had to add some commentary about whats really happening on the ground with homebuilders. seeing nearly weekly reports about best interest rates ever, existing home sales drops, new home prices all time high, etc, the reports coming across my stream are conflicting as if they dont remember what they (cnbc) just posted the day before.... so heres the deal..
a few of my long time followers know i work in the homebuilding industry in south texas and "i know a guy that knows a guy" . these comments are not on a specific builder since the issues are industry wide.
Sales - sales are best ever ive seen, even better than pre-financial crisis.. difference is the pace is better without the bullshit no income verification, 520 credit scores, no job type of loans that helped cause the financial crisis.. if you roll into a sales center with a 520 credit score thinking youre getting a home loan for $300,000, let me save you a trip. they dont need your business. i took a recent drive thru a couple subdivisions with new homes under construction that had 4-5 different homebuilders and price points. it was assholes and elbows, so much construction happening almost to the point of not being able to drive down the street. saw 95% "sold" signs for homes under construction. that means pipeline. that means they are closing those homes the same month the construction is finished. that means very minimal finished homes that are unsold
Pricing - the difference between a home under construction vs finished is going to be the pricing. those 95% of homes that are sold... why would the homebuilders offer any discounts for those? outside of the paltry 1% or so to use their lender or something similar. with the current pace of customers prices are getting raised across the board.. between a couple thousand or 5% straight up. or you can buy this one that will finish next month for sticker price or if you want to build one in the new section for 3rd quarter 2021 for 3% more. 3% doesnt seem like much but on a $400,000 sticker price that $12000. eventually the price will reach a tipping point but the market is not there yet.
Starts - new home starts and permits are always metrics shown on the business shows, the homebuilders see whats going on and its not a bad problem to have. that being not enough homes on the ground so new starts get increased.. ive seen reports /tweets from homebuilder management about wanting 10% or better growth next year.
Labor - despite what you hear on TV about the unemployment rate, there are significant labor shortages. homebuilding boils down to whats happening at the subdivision level. thats where 1-4 construction managers schedule the daily labor and material work to happen. those subdivisions have their own tipping point. a frame crew can only go so fast, the painter crew can go only so fast, the roofing installers can only go so fast. so the grand visions of just slam more new starts down the pipeline doesnt always work. the homes just get backed up. the labor base is at its tipping point now. again from that guy that knows a guy, good ways to track that are how many people are looking for work. in south texas its generally larger companies that do plumbing, electric, HVAC, etc , they have the contract for multiple subdivisions or certain series. the smaller trade partners (trades) such as painters, carpenters, cleaning crew, framers, etc are selected by the construction manager at the subdivision level and its literally a crew in a van. they have the appropriate insurance etc with corporate but there are no unions etc here. so point being, no one is looking for work.. they have as much as they can handle now. i even heard a really stupid comment from Melissa Lee on one of the Fast Money clips (which is not normal for her but if youre not in the industry you dont know)... she said labor is not a problem in construction with the high unemployment rate, as in there are plenty of people looking for work.. ok , well i guess. but do you know anyone that looks a TPS reports all day or works as a bartender that has lost their job and decides to now want to hang drywall? not happening . current significant shortages for labor are flooring installers.. tile and carpet. just not enough crews reporting in first thing with the flooring companies
Material / Covid - 2020 has seen unprecedented disruptions in the supply chain. innocent events such as a plant in Pennsylvania shutting down from covid because 2 guys tested positive and that plant makes all the cabinets for the texas region, or the window manufacturer shutting down their lines because a guy was at a BBQ where someone had Covid and they supply nearly all the windows in the city for muliple builders or a near miss from a hurricane in Texas rips thru Louisiana where some lumber mills are resulting in really long pieces of lumber being backordered... those really long pieces you would need for rafters. no rafters means the home comes to a stop. the pendulum swings back and forth on whats short, currently shingles and garage door panels, last month dishwashers. i hear roof decking radiant barrier and hardi type siding products are getting tight also. so not just covid, think of all those homebuilders , both public and private, plus the renovation crowd increasing the orders to capitalize on the increased sales.
Stocks - i dont trade futures so i cant participate in lumber price movements and from my research the best play has always been just trade the homebuilders, not the ETFs. the builders tend to move in concert but of course some execution risk. ive been trading LEN Lennar for ages so i just stick to that one. TOL Toll brothers reports a few days prior to Lennar so its a good way to gage the tone of the sector based off what Toll says.
Bottom line - despite the inconsistent CNBC tweets that vary from "its the best ever" comments to "market cooling" , the homebuilders are building as fast as they practically can, customers snapping them up even before construction has started and paying full price most of the time, and per recent conference calls the homebuilder margins are best ever. thats a business i would be interested in trading with a bullish thesis. there will be some give and take as usual. having lived thru the financial crisis with the builders and watching them barely survive, the issues they are working thru now are good problems to have.
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