 2009. Obviously the first buy was almost a total loss but in total it worked out alright. It's better to buy at $4 after the shytestorm blew over though.

What I am trying to do is disprove, largely just for my own mental framework, the @dealrakerguide to long term wealth. And it does seem, pretty concretely, if you avoid secular decliners, it’s almost impossible not to do well with this strategy long term. Especially if you also avoid companies with unhealthy amounts of leverage. Valuation itself is almost irrelevant if you apply a DCA approach. So in this example, even if you blew your entire load on Horton in 2005 at the top, at $40, less than two decades later I’ve got a $116 stock. And again, that’s being both an idiot, and terribly unlucky on timing. Meanwhile, I’ve heard just buying zero coupon bonds is the best way to go. And if I’m looking correctly, the current quote on a 20 year zero coupon treasury is like 45. Stock still wins.

Spekulatius · June 14, 2023

10 minutes ago, Gregmal said:

What I am trying to do is disprove, largely just for my own mental framework, the @dealrakerguide to long term wealth. And it does seem, pretty concretely, if you avoid secular decliners, it’s almost impossible not to do well with this strategy long term. Especially if you also avoid companies with unhealthy amounts of leverage. Valuation itself is almost irrelevant if you apply a DCA approach. So in this example, even if you blew your entire load on Horton in 2005 at the top, at $40, less than two decades later I’ve got a $116 stock. And again, that’s being both an idiot, and terribly unlucky on timing. Meanwhile, I’ve heard just buying zero coupon bonds is the best way to go. And if I’m looking correctly, the current quote on a 20 year zero coupon treasury is like 45. Stock still wins.

I think the big question with DCA is where is the cash coming from? Much depends on your personal circumstances but if you are fully invested in the GFC you likely have little cash in 2009 to DCA down. Also, many lost their jobs at that time or were afraid of job losses and needed to pay back debt or build some cash reserves. It was a scary time.

Everything sounds easy in retrospect but in order to thrive, you must first survive.

thepupil · June 14, 2023

1 hour ago, Gregmal said:

What I am trying to do is disprove, largely just for my own mental framework, the @dealrakerguide to long term wealth. And it does seem, pretty concretely, if you avoid secular decliners, it’s almost impossible not to do well with this strategy long term. Especially if you also avoid companies with unhealthy amounts of leverage. Valuation itself is almost irrelevant if you apply a DCA approach. So in this example, even if you blew your entire load on Horton in 2005 at the top, at $40, less than two decades later I’ve got a $116 stock. And again, that’s being both an idiot, and terribly unlucky on timing. Meanwhile, I’ve heard just buying zero coupon bonds is the best way to go. And if I’m looking correctly, the current quote on a 20 year zero coupon treasury is like 45. Stock still wins.

I think pretty much everyone would agree with you. I've highlighted the key qualifier. Applying a DCA approach assumes a portfolio to which one is able to add through a downturn and is not utilizing for any purpose other than to build wealth for some far out purpose. Most would agree that on a 15-20+ year time horizon stocks will beat bonds/cash.

Using DHI as an example. DHI has returned 12.3% / year for the last 20 years.

I just did a quick spreadsheet using last 20 years of monthly total returns. Here's your IRR's at various withdrawal rates (with no upward adjustments for inflation, so monthly distribution is the same.

$10K invested 20 years ago

WR IRR Ending

0% 12.3% $99K

5% 10.8% $44K

10% 5.2% Depletes in 5/2017 (notice that despite the 20 year return of the asset being greater than the withdrawal rate, the corpus is depleted in year 14, volatility and withdrawals kill the corpus)

Now let's reverse it. What if we add money? We add 5% of initial 10k / year 10% and 20%

Savings Rate IRR Ending

5% 13% $155K (on $20K total invested, $10K initially then $42/month)

10% 13.4% $210K (on $30K total invested, $10K initially then $84/month)

20% 13.9% $321K (on $50K total invested, $10K initially then $166/month)

So it's the same as the point I made elsewhere, one's attitude toward volatility depends on whether or not one is adding to the overall portfolio as well as the correlation between investments.

I ran this quickly. I may be wrong. Feel free to check/challenge as you wish.

@Gregmal one thing I've always found befuddling about your comments on this subject is you simultaneously espouse high qithdrawal rates ("you don't need that much money to do ________ and 4% rule is dumb") and immunity to volatility. The two ideas in my mind are contradictory and potentially dangerous in combination to all but the most adept of investors (which you likely are) but it would lead to ruin for many others.

EDIT/ADD:

same with bond index for last 20 years, which has returned 3% / yr

WR IRR Ending

0% 3.0% $18K

5% 3.6% $5.7K

10% 4.4% Depletes in 6/2016 (Here the corpus is depleted because bonds by themselves aren't generating adequate return. In both DHI's and bonds' case, you die but for two different reasons. The "safe" bonds don't earn enough. DHI makes enough on a long enough time horizon but is too volatile for a 10% WR).

So there's no question here. Investing in DR Horton instead of the bond index was superior 20 years ago. Even at a 10% withdrawal rate. But at a 10% withdrawal rate, DR Horton is only 80 bps of IRR better and depletes 1 year later despite returning much more than bonds. So if you think you can identify stuff that will make 12% / yr for the next 20 years...that will likely beat the snot out of bonds (which are currently priced to return 4.8% ish / yr. But as with everything it a big fat "it depends"

Now let's get crazy and assume 70% DHI / 30% bonds, rebalanced at the end of every month

WR IRR Ending

0% 11.15% $81K

5% 10.5% $41K <---note this is just 7% less than 100% DHI and distributions are the same.

10% 8.4% $340 <---We are on the verge of depletion, BUT we lasted over 6 years longer than 100% DHI.

Notice how by doing 70/30 we didn't reduce overall IRR by that much relative to 100% DHI? And at higher withdrawal rates the addition of the safe asset improved IRR and increased survival.

But let's assume again rather than subtracting we're adding, just doing the add 20% with the 70 /30, I get a 12% IRR / ending value of $244K, which is 24% less than the almost 14% / $321K for DHI.

So at the risk of obnoxious repetition, whether you like volatility depends on whether you're adding or subtracting to the portfolio. Highest and most volatile CAGR WINS if adding.

This is basically MPT which most value investors call bullshit. But it's not really all bullshit.

Edited June 14, 2023 by thepupil

dealraker · June 14, 2023

The game, at least for me and my large family I'm in cahoots with, is that Buffett comment about (not verbatim here) "all weath is the result of buying business that imputs labor and materials of some value and spits out something of more value." That $ is capital to produce more capital.

We also preach never leaving the game. In other words in my large extended family it seems at least to me, we don't discuss going to tax free bonds to "make it out of here" and such. While in the end I guess surely somebody if not everybody is gunna blow it, we like the idea of passing it foward or down.

Just think, for some it is bonds and/or Bitcoin. Life is great...if you can stand it.

Edited June 14, 2023 by dealraker

Castanza · June 14, 2023

I think WFG or other suppliers is a better way to play the housing market in general. Good read by Morningstar (link). One thing I've noticed is that the younger generations seem less likely to pay more for older homes. A lot of my peers are looking to build new construction vs paying slightly less for a house built in the 60-70's that is going to need another 50k worth of work. Some of this is the younger generations obsession with "it has to be new" and their general lack of ability to do basic repairs/renovations. You also typically have two spouses working which would cut into any time spend fixing up your own home. Then you have the majoroty of existing homes locked up for at least another decade or two should rates remain where they are. Well people need to live somewhere. Wages are rising and people are justifying a little more spend to build. It was mainly during Covid where you saw people thinking about renovations or DIY projects since they were stuck at home. But that was generally little stuff or contractors were still hired out. All of my contractor friends have been buried up to the gills in work.

I bet over the next 2-3 decades we see more old homes being torn down and new ones built in their place. The codes and housing tech has gotten much better and it seems like that margin of difference between a house built in the 70's vs today is much greater than say a house built in the 90s. I think the general home owner is recognizing this and looking for the new shiny more efficient model that they think they have "less" to worry about.

Gregmal · June 14, 2023

1 hour ago, thepupil said:

@Gregmal one thing I've always found befuddling about your comments on this subject is you simultaneously espouse high qithdrawal rates ("you don't need that much money to do ________ and 4% rule is dumb") and immunity to volatility. The two ideas in my mind are contradictory and potentially dangerous in combination to all but the most adept of investors (which you likely are) but it would lead to ruin for many others.

It probably is contradictory. I guess I just have a different perspective on things like standard of living, retirement, funding future life, etc. But Ive always seen it as a sliding scale that can be modified. At my peak thus far in life, Ive had months spending $50-70k when times were really good. Ive also had good months where I get by on like $2000-3000. So a lot of where I am coming from is the realization that you make modifications to account for life circumstances. I see no situation in life where I wouldnt at least be working a 20 hour a week bs job just to get some socialization in and have healthcare or something. Shit working for the municipality doing a 9-4 with a 2 hour lunch break making $50k a year. Thats stuff seems fun to me and its working by choice not out of necessity. If I needed to live on $70k after tax a year, I could 100% do it, and quite happily. So back that into what it takes to "retire" and its not as farfetched to have a low withdrawal rate and immunity to volatility. BS job. Some dividend and rental income. Withdrawal for rest.

Gregmal · June 14, 2023

1 hour ago, Castanza said:

I think WFG or other suppliers is a better way to play the housing market in general. Good read by Morningstar (link). One thing I've noticed is that the younger generations seem less likely to pay more for older homes. A lot of my peers are looking to build new construction vs paying slightly less for a house built in the 60-70's that is going to need another 50k worth of work. Some of this is the younger generations obsession with "it has to be new" and their general lack of ability to do basic repairs/renovations. You also typically have two spouses working which would cut into any time spend fixing up your own home. Then you have the majoroty of existing homes locked up for at least another decade or two should rates remain where they are. Well people need to live somewhere. Wages are rising and people are justifying a little more spend to build. It was mainly during Covid where you saw people thinking about renovations or DIY projects since they were stuck at home. But that was generally little stuff or contractors were still hired out. All of my contractor friends have been buried up to the gills in work.

I bet over the next 2-3 decades we see more old homes being torn down and new ones built in their place. The codes and housing tech has gotten much better and it seems like that margin of difference between a house built in the 70's vs today is much greater than say a house built in the 90s. I think the general home owner is recognizing this and looking for the new shiny more efficient model that they think they have "less" to worry about.

I like some homebuilders but have exposure limited to my short near dated puts and buy longer dated calls trade which is getting sizable as more put become worthless and the longer dated calls appreciate, but overall it isnt like the homebuilders in general are expensive yet either. But I do like pick and shovel stuff. LII is a beast. Bought a small starter end of last year but think somewhere in the HVAC ecosystem theres good money. Especially with migration to areas needing year round cooling systems, those should crank out. CARR is cheaper, but I haven't fully dove into either and do eventually need to get off my ass and do some work.

bizaro86 · June 14, 2023

2 hours ago, thepupil said:

I think pretty much everyone would agree with you. I've highlighted the key qualifier. Applying a DCA approach assumes a portfolio to which one is able to add through a downturn and is not utilizing for any purpose other than to build wealth for some far out purpose. Most would agree that on a 15-20+ year time horizon stocks will beat bonds/cash.

Using DHI as an example. DHI has returned 12.3% / year for the last 20 years.

I just did a quick spreadsheet using last 20 years of monthly total returns. Here's your IRR's at various withdrawal rates (with no upward adjustments for inflation, so monthly distribution is the same.

$10K invested 20 years ago

WR IRR Ending

0% 12.3% $99K

5% 10.8% $44K

10% 5.2% Depletes in 5/2017 (notice that despite the 20 year return of the asset being greater than the withdrawal rate, the corpus is depleted in year 14, volatility and withdrawals kill the corpus)

Now let's reverse it. What if we add money? We add 5% of initial 10k / year 10% and 20%

Savings Rate IRR Ending

5% 13% $155K (on $20K total invested, $10K initially then $42/month)

10% 13.4% $210K (on $30K total invested, $10K initially then $84/month)

20% 13.9% $321K (on $50K total invested, $10K initially then $166/month)

So it's the same as the point I made elsewhere, one's attitude toward volatility depends on whether or not one is adding to the overall portfolio as well as the correlation between investments.

I ran this quickly. I may be wrong. Feel free to check/challenge as you wish.

@Gregmal one thing I've always found befuddling about your comments on this subject is you simultaneously espouse high qithdrawal rates ("you don't need that much money to do ________ and 4% rule is dumb") and immunity to volatility. The two ideas in my mind are contradictory and potentially dangerous in combination to all but the most adept of investors (which you likely are) but it would lead to ruin for many others.

EDIT/ADD:

same with bond index for last 20 years, which has returned 3% / yr

WR IRR Ending

0% 3.0% $18K

5% 3.6% $5.7K

10% 4.4% Depletes in 6/2016 (Here the corpus is depleted because bonds by themselves aren't generating adequate return. In both DHI's and bonds' case, you die but for two different reasons. The "safe" bonds don't earn enough. DHI makes enough on a long enough time horizon but is too volatile for a 10% WR).

So there's no question here. Investing in DR Horton instead of the bond index was superior 20 years ago. Even at a 10% withdrawal rate. But at a 10% withdrawal rate, DR Horton is only 80 bps of IRR better and depletes 1 year later despite returning much more than bonds. So if you think you can identify stuff that will make 12% / yr for the next 20 years...that will likely beat the snot out of bonds (which are currently priced to return 4.8% ish / yr. But as with everything it a big fat "it depends"

Now let's get crazy and assume 70% DHI / 30% bonds, rebalanced at the end of every month

WR IRR Ending

0% 11.15% $81K

5% 10.5% $41K <---note this is just 7% less than 100% DHI and distributions are the same.

10% 8.4% $340 <---We are on the verge of depletion, BUT we lasted over 6 years longer than 100% DHI.

Notice how by doing 70/30 we didn't reduce overall IRR by that much relative to 100% DHI? And at higher withdrawal rates the addition of the safe asset improved IRR and increased survival.

But let's assume again rather than subtracting we're adding, just doing the add 20% with the 70 /30, I get a 12% IRR / ending value of $244K, which is 24% less than the almost 14% / $321K for DHI.

So at the risk of obnoxious repetition, whether you like volatility depends on whether you're adding or subtracting to the portfolio. Highest and most volatile CAGR WINS if adding.

This is basically MPT which most value investors call bullshit. But it's not really all bullshit.

This is a great post, thanks for making it. I was half way through and had it quoted planning to ask about a rebalancing between the two options.

Thinking about it, since in practice I'm more on the Gregmal side where my portfolio tends to go between 90% and 120% long equities, I wonder if there are quality companies with very low correlations you could rebalance between. I suppose probably not, because the time when rebalancing from bonds pays all the benefits is like 2008-2009 and spring 2020 when basically all equities are down.

valueseek · June 14, 2023

6 hours ago, thepupil said:

I think pretty much everyone would agree with you. I've highlighted the key qualifier. Applying a DCA approach assumes a portfolio to which one is able to add through a downturn and is not utilizing for any purpose other than to build wealth for some far out purpose. Most would agree that on a 15-20+ year time horizon stocks will beat bonds/cash.

Using DHI as an example. DHI has returned 12.3% / year for the last 20 years.

I just did a quick spreadsheet using last 20 years of monthly total returns. Here's your IRR's at various withdrawal rates (with no upward adjustments for inflation, so monthly distribution is the same.

$10K invested 20 years ago

WR IRR Ending

0% 12.3% $99K

5% 10.8% $44K

10% 5.2% Depletes in 5/2017 (notice that despite the 20 year return of the asset being greater than the withdrawal rate, the corpus is depleted in year 14, volatility and withdrawals kill the corpus)

Now let's reverse it. What if we add money? We add 5% of initial 10k / year 10% and 20%

Savings Rate IRR Ending

5% 13% $155K (on $20K total invested, $10K initially then $42/month)

10% 13.4% $210K (on $30K total invested, $10K initially then $84/month)

20% 13.9% $321K (on $50K total invested, $10K initially then $166/month)

So it's the same as the point I made elsewhere, one's attitude toward volatility depends on whether or not one is adding to the overall portfolio as well as the correlation between investments.

I ran this quickly. I may be wrong. Feel free to check/challenge as you wish.

@Gregmal one thing I've always found befuddling about your comments on this subject is you simultaneously espouse high qithdrawal rates ("you don't need that much money to do ________ and 4% rule is dumb") and immunity to volatility. The two ideas in my mind are contradictory and potentially dangerous in combination to all but the most adept of investors (which you likely are) but it would lead to ruin for many others.

EDIT/ADD:

same with bond index for last 20 years, which has returned 3% / yr

WR IRR Ending

0% 3.0% $18K

5% 3.6% $5.7K

10% 4.4% Depletes in 6/2016 (Here the corpus is depleted because bonds by themselves aren't generating adequate return. In both DHI's and bonds' case, you die but for two different reasons. The "safe" bonds don't earn enough. DHI makes enough on a long enough time horizon but is too volatile for a 10% WR).

So there's no question here. Investing in DR Horton instead of the bond index was superior 20 years ago. Even at a 10% withdrawal rate. But at a 10% withdrawal rate, DR Horton is only 80 bps of IRR better and depletes 1 year later despite returning much more than bonds. So if you think you can identify stuff that will make 12% / yr for the next 20 years...that will likely beat the snot out of bonds (which are currently priced to return 4.8% ish / yr. But as with everything it a big fat "it depends"

Now let's get crazy and assume 70% DHI / 30% bonds, rebalanced at the end of every month

WR IRR Ending

0% 11.15% $81K

5% 10.5% $41K <---note this is just 7% less than 100% DHI and distributions are the same.

10% 8.4% $340 <---We are on the verge of depletion, BUT we lasted over 6 years longer than 100% DHI.

Notice how by doing 70/30 we didn't reduce overall IRR by that much relative to 100% DHI? And at higher withdrawal rates the addition of the safe asset improved IRR and increased survival.

But let's assume again rather than subtracting we're adding, just doing the add 20% with the 70 /30, I get a 12% IRR / ending value of $244K, which is 24% less than the almost 14% / $321K for DHI.

So at the risk of obnoxious repetition, whether you like volatility depends on whether you're adding or subtracting to the portfolio. Highest and most volatile CAGR WINS if adding.

This is basically MPT which most value investors call bullshit. But it's not really all bullshit.

This is a great post. Thanks for concise and thoughtful explanation.

Gregmal · June 14, 2023

Lennar reports. Housing experts still waiting for impairments.

Gregmal · June 21, 2023

No mass inventory impairments from KB. Where oh where are all the impairments!

UK · July 6, 2023

https://www.wsj.com/articles/home-builder-stocks-are-booming-as-homeowners-stay-put-df748479

“It’s a perfect example of the market where just when you think there’s nothing that can go right for a group, that’s when things start to go right,” Hickey said.

Gregmal · July 6, 2023

Closed this out. Was a doozy but it’s lapped.

LC · July 6, 2023

Yeah, I sold deep ITM calls against my entire LPX position. Was a nice IRR.

fareastwarriors · August 9, 2023

Homebuilding Boom Lifts Giants, Leaves Small Rivals in the Dust

Private companies faced with rising costs and tight credit are losing market share while their publicly traded counterparts are able to capitalize on rising demand for new homes.

Gregmal · August 9, 2023

#impairments

#whereRtheExpertsHiding?

Dinar · August 14, 2023

Buffett disclosed stakes in DR Horton, NVR and Lennar

Gregmal · August 14, 2023

But homebuilders should be trading for 1/3 of book value….

UK · August 31, 2023

https://www.economist.com/finance-and-economics/2023/08/30/how-can-american-house-prices-still-be-rising

What explains this impressive resilience? For something the size of America’s property market—where annual sales are worth about $2trn, scattered across a continent-sized economy, in which some regions are flourishing and others contracting—there is inevitably a nuanced answer. However, a good summary came in late August from Douglas Yearley, chief executive of Toll Brothers, one of America’s biggest homebuilders, during an earnings call. “There are still buyers out there. They have very few options,” he explained.

...

Many of those braving the market in order to buy homes have opted for new-builds, not existing stock. One advantage of newly built homes is that they are actually available. Thus they account for about one-third of active listings this year, up from an average of 13% over the two decades before the covid-19 pandemic, according to the National Association of Home Builders. As Daryl Fairweather of Redfin puts it: “Builders are benefiting because they don’t have competition from existing homeowners.”

Edited August 31, 2023 by UK

Gregmal · October 12, 2023

On 7/6/2023 at 11:40 AM, Gregmal said:

Closed this out. Was a doozy but it’s lapped.

Weird. Almost like the easiest way to call tops and bottoms is by not trying to and just gauging sentiment.

yesman182 · October 13, 2023

On 7/6/2023 at 11:17 AM, LC said:

Yeah, I sold deep ITM calls against my entire LPX position. Was a nice IRR.

Are you ready to start buying LPX again?

LC · October 13, 2023

Definitely looking at it. Long term the US needs to build homes.

Going to wait for Berkshires 13-F to see if they were selling.

There was also that UK (or Ireland? I forget) listed building supply company which just listed in the US, at about half of LPXs valuation. I haven’t done work there, but that’s one of the first things I’d look at to see how much of a comp it is.

fareastwarriors · July 20

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