Wednesday, August 26, 2009 2 comments ++[ CLICK TO COMMENT ]++

Some homebuilders think the housing bottom has been hit

A lot of people look at measures like the S&P/Case-Shiller index or home transaction volume to figure out if housing has hit a bottom. If you are a free-market guy like me, a stronger sign is when homebuilders actually ramp up their activities. Home sales, prices, and so forth, can be distorted by subsidies, bank write-offs, and the like; but when a homebuilder risks their precious capital to start building more homes or acquire more land, it is a powerful signal. Bloomberg is reporting that some are actually starting to acquire land or start new projects:

Signature Properties has been trying since 2005 to sell 4,000 finished lots in its Fiddyment Farm community, a former pasture and pistachio orchard northeast of Sacramento, California.

The developer sold 41 sites in April to Meritage Homes Inc. for $66,000 each, and another 41 in June to Hovnanian Enterprises Inc. for $68,000 apiece. This month, they got their best offer yet -- $103,500 each for 77 sites.

Signature Properties said no.

“We decided to build it out ourselves,” said John Bayless, president of the Sacramento division of Signature Properties, a closely held developer in Pleasanton, California. “Our feeling is, ‘The tide’s turning. Let’s build ‘em.’”

Homebuilders that spent the past three years selling off land and writing down the value of property holdings are scouring markets in Sacramento, Phoenix, Denver and Orlando -- cities synonymous with the real estate bubble -- looking for deals on ready-to-build lots as they prepare for a rebound.

Writedowns and write-offs by 14 of the largest publicly traded homebuilders totaled $28.5 billion since the start of 2006, according to a July 15 report by Fitch Ratings.

Home prices in 20 U.S. cities fell in June at a slower pace than forecast. The S&P/Case-Shiller home-price index declined 15.4 percent from a year earlier, the smallest drop since April 2008, the group said yesterday. The gauge rose from the prior month by the most in four years.

New home sales climbed 11 percent in June, the biggest gain in eight years, and housing starts were the highest since November. Single-family home starts increased again in July, for the fifth straight month, the U.S. Commerce Department reported on Aug. 18. July new home sale data will be released today.


Of course, none of this means that things won't deteriorate further. Market is usually efficient but not during stressful times or during turns. It's always possible that these homebuilders are completely wrong and will end up losing money. The possibility of Japan-like real estate bust cannot be ruled out. The risk will materialize if the US government orders the GSEs to stop absorbing losses. So far, the GSEs have been supporting the mortgage market (they were especially powerful last year when they were the only ones keeping their "lending" somewhat loose.)

Here is a chart of some of the leading homebuilders, as well as the S&P 500:



Homebuilders have been on fire and all of the ones in the chart are outperforming the S&P 500 this year (S&P 500 is coloured tan.)

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2 Response to Some homebuilders think the housing bottom has been hit

Daniel M. Ryan
August 28, 2009 at 12:40 AM

I agree. It looks like the housing market is slowly healing.

On the other hand, there's the huge foreclosure inventory still out there. Contra the doomsayers, though, I think the earlier foreclosures will merely be a drag on a rising market.

Another point: a foreclosed house is not the same as a regular house if the former's been allowed to decay. Houses are consumer goods. If the economy picks up somewhat, a foreclosed house will be treated as a different (inferior) good relative to a well-maintained house. This difference in quality will lessen the drag that foreclosures will exert on the housing market. For many of them, you'd practically have to be a handyperson - if not a security guard - to get the house up to snuff.

Sivaram Velauthapillai
August 28, 2009 at 10:14 AM

Yep, good insights Daniel. The new homes built by the homebuilders are likely superior in many aspects to the foreclosed homes. The major advantage foreclosed homes may have, apart from lower pricing, is location. The land in some locations are probably as valuable as the home in the long run. But you may have to wait if you go for the land.

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