New Home Sales Decline No Surprise to Some [View article]
Tack - - -
What is disappointing about the May new housing report is that it appears to reflect a drop in demand. The inventory of available new homes rose sharply, so supply is not an issue. The downward revision of the April sales reflects the problem with demand, whether because of buyers getting cold feet and backing out of contracts eligible for tax credits or because mortgages are harder to get.
As I discussed in the article, the issue regarding demand will probably be resolved or exasperated by the direction of employment in the coming months. It will also be affected by how far ahead sales have been moved by the tax credits. In Cash for Clunkers, the sell ahead turned out to be a couple of months. I worry that buying a house is a much bigger commitment than buying a car and we may see a much longer sell ahead "reach". We'll know if this is a problem by the end of the summer.
New Home Sales Decline No Surprise to Some [View article]
apppro - - -
I have long been in support of your proposal to graduate capital gains based on a multi-step formula for holding periods.
With respect to your proposal on short sales, I would want an exception to the tax on gains for shorting against the box. That is a technique I use to protect capital gains on stocks that I do not want to sell (or are restricted).
For readers who are not familiar with the term, shorting against the box refers to shorting shares that are simultaneously owned. That creates a neutral position: x shares long and x shares short. Common reasons for doing this:
1. To prevent loss of capital gains for appreciated stock held for less than one year. The maneuver sacrifices any further net capital gains but locks in gains already achieved. The position can be sold after the one year is satisfied for the long position with long term capital gains tax rates applied to the realized gains on the long position and short term gains realized on the short position.
Note: If the stock price continues to rise after the short against the box is entered, the amount eligible for long term capital gains continues to increase and a short term capital loss is realized on the short position. This is useful if there are realized short term capital gains on other positions which are offset by selling the short. In effect, this tactic can result in the net effect of converting short term capital gains to long term capital gains.
2. If you owned restricted stock (stock acquired by an employee which can not be sold until a required holding period is satisfied). Shorting against the box until the end of the required holding period protects capital gains not realized at the time of the short.
I would not want to penalize legitimate hedging actions by the little guy. The cost of using options for such hedging can be much higher than the cost of shorting against the box.
Investor demand is something to be reckoned with. After all, those who aren't buying houses are renters and we will be having more renters. That means I'll have to track rental vacancy rates. I wrote something about that a few months ago (can't recall the details) but it has been off my radar since.
You are brave to analyze 2011 projections. I am afraid I don't understand the projections for 2010.
I am still working on my housing demand analysis - maybe this week I'll finish? People (including me) have worked the supply factors into the ground. Demand, not so much.
The new household formation number is quite variable as your graphic shows. Population growth is smoother, between 2.5 and 3 million per year. If we make a gross assumption that the maximum average for new household formation would be roughly about 1/3 that (assuming average household has 3 persons), that would indicate that we should be averaging between 0.8 and 1.0 million new households per year.
If the average household is 2.5 persons, then the rate of new household formation would be between 1 and 1.2 million.
The ten-year average of 1.3 million implies an average household between 1.9 and 2.3 persons, which is reasonable if we assume that new households have, on average, fewer children than established households.
Okay, so we continue with the 1.3 million new households average. Until recently that would imply about 900,000 additional homes needed each year, based on a home ownership rate around 70%. Since that may be falling back toward the low 60% area, the average demand for new homes would project to be less than 800,000 per year, a decline from previous levels of more than 100,000.
The next trick is to figure out how lingering high unemployment will further reduce this demand. I haven't quite gotten there yet.
Home supply is increased by foreclosures, but these also diminish demand. Foreclosed home owners are mostly out of the home buying market for several years at a minimum.
This outlines where my analysis is going. Blast away if you think it is misguided.
For Lennar, I used revenue from sales of homes ($513.3 million) reported for 1Q/2010. When $53.365 million is added for revenue from financing operations and $7.428 million added for land sales, the total revenue you mentioned ($574 million) is obtained.
The $574 million number is more appropriate for ratios to future estimates because financing and land sales are included in the estimates.
A better analysis would involve isolating the home sales revenues from the future estimates and using ratios of home sales revenues only. I haven't tried to do that, but I expect the result is likely to be between your 46% and my 52%.
I think trying to refine the numbers further is not productive since the future estimates are likely to have uncertainties approaching (or exceeding) +/- 10%. The conclusion for my analysis is that this uncertainty will be resolved to the downside (on revenue estimates). I am anticipating that your conclusion will be that there is not that much downside potential.
That is what makes a market. If there was no variation of opinion on revenue and earnings estimates, investing would offer less opportunity for gains (and losses).
I have another article (not yet published) which analyzes supply and demand factors for housing in 2010. Increasing supply and flat demand is what appears to be the likely path this year. That outlook is creating a bias in how I look at the data in this article. If you can create a case for increasing demand, then a more optimistic new home sales growth can be envisioned.
I think the increasing supply is baked in the cake, unless we have a very strong recovery with 5% or higher GDP growth for the entire year. With the addition of a few million to the employment roles the supply from foreclosures could start to weaken.
I have run all the numbers through a spread sheet and set up internal crosschecks. Some of the analysts consensus estimates on Yahoo Finance are lower that last week and I found two significant errors in my hand calculation. I now have a 52% improvement in sales needed, not the 74% I have in the article, and not the 44% you calculated.
I will be going over everything again and writing up a new Instablog post with the corrected numbers, a spreadsheet table showing all the numbers, and a new graph.
I will discuss with the SA editors whether the corrected article should replace this one or if some other course should be followed.
The conclusions of the article are not changed. The target area for the second half of 2010 is in the 490,000 to 520,000 region, not the area in the above 550,000 as shown originally. This still implies a strong recovery in new home sales from existing levels if analysts' projections are to be met. There must be a dramatic change of trend in the next 2-3 months for that to have any chance of being realized.
BTW, approximately 75% of the change in the result is from my hand calculation errors and about 25% comes from lowering of analysts' consensus estimates at Yahoo Finance. (Unless, of course, I copied the data incorrectly last week.)
I'm on the road for a few days. I'll go over the numbers when I get home and post a spread sheet summary. I did my calculations by hand. If I have made an error it will certainly show up in the spread sheets. When I have the spread sheet posted (as an Instablog), I'll leave another comment here to alert you.
Pending Home Sales Index Is Down 6.4% [View article]
I find it curious that the NAR characterizes the Pending Sales indicator as "a forward-looking indicator based on contracts signed in January,".
For new construction, this would be looking forward approximately six months or so to closings. For completed construction and existing home sales, this would be looking forward approximately 30-45 days to closings. Since less than 10% of current sales are new construction (and that includes completed new construction), the average of the forward look would be less than 1 1/2 months.
This is much closer to the customary lead time for something that would be considered a coincident indicator.
New Home Sales Decline No Surprise to Some [View article]
What is disappointing about the May new housing report is that it appears to reflect a drop in demand. The inventory of available new homes rose sharply, so supply is not an issue. The downward revision of the April sales reflects the problem with demand, whether because of buyers getting cold feet and backing out of contracts eligible for tax credits or because mortgages are harder to get.
As I discussed in the article, the issue regarding demand will probably be resolved or exasperated by the direction of employment in the coming months. It will also be affected by how far ahead sales have been moved by the tax credits. In Cash for Clunkers, the sell ahead turned out to be a couple of months. I worry that buying a house is a much bigger commitment than buying a car and we may see a much longer sell ahead "reach". We'll know if this is a problem by the end of the summer.
New Home Sales Decline No Surprise to Some [View article]
I have long been in support of your proposal to graduate capital gains based on a multi-step formula for holding periods.
With respect to your proposal on short sales, I would want an exception to the tax on gains for shorting against the box. That is a technique I use to protect capital gains on stocks that I do not want to sell (or are restricted).
For readers who are not familiar with the term, shorting against the box refers to shorting shares that are simultaneously owned. That creates a neutral position: x shares long and x shares short. Common reasons for doing this:
1. To prevent loss of capital gains for appreciated stock held for less than one year. The maneuver sacrifices any further net capital gains but locks in gains already achieved. The position can be sold after the one year is satisfied for the long position with long term capital gains tax rates applied to the realized gains on the long position and short term gains realized on the short position.
Note: If the stock price continues to rise after the short against the box is entered, the amount eligible for long term capital gains continues to increase and a short term capital loss is realized on the short position. This is useful if there are realized short term capital gains on other positions which are offset by selling the short. In effect, this tactic can result in the net effect of converting short term capital gains to long term capital gains.
2. If you owned restricted stock (stock acquired by an employee which can not be sold until a required holding period is satisfied). Shorting against the box until the end of the required holding period protects capital gains not realized at the time of the short.
I would not want to penalize legitimate hedging actions by the little guy. The cost of using options for such hedging can be much higher than the cost of shorting against the box.
Ugly Chart of the Day: Lumber As Housing Proxy [View article]
The second subsidy was a mistake. See seekingalpha.com/insta... . From the beginning it was clear that it would not be as successful as the 2009 program. See seekingalpha.com/insta... .
You can only sell ahead so far. A third tax credit program would fail even more than the second one has.
Are New Home Sales About to Go Up? [View article]
Are New Home Sales About to Go Up? [View article]
Good article.
You are brave to analyze 2011 projections. I am afraid I don't understand the projections for 2010.
I am still working on my housing demand analysis - maybe this week I'll finish? People (including me) have worked the supply factors into the ground. Demand, not so much.
The new household formation number is quite variable as your graphic shows. Population growth is smoother, between 2.5 and 3 million per year. If we make a gross assumption that the maximum average for new household formation would be roughly about 1/3 that (assuming average household has 3 persons), that would indicate that we should be averaging between 0.8 and 1.0 million new households per year.
If the average household is 2.5 persons, then the rate of new household formation would be between 1 and 1.2 million.
The ten-year average of 1.3 million implies an average household between 1.9 and 2.3 persons, which is reasonable if we assume that new households have, on average, fewer children than established households.
Okay, so we continue with the 1.3 million new households average. Until recently that would imply about 900,000 additional homes needed each year, based on a home ownership rate around 70%. Since that may be falling back toward the low 60% area, the average demand for new homes would project to be less than 800,000 per year, a decline from previous levels of more than 100,000.
The next trick is to figure out how lingering high unemployment will further reduce this demand. I haven't quite gotten there yet.
Home supply is increased by foreclosures, but these also diminish demand. Foreclosed home owners are mostly out of the home buying market for several years at a minimum.
This outlines where my analysis is going. Blast away if you think it is misguided.
It’s Crunch Time for Housing [View article]
It’s Crunch Time for Housing [View article]
For Lennar, I used revenue from sales of homes ($513.3 million) reported for 1Q/2010. When $53.365 million is added for revenue from financing operations and $7.428 million added for land sales, the total revenue you mentioned ($574 million) is obtained.
The $574 million number is more appropriate for ratios to future estimates because financing and land sales are included in the estimates.
A better analysis would involve isolating the home sales revenues from the future estimates and using ratios of home sales revenues only. I haven't tried to do that, but I expect the result is likely to be between your 46% and my 52%.
I think trying to refine the numbers further is not productive since the future estimates are likely to have uncertainties approaching (or exceeding) +/- 10%. The conclusion for my analysis is that this uncertainty will be resolved to the downside (on revenue estimates). I am anticipating that your conclusion will be that there is not that much downside potential.
That is what makes a market. If there was no variation of opinion on revenue and earnings estimates, investing would offer less opportunity for gains (and losses).
It’s Crunch Time for Housing [View article]
I have another article (not yet published) which analyzes supply and demand factors for housing in 2010. Increasing supply and flat demand is what appears to be the likely path this year. That outlook is creating a bias in how I look at the data in this article. If you can create a case for increasing demand, then a more optimistic new home sales growth can be envisioned.
I think the increasing supply is baked in the cake, unless we have a very strong recovery with 5% or higher GDP growth for the entire year. With the addition of a few million to the employment roles the supply from foreclosures could start to weaken.
I will look at my Lennar 1Q number again.
Look forward to your article.
It’s Crunch Time for Housing [View article]
This article has been rewritten and is available at seekingalpha.com/insta...
Additional data has been added. Conclusions are unchanged, but calculation details have changed.
It’s Crunch Time for Housing [View article]
I have run all the numbers through a spread sheet and set up internal crosschecks. Some of the analysts consensus estimates on Yahoo Finance are lower that last week and I found two significant errors in my hand calculation. I now have a 52% improvement in sales needed, not the 74% I have in the article, and not the 44% you calculated.
I will be going over everything again and writing up a new Instablog post with the corrected numbers, a spreadsheet table showing all the numbers, and a new graph.
I will discuss with the SA editors whether the corrected article should replace this one or if some other course should be followed.
The conclusions of the article are not changed. The target area for the second half of 2010 is in the 490,000 to 520,000 region, not the area in the above 550,000 as shown originally. This still implies a strong recovery in new home sales from existing levels if analysts' projections are to be met. There must be a dramatic change of trend in the next 2-3 months for that to have any chance of being realized.
BTW, approximately 75% of the change in the result is from my hand calculation errors and about 25% comes from lowering of analysts' consensus estimates at Yahoo Finance. (Unless, of course, I copied the data incorrectly last week.)
It’s Crunch Time for Housing [View article]
I'm on the road for a few days. I'll go over the numbers when I get home and post a spread sheet summary. I did my calculations by hand. If I have made an error it will certainly show up in the spread sheets. When I have the spread sheet posted (as an Instablog), I'll leave another comment here to alert you.
Pending Home Sales Index Is Down 6.4% [View article]
For new construction, this would be looking forward approximately six months or so to closings. For completed construction and existing home sales, this would be looking forward approximately 30-45 days to closings. Since less than 10% of current sales are new construction (and that includes completed new construction), the average of the forward look would be less than 1 1/2 months.
This is much closer to the customary lead time for something that would be considered a coincident indicator.