Cheap Houses Explained

By Dr. Duru written for One-Twenty

January 26, 2006


In the last two weeks, we have been deluged with earnings reports and news from various homebuilders. Last week, I joined the chorus of hecklers amazed at the firesale of houses that Centex threw down. This week, I decided to listen in on Centex's earnings call. I always get a kick out of the earnings calls for companies that sell us stuff - you get to hear the real deal. When we are buying their stuff, they are all about the consumer's welfare. When we are shareholders and analysts, they are all about taking as much green out of the consumer's bank account as possible - for as little cost as possible to boot. Anyway, I digress...

Give the analysts credit. They were all over the firesale story. At least half of the folks with questions brought up the "discount issue." The Centex executives went to incredible pains to downplay the financial impact of the discounts. They also emphasized that these sales are well within the bounds of normal operating procedure. The sales are part of promotions on very specific homes that are hard to move otherwise (they never explained in great detail what is wrong with the homes - I did hear something about being near power lines). The promotions are dressed up to assist in marketing efforts to drum up interest in Centex inventory right before the home-selling season kicks off in February. Apparently, other builders have picked up on the idea as well. The Centex executives also reassured the analysts that these discounts of 20% and more are not really all that big when compared to the tremendous run in prices these same homes and locales have seen over the past six months.

To me, the true headline is that earnings growth is truly slowing down. Centex gave guidance of 34% earnings growth for 2006 and 13% in 2007. Now we know why the market continues to refuse to pay large multiples for these homebuilders. All signs point to cooldown. Centex admitted that house flippers have been exiting the Phoenix and Washington D.C. markets faster than anticipated. However, they characterize this change in these over-heated markets as a transition to a more normal housing market. Time will tell, but there are pockets of good news like Texas and the Carolinas where sales are actually accelerating. Centex also continues to sell out in parts of California. They are also not seeing a slowdown in the percentage of buyers who are first-time homebuyers.

At the end of the day, Centex's stock finished the day down by 3.4% from the previous day's stock price. THe stock is still well within a long-term uptrend. The financial news is not good, but it is not all that bad either. The housing boom continues to delfate....ever so slowly.

As always, be careful out there!

DrDuru, 2006