Housing Rolling Along 2

[onewaypockets]

Quote from AAAintheBeltway:

....where are all the buyers for these homes coming from? Wouldn't the demand pretty much be limited to population growth? And who is buying all the homes these move up buyers and people moving to Florida are selling?

You would think demand for housing would be a steady and linear thing...but you can see from the two attached charts it is anything but. You can see at the bottom of the first chart the more linear population growth and income growth. It would seem home prices should more closely follow this trendline.

Many more homes are sold during "hot" real estate markets than during "off" cycles. Probably like people chasing stocks and mutual funds... most do so though after the big move.

 

[SteveD]

Real estate purchases are driven by interest rates.

Housing demand: Take a look around your neighborhood. How many kids going off to college this next Sept? There is the demand in about 6-8 years. Add in immigrants and there you have it.

President of KB said that there are about 400,000 houses destroyed each year, obsolete, fire, etc. With about 2 million in starts that gives you a net 1.4-1.5 million new units which is about where demand is.

High interest rates will not stop the demand. It only stops the supply side of the equation and inhibits the ability of the buyer to exercise his desire.

I believe that major home builders have taken a lot of the traditional cyclical aspect of the business out of play. If this is true then on a PE basis they are probably 30-40% undervalued now.

Also, keep in mind, interest rates are about at a normal level on a historical basis. For many, many years home mortgages stayed at 6% for a 30 year fixed self liquidating mortgage.

IMHO,

SteveD

 

[Lights]

in nj, builders are going farther and farther away from nyc to build. why? because there's no land left. one strange scenario could be that there is no housing bubble here, yet homebuilders tank anyway. homebuilder execs claim that lack of supply is one reason real estate has been thriving. there is no land to build in bergen county, a huge suburb of nyc..

ok so if their land parcels near the city is diminishing , they'll have to build out the boonies (>1 hour commute) and market those communities.

problem is that those locations get 1/2 the sale prices as those near the city. earnings growth for the builders is dependent on rising home prices. they would need people to pay up a million for a home in the boonies or home purchases over there would have to more than double in the near future.

but at rate at which things have been going, who knows.. this could even happen...
insane.

 

[OldTrader]

Quote from Lights:

in nj, builders are going farther and farther away from nyc to build. why? because there's no land left. one strange scenario could be that there is no housing bubble here, yet homebuilders tank anyway. homebuilder execs claim that lack of supply is one reason real estate has been thriving. there is no land to build in bergen county, a huge suburb of nyc..

ok so if their land parcels near the city is diminishing , they'll have to build out the boonies (>1 hour commute) and market those communities.

problem is that those locations get 1/2 the sale prices as those near the city. earnings growth for the builders is dependent on rising home prices. they would need people to pay up a million for a home in the boonies or home purchases over there would have to more than double in the near future.

but at rate at which things have been going, who knows.. this could even happen...
insane.

What makes you think earnings growth for the builders is dependent on rising home prices? Not true at all.

Large builders these days have been acquiring small local builders. This has been one element in expanding profits. Obviously the number of units sold makes a difference. General price levels of the house makes some difference. Costs make a difference. But rising prices? Nope...except to the extent that rising prices create demand.

As builders move farther out from a city they tend to build entry level for many cities, so that where affordability is an issue the new area solves that problem. Check the Inland Empire in California back a number of years for this. Also, the builders can build larger homes for a somewhat lower price because the land cost is lower.

OldTrader

 

[Lights]

Quote from OldTrader:

What makes you think earnings growth for the builders is dependent on rising home prices? Not true at all.

Large builders these days have been acquiring small local builders. This has been one element in expanding profits. Obviously the number of units sold makes a difference. General price levels of the house makes some difference. Costs make a difference. But rising prices? Nope...except to the extent that rising prices create demand.

As builders move farther out from a city they tend to build entry level for many cities, so that where affordability is an issue the new area solves that problem. Check the Inland Empire in California back a number of years for this. Also, the builders can build larger homes for a somewhat lower price because the land cost is lower.

OldTrader

how can it not be.. rising prices is a component, cos it brings in higher margins communities near the city garner even higher margins than in the boonies cos they have had a rising premium above cost of land and materials.

you have a point about land costs in the boonie areas, but the distance to a metro area is more difficult to sell. there is plenty of cheap undeveloped land >1 hour away from the city, cos commuters don't wanna live there. i believe that is why las vegas is one of the first communities to show signs.. nobody really wants to live there. and communities in the boonies bring in lower margins than those near the city. they'd have to build out more than ever, and target lower income families and hope for a 100 year mortgage product for them to afford it.

they're gonna have to sell alot more units in 2005 to attain comparable yoy #'s.

i was saying don't need a real estate bubble for homebuilders to still go down. they got nowhere to break ground here anymore.

 

[SteveD]

OldTrader is correct.

Please don't make the assumption that everyone in the "boonies" goes into the CBD every day. Retail will follow the rooftops. The manager of the grocery store, McDonalds, small business, real estate agents, etc all live in area and a fairly large number of people that office at home with the internet etc. Don't forget school teachers, church etc.

SteveD

 

[AAAintheBeltway]

The biggest driver of profits for homebuilders is converting raw land into buildable lots. Its not the selling price of the house that is important. It's the difference between their costs and the selling price.

 

[Lights]

Quote from AAAintheBeltway:

The biggest driver of profits for homebuilders is converting raw land into buildable lots. Its not the selling price of the house that is important. It's the difference between their costs and the selling price.

agree, but the margins in the boonies are lesser. my point is they're gonna have to sell more than ever.

 

[Covertibility]

Toll Brothers profit more than double
Home sales drive earnings above analysts' expectations

The company said net income rose $110.2 million, or $1.33 per share, from $50.1 million, or 62 cents a share, during the same period last year.

Analyst polled by Thomson First Call had forecast, on average, quarterly earnings of $1.15.

Toll Brothers raised its estimated net income growth for the 2005 fiscal year to 60 percent, from its previous guidance of 40 percent growth. It expects to deliver between 8,050 and 8,400 homes, an increase from its previous projection of 7,900 to 8,300 homes.

----------

Up up and away!

 

[Covertibility]

Let me update a few things for the intellectually impaired, including the Economist and their housing bubble crap in 2003:

Stocks of Homebuilders Test New Highs:

Pulte executives told investors during the company's annual conference in New York that it expects earnings from continuing operations will grow at an average annual rate of about 20 percent during the next three years.

Toll Brothers Raises the Roof:

For its fiscal 2005 first quarter, Toll Brothers' net income soared to $110.2 million, or $1.33 per share. That's more than double last year's $50.1 million, or $0.62 per share. Those results demolished analysts' expectations of $1.15 per share. Revenues expanded 67% to finish the quarter at just under $1 billion.

OK, so there was a plethora of good news for the company, but it can't possibly keep up at this pace, can it? Can it? The good thing about housing companies is that we can quickly get a feel for what the near-term future holds. At the end of the quarter, Toll Brothers had a backlog of $4.89 billion, or 7,292 homes. That's a 66% increase over the company's previous record backlog of $2.95 billion, or 5,079 homes. The luxury home builder also controls 63,000 home sites (many in desirable locations where land is hard to come by), which works out to a supply that should last for five to six years based on the historical pace of expansion.

---------------

Be Cool