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Apparently, the Citibank analyst that has issued several bullish reports on the builders during their downturn is at it again. Citibank has enormous analytical resources, considerably more so than my operations. Despite this, I find the facts to be at odds with his findings, not to mention common sense. The only conclusion is that this sector is being pushed for reasons other than fundamental. My analysts and I see several bankruptcies imminent in this sector. Citibank sees a buying opportunity in the public equity. One of us is very wrong. Or are we both right with differing objectives??? This guy is unbelievable. First, let's go through the press release:

Citigroup Analyst Says Homebuilders May Be Most of the Way Done Writing Off Land

NEW YORK (AP) -- Shares of homebuilders closed mixed Tuesday after a Citigroup Global Research analyst said companies in the sector may be nearly finished adjusting their books to reflect land that has lost value. Wouldn't this mean that the underlying market that caused the land to lose value would be nearly finished in its decline?

Citigroup analyst Stephen Kim, who upgraded the foundering sector last week, issued a report on a type of charge known as a land writedown. Homebuilders assume the land they own is worth a certain amount, which is reflected in the companies' financial statements. When property values decline, as has happened for the past two years, the builders need to record charges reflecting how much value the land has lost.

Kim said homebuilders have written off $10 billion in land since the middle of last year, a major factor squashing investor confidence in the sector. True.

Homebuilders do not write down land based on what land is selling for, Kim said. They write down land based on what houses are selling for, since that represents the value homebuilders ultimately wring out of the land they own. Okay, and based on that statement it would appear that writedowns will be more severe in the next few quarters, not less severe and definitely not over.The writedowns started at the very apex of the greatest US real estate bubble since the GOLD RUSH! Prices are just starting to trend down. The significantly inflated portions of the country have showed the largest move the soonest, but they are not isolated and it is not showing any signs of the trends abating or be 2/3 over. The CME residential real estate futures indicate price declines up to 4 years out in many areas.

On that basis, he thinks builders may be two-thirds of the way finished with their writedowns, and eventually people will regain confidence. The only ones that will regain confidence that quickly will be the one's who don't have access to empirical data, or potentially Citibank clients. Take a look at the trend and rate of increase in REOs by this sampling of major lenders in Washington DC over the last ten weeks. REOs are an indication of a sharply declining market, not one that is about to stabilize.


The shift in sentiment -- from believing more charges are on the way to believing the books are accurate -- comes quickly, he said. Once it comes, the stocks will rally as investors apply higher value to the value of homebuilders assets, he said. Oh, I definitely believe the stock will rally, except for the ones of the builders that went bankrupt. These rallies are not justified fundamentally. The funny thing about real estate is that it is hard to fool all of the people all of the time. If or when these stocks due rally prematurely, some investors will get hurt.

Here is how shares of some homebuilders fared Tuesday:

We have already went over the situation with the banks in Bubbles, Banks and Builders and the increasing distress in the primary profit centers of the builders in Bubbles, Banks, and Builders, Pt. Deux. In Bubbles, Banks & Builders: Pt.III - "Do or Die, Bed Stuy" we reviewed the extent of the distress of the largest builder. I would think that we have presented a pretty bearish case already, but I do want to address the specifics of Mr. Kim's report.

In order for the builders to be "two thirds" through the way of writing down the value of their land assets based upon the sales price of houses, there must be some clarity in the vision that housing prices will soon be trending flat or upwards. Well, with a sharply increasing REO inventory in each and every major profit center of the builders, this appears highly unlikely. It may be possible though, so let's check the asking prices of the markets in question and look into the supply issue to see if inventory is abating. As usual, simply click on any graphic to enlarge it.


This is the inventory snapshot of Washington DC for the last 10 months. Except for the normal fall off during the winter holiday seasons, inventory has ramped up. This means that there are actually more properties for sale to compete with the builders, not less. It also means that the excess supply lowers the value of the inventory, which makes it less likely that it will see a cessation in writedowns if the trend continues. The big question is, "Will it continue?". Well, judging by the asking price trends (and keep in mind that these are the asking price trends, not the actual transaction prices which tend to be less than asking in a down market) I see larger write down in lieu of an abatement in writedowns. Let's take a look.


These are the trends in asking prices of the DC area over the last 10 months, segregated into pricing tranches. Notice how properties in 25th, 50th (median) and 75th percentiles are ALL trending downward over the last 10 months including this one (month to date). What this means is that sellers of the less expensive homes, the sellers of homes in the middle price range, and the sellers of homes in the upper price ranges are all asking less for their properties consistently over the last ten months. If I were to superimpose the Case Shiller index in the graph with the appropriate lag, you will see that the actual transaction prices are following suit. The only caveat is that the CME index does not include condos, while this representation does. As stated earlier, the futures on the CME index point to a declining market SEVERAL YEARS out, up to 28% down in areas like Miami. Two thirds through the devaluation period, Okayyyyy...

Since a picture is worth a thousand words, and I am tired of typing, I will simply offer up graphs for all of the builder major profit centers.






It doesn't get that cold in Tampa!








Property values have started declining in some markets two years ago and are still on their way down, at an even steeper pitch. Many other markets that didn't turn two years ago are starting to turn now. The trend is increasing, not abating.