Saturday, 01 September 2007 01:00

Who else is in trouble?

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By now, you probably realize that I think the homebuilders are in worse trouble than the mortgage lenders. Their collateral is not as ephemeral, since it is a real asset, but it is also much less liquid. Don't get me wrong, I think the mortgage lenders are in very big trouble as well, but the big lenders cannot be allowed to go out of business due to the damage to the economy. Nobody is going to miss a homebuilder going belly up.

The only way out of the mess is the way we got into it, the hard way.

Saturday, 01 September 2007 01:00

Correction, and further thoughts on the topic

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It has been called to my attention that among the many typos in my earlier post, an important one was the reference to the funding costs of DHI. The company in question was actually DHOM - Dominion Homes, not DR Horton - DHI. The general theme still stands, though, these guys as an industry who hold significantly depreciating real assets or options on said assets, financed by debt (all of them) or those who have significant mortgage banking operations without internal financing (ex. deposit accounts, etc.) (the vast majority of them), and who are running consistent operating losses for the last quarter and foreseeable next half (all of them) are in trouble, to say the least.

Saturday, 01 September 2007 01:00

How Far Will US Home Prices Drop?

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I do not know, and I doubt anybody else does either. How much they will drop nationwide is a fools question, and to hazard a guess would be an exercise in futility due to the extremely geographic nature of the housing industry. Remember, no one lives in a nationwide home!!! There are some areas where I would bet the farm on a 20-25% drop though from peak to trough, Vegas doesn't look to good and Southern Florida is in for a lot of pain (re: condos). There are southern Florida condo developers who have been foreclosed upon because they could not sell above their cost and the land was too expensive to convert into a rental. That, in itself represents a 25% drop, retail, so it has already started happening in some areas at a rate that is higher than the historical average - and we have just started the real estate bust. Florida is an interesting area due to the inherent demand for clear water, good weather and the pretty women night life effect, not to mention favorable homestead laws. It also has laws that favor condo development for you don't need a red herring in the same fashion as cities such as NYC, hence you can pre-sell condo units with a set of plans and then finance the actual construction with a bank loan and deposits from pre-sales.

Saturday, 01 September 2007 01:00

Thoughts on the US Publicly Traded Homebuilders

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I noticed that many pundits are focusing on single family residential market, most likely because it is in the news so often. It is bad, very bad. I am an ex-residential real estate investor who sold off in 2005 due to fundamentals that were totally out of whack. It appears that many do not see how precarious the commercial sector has become, with many deals being done at 2-5% cap rates (net profit yields) in Manhattan and many major metro areas, which is absolutely ridiculous considering the risk and illiquidity of these deals. The compensation for these deals are coming no where near justifying the risk. I am sure the excessive liquidity coupled with significant demand caused the cap rate compression, but the buyers fell for it assuming liquidity and demand would continue for some time. Well, corporate liquidity has just dried up, and

many are stuck holding the bag with buildings that are yielding as low as half that of treasuries, yet easily quadrupling the risk. Some are even selling at lower cap rates in successful flips (reference the Blackstone purchase of Sam Zell's portfolio, which was totally overpriced, yet Blackstone managed to flip much of the portfolio over to speculators, some of which actually flipped it over to someone else at a profit - ALL in a period of a few months). This has now become nigh in impossible, but in an attempt to raise the cap rates, commercial rents have skyrocketed to all time highs in the major metro areas, causing significant pressure on corporate profits (I have inside knowledge of this affecting MAJOR public and private firms who are looking to expand and are getting squeezed).

And now, on to small residential (single family and 1-4 family residential)...
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