Wednesday, March 11, 2009

Some Thoughts on the Home Builders

The Wall Street Journal has an interesting story this morning that summarizes the main issue facing the homebuilders: a glut of housing inventory, some of it from foreclosed properties in their own developments.  The article has examples of new homes built as little as two years ago in new home developments that are now in foreclosure and offered at steep discounts to nearly identical houses in the same development.  One example is in the Inland Empire of Southern California where the foreclosed house is offered at $229,900 compared to a nearly identical house offered by the developer for $299,000.  Fortunately, the builders have spin on their side, as the article is filled with quotes such as "Our brand-new homes appeal to the buyer who wants up-to-date features and a chance to make their own selections like carpeting and paint colors" from a spokesman at Pulte.  Even better is the one from the Centex CEO that claims "In general, we try not to compete with foreclosures.  It's not all about price, it's about value."  I've always thought that price and value are somehow correlated, but maybe I'm wrong.  I'm fairly certain, however, that those buyers in the market for a house in the $229K price range will likely calculate the cost of a new carpet and some paint, if they happen to hate the current choices in the abandoned house, and it will equal less than $70,000.  That is a value proposition if I've ever heard one.

Meanwhile, in RealityLand, Hovnanian posted a worse-than-expected loss of $178.4 million for its fiscal first quarter, compared to $130.9 million in the same quarter of last year.  Revenue tumbled 66% to $373.8 million.  Who does the CEO Ara Hovnanian blame for its lousy quarter?  Why, the government, of course: "Given the lack of steps taken by the federal government to address housing demand, prospective homebuyers are still faced with making the decision to buy a home against an exceeding difficult economic backdrop."  While its true that if you ignore the $750 billion in TARP funds shoveled into banks to keep them lending, the multi-billions in mortgage modifications enacted, Operation "Hope for Homeowners", the $200 billion conservatorship of Fannie and Freddie, the bailout of credit unions, extension of the Federal Home Loan Banks borrowing ability from the Fed, the TALF, TAF, TSLF (insert 15 more acronyms) from the FED, the government has positively fallen asleep at the switch.  But frankly, Mr. Hovnanian has no one else to blame for his company's current misfortune other than himself and his compatriots, who borrowed too much money to buy too much land at inflated values and built too many houses in what was clearly a bubble (and yes it was very clear to many.)  Now the builders are getting a bunch of tax breaks (Hovnanian received $145 million in a government tax refund in the first quarter) and many of them won't make it DESPITE what has been a ridiculous amount of government intervention to prop up the housing market.  Mr. Hovnanian may complain, but I'm not shedding any tears.       

1 comment:

mrbogue said...

The homebuilders were some of the easiest stocks to short. You could play blind-folded pin the tail with these donkeys and you'll still come out on top. When the illegals disappear from the Home Depot parking lots, you know the homebuilders will be going down next.