Comments on: Is housing finally on the way down?

By: wcw

wcw — Thu, 03 Aug 2006 19:33:44 +0000

TOL has been one of the industry’s more honest brokers. The market rewarded that by driving their stock down first. Cf http://bigcharts.marketwatch.com/charts/big.chart?symb=tol&comp=bhs+bzh&type=2&size=3&style=320&freq=1&startdate=6%2F30%2F05 and note how Toll leads the other names down.
However, just because they’re honest and know their business backwards and forwards doesn’t mean I was buying them last week, even though along with the whole group they’re up 5% today. You might be surprised at what happens to homebuilders in toto even if prices merely remain flat for a while, unless rates come back down as well. I might be even more surprised, of course. A group whose underlying market looks to be changing will have volatile earnings. If you want to be long, check out book multiple as well as earnings.

By: bailey

bailey — Tue, 01 Aug 2006 14:37:20 +0000

I sold in Jan ‘05 using similar reasoning. Until we see the next significant price reductions I advise all to calc. costs using “Flat” pricing. Remember, the $500k price reduction is off of ASKING price. All that really means is the upward spiral has stopped, for this brief point in time. Understand, I’m with (& perhaps ahead of) Mark on this, but it’s still to early to get puffed up.

By: steveteles

steveteles — Tue, 01 Aug 2006 01:33:51 +0000

Since we’re in the business of noting what side of the market on now, I should note that I am long Toll Brothers, which is the homebuilder at the top of the market (the men who brought you the McMansion). I am with Mark that housing is on its way down (although it is interesting that we haven’t actually seen that much of a move in prices, yet). It is possible to believe that housing prices could go down 15-20% in many overpriced markets, and still think that TOL is an incredible opportunity. TOL is selling at nine times the most pessimistic analyst estimate of 07 earnings and five times this year’s earnings. There’s an old adage that the time to buy is when the blood is running in the street. With TOL 60% off of its highs, I’d say that time was now. There is irrational exuberance, but there’s also irrational pessimism. The former helps explain why some people can make money on the short end of the market, the latter why you can make a lot of money going long.

By: wcw

wcw — Mon, 31 Jul 2006 18:49:42 +0000

MK:
In the interest of full disclosure. Shorting homebuilders has been one of my big, big winning trades this calendar year. My targets had a little LA exposure, as well as SD, SF, DC and Miami. I covered most of these, but expect to fade rallies. Why didn’t you short futures? You could have collected cash against your home’s drop in value while continuing both to live in it and to book the governments generous mortgage interest tax deduction.
Whatever your and my market stances, futures markets still do not make predictions. Futures sometimes offer a convenience yield. Some market participants indeed attempt to book it. I am not one. I am a little shocked that a tenured policy expert thinks misdirection is effective refutation, but perhaps I overestimate you.
Kidding aside, buy Hull and read the first six chapters: http://www.rotman.utoronto.ca/%7Ehull/ofodout/

By: TT

TT — Mon, 31 Jul 2006 14:18:18 +0000

During the last bad market in California in 1991, I put my home on the market at $795,000 based on my realtors advice. I purchased a house in Arizona thinking I could reduce my costs. Two years later the California house was listed at $559,000 and still unsold. I rented the house at a loss for 7 years until the market came back so I could sell at $719,000. I think this market could be worse.
The banks are gearing up for a surge in forclosures. When these adjustable loans reset, recent buyers will walk away.

By: Barry

Barry — Mon, 31 Jul 2006 13:46:41 +0000

Mark, congratulations for having the courage to act on your convictions!

By: Barry

Barry — Mon, 31 Jul 2006 13:45:54 +0000

Brett: “On the bright side, a drop in market value doesn’t actually cost you anything until you sell. It doesn’t mean squat to us weird people who buy houses and then just sit there living in them.”
Brett, for many of us, life occasionally forces (strongly encourages, for the econopedantics) us to move. I worked with a guy at Ford, in the 1990’s, who spent three years renting out his CA house while working in Dearborn, MI, because he couldn’t sell it for an acceptable price.

By: Mark Kleiman

Mark Kleiman — Mon, 31 Jul 2006 08:05:09 +0000

bernard:
I agree that current owners would have to expect continued declines to make it rational for them to sell, given the transactions costs. But think about someone about to buy: is he really willing to take the additional 7% hit? Not if he’s sane. He ought to keep renting, and maybe buy the futures as a hedge.
wcw:
So are you long the L.A. contract or the composite? If you’re right that the futures price systematically underpredicts actual growth in housing values, that’s money for jam. In the longer run, of course, if enough people take advantage of the time-arbitrage, the futures price will come into line with the expected value of cash prices in the future.

By: wcw

wcw — Mon, 31 Jul 2006 03:53:48 +0000

I have to agree. Our host is a smart cookie, but he’s outside his competence here. Like many, he tends to conflate futures prices with predicted prices. Futures markets do not predict price; they reflect the influences of arbitrage, hedging and speculation. Backwardation is usually explained via convenience yield. With something like residential housing, that actually makes intuitive sense. Mr. K., if you find the time, read the first several chapters of Hull. It’s a classic text for a reason.
When your premise is demonstrably false, you shouldn’t be surprised that the calculations that result arouse reactions ranging from bemusement to disagreement from rational interlocutors.
SP, you could use the CME to hedge your house, but I am not sure I recommend it. You could hedge out your $1.5M SF home by selling around 30 futures contracts and rolling them over, but if markets keep going up, you’ll have to pay up cash on the futures losses while the gains on your home remain unrealized. While this might be a nice tax dodge in a few circumstances, in most I expect the pain of cash payments quickly would drive most retail clients out of the position. Options on futures are a thought, I suppose, but then you’re long volatility instead of just hedged, which seems even worse.

By: Sebastian Holsclaw

Sebastian Holsclaw — Mon, 31 Jul 2006 03:51:53 +0000

In proof that I’m selfish–I’m going to be able to buy a house for the first time in about 2 years (in San Diego). If housing prices stay level or go down without wrecking the overall economy, I’ll be thrilled.

By: Bernard Yomtov

Bernard Yomtov — Sun, 30 Jul 2006 19:34:21 +0000

I agree that housing prices are dropping, but have some quibbles with the analysis.
Even if prices drop 7% in the coming year – quite plausible – they are very unlikely to continue dropping at a 7% annual rate. It’s really not accurate to lump this cost with the mortgage. And, ironically, once the prices drop, the opportunity cost of the equity drops also. A twenty percent price drop, or less in many cases, leaves you with no equity, hence no opportunity cost.
Also, selling a house has large transaction costs, so unless you think there’s going to be a crash, it’s questionable whether selling for pure financial reasons makes sense.

By: erg

erg — Sun, 30 Jul 2006 18:54:49 +0000

No, note that this is the land price, and it’s in Yen / Square Meter (there are currently about 116 Yen / US Dollar, and there are about 10 square feet per square meter).
There’s a very interesting long time series of real estate data in Amsterdam which basically shows that over a 350 year period house prices basically went nowhere in real terms. This is discussed here:
http://economistsview.typepad.com/economistsview/2006/03/shiller_longter.html

By: Sam Spade

Sam Spade — Sun, 30 Jul 2006 18:39:10 +0000

“The price has been reduced by half a million dollars”? Zounds.

By: SP

SP — Sun, 30 Jul 2006 17:56:04 +0000

How can homeowners use the CME housing market to hedge against declining home values? After all, I just put in all these nice fluorescent bulbs.

By: i dunno

i dunno — Sun, 30 Jul 2006 15:00:40 +0000

Had an interview with a realtor who still said that “a house is the best investment you can make”.
What else would a realtor say? Many of them believe it. The human animal is capable of amazing self-deception for the furtherance of its self interest…

By: Quiddity

Quiddity — Sun, 30 Jul 2006 14:02:56 +0000

This Sunday on ABC’s national morning show (not This Week) one of the segments was Now Is The Time To Buy A House, teeing off the fact that it’s a buyer’s market. Had an interview with a realtor who still said that “a house is the best investment you can make”.
And that’s after a slowdown in sales, not prices (at least not much of a decline in prices).

By: Anonymous

Anonymous — Sun, 30 Jul 2006 12:14:51 +0000

Houses were the latest pot of borrowed money to live on. Now there’s nothing left for average consumers to maintain deficit lifestyles. We’ll be hurtin’ soon. But sadly the corporate owners of America can still sell their hard assets and the government can still sell services (like toll ways and PORT DEALS). In the end, like a British aristocratic family selling the art off the castle walls before going bankrupt, or a rock/movie star blowing it all on blow, america is in for a serious take down.
Do I take any pleasure in it? Hell now. My wife and I are savers, and our assets have grown in 18 years from literally $500 to a pretty good portfolio of cash and stocks and bonds and a good public pension–never bought the McMansion-on-the-lake I dreamed of–but those will all go to hell when the economy tanks. Makes me feel like a middle class German family in the 1920s. My brother has a 150,000 German mark note framed on his wall. That bought a loaf of bread back then. doubt it will get that bad but with Bushco, who knows?

By: Brett Bellmore

Brett Bellmore — Sun, 30 Jul 2006 11:50:58 +0000

On the bright side, a drop in market value doesn’t actually cost you anything until you sell. It doesn’t mean squat to us weird people who buy houses and then just sit there living in them.