Lennar (LEN) 2007 Q1 Profit Sharply Drops

Well, it was starting to happen and now it's prevalent: National Homebuilders have lower profits and see no home price stabilization in sight. From Marketwatch, Lennar reported first-quarter net earnings of $68.6 million, or 43 cents a share, for the three months ended Feb. 28, down 73% from the $258.1 million, or $1.58 a share, earned in the year-earlier quarter. Revenue overall dropped to $2.79 billion from $3.24 billion as revenue from home sales fell about 10% to $2.62 billion. Orders were down nearly 30%

In a maverick move and one in which I applaud, Lennar withdrew its previously (read Jan '07) stated target of topping 2006 numbers, and going as far as not issuing new guidance. I applaud this move because with the housing bubble bursting, instability of home prices, unknown land impairments, increased difficulty for buyers to qualify for loans, and increasing inventory, any homebuilder trying to issue numbers would be trying to pin down a moving target.

Math & Methodology of Housing Numbers

Doug Kass' article, The Simple Math of Subprime's Slide:

It is truly remarkable how the slightest provocation (last week's "solid" home-sales headline) had the media and other permabullish types declare that the housing market has finally bottomed (again!) and that the impact on the subslime mess would be contained.

Nicholas Yulico's article, Home-Sales Data Debated:

The Commerce Department reported much-worse-than-expected new-home sales data for February, with sales dropping 3.9% from January and inventories hitting fresh highs.

The news comes after seemingly positive housing data last week. The National Association of Realtors reported Friday that sales of existing homes climbed nearly 4% in February, beating economists' estimates.

My observations later...

Buy a House, Be a Contrarian (Yeah, Right!)

This morning on CNBC, 30 minutes after the Commerce Department reported single-family new home sales were down 3.9% in February versus January and down 18.3% compared to year ago levels, David Michonski (president/CEO of Coldwell Banker Hunt Kennedy) squared off against Dean Baker (Economist and co-director of CEPR) to discuss if now is a good time to buy a house. Could you guess who took which side?

While Dean Baker pointed towards the newly release sales numbers and the general psychology of buyers believing prices could go lower, Michonski was expectedly upbeat about the housing market. If fact, Michonski stated that the median price for a single-family home was up 1.1% in 2006, slightly lower than the historic 4%. He ventured that median prices were slightly down last year, but should return to the the historic 4% in 2007. He further followed the REIC mantra by saying it's hard to be a contrarian and buy a house now, and that now is a good time to buy a house and that a 6-month inventory is a balanced buyer and seller market. Even the host of CNBC asked Michonski if he is doing a disservice to his customers by saying that kind of thinking out there if the face of economic indicators and sales numbers that show housing weakness.

To Dean Baker's credit, he didn't get into a cat fight with Michonski. He pointed out that these are monthly numbers and can only suggest a trend, but he did nail Michonski for the median sale price rising 1.1% in 2006 comment as being disingenuous. Baker has read the tea leaves (indicators/numbers) and is not paid to selling homes as Michonski is.

DirectBuy

DirectBuy has been advertising quite a bit on TV and I've always wondered if they were as great as touted on TV. In a nutshell, the commercial states that they are America's #1 place to buy big ticket home improvement items for your home. The commercial entices you to call the phone number to receive a visitor's pass to visit a nearby DirectBuy showroom.

Well, based on online testimony, the membership for DirectBuy is $5000. The sales reps are trained to force you into forking over the $5000 during your free visit or you're banned forever. As for their prices, people note DirectBuy is higher than prices you would get as Lowes, Home Depot, Sears, etc. Shipping prices, shipping damage, return policy, and product delivery times were also huge negatives noted by members.

Infomercial Ratings

Infomercial Scams




SCAM

Home Builders' Cancellation Rates and Impairments

Part 2 - Land Impairments

The headlines that have gained some traction from the national home builders since Q4 2006 have been standing inventory, cancellation rates, and land impairments. Yet, the Philadelphia Housing Sector Index (^HGX) has been up 10% since mid-December, and this increase takes into account the 10% February drop for the index.

The market appears to place greater weight on the latest headlines declaring reduce inventory and lowered cancellation rate (even though I question how those number are presented) and lesser weight on the issue of land impairments. What exactly are land impairments? Periodically home builder must review the value of the raw land (among other things) held in inventory. Under accounting rules, when the value of the land has decrease at the time of the review, a land impairment must be entered as one-time non-cash expense against earnings. Well, many home builders were snapping up raw land at ever exorbitant rates in the last few years with the expectation the housing boom would continue for years to come. Unfortunately, the housing market has slumped and many home builders are sitting on land options that are not going to be exercised and raw land that has greatly decreased in value.

In Q4 2006, these were the land impairments and options write-downs reported by selected home builders:

Hovnanian Enterprises - $336M (12/2006)
Pulte Homes - $88M (2006 Q3)
Toll Bros - $60M (projected in 12/2006); revised range of $60M to $160M+ (2/2007)

It is this last example that has piqued my interest. The markets have treated these write downs as one-time charges and have not punished the stock. Given the continued housing slump, these write downs going to continue. What also worries me is the methodology in calculating these land impairments. Land options losses are relatively easy to calculate as the money used to purchase the options is lost.

So is there a standard in which the home builders use to value their land impairments? It's apples to oranges comparison but this reminds me of the accounting irregularities during the dot com era when companies would hold back reporting of revenue if the company knows they will meet the current quarter's earnings estimates. The held back revenue would be used in future quarters in case the company did not meet estimates.

Home builders could decide that since the current quarter is already "lost", they could apply more land impairments during that quarter. The thought is that if they're already going to miss earnings estimates by a significant amount, what's another few millions dollars recorded as a lost? If more is written off now, less can be written off later. Or conversely, if the home builder is close to meeting the newly lowered earnings estimates based on recent land impairments, why not report less land impairments now to meet estimates, and record the impairments in a future quarter?

It's appears to be a giant loophole home builders can exploit to manipulate their stock price, especially during earnings time.

Bad Signs Around Town

I'll start off by saying I'm notorious for correcting emails circulating at work for spelling errors and basic grammar issues. So, it should come as a surprise that I am bothered by this homemade sign for a barber. First there is the obvious issue with spelling. There is the off chance I am completely wrong and this is actually a sign for the fitness gym loaded with barbells located in the same strip mall, but I doubt it. Then there is the problem with word placement. What is with all that white space? Maybe use bigger letters and center the letters?

A mile down the road is a homemade telephone post sign for handyman services.

This last sign is for the Grand Opening of a Great Clips. There is actually nothing wrong with the sign, but I find it strange to advertise a "haircut sale". I really don't know how else to word it, but "haircut sale" just has a strange ring to it.

It's a perfect time to buy!

I have to give the folks at Sacramento Land(ing) credit for digging up this research nugget posted on March 3rd from Jimmy Castro, Team Leader/Owner (and Snake Oil Salesman for the Re/Max Gold in Sacramento).


Here are a few choice quotes from the article:

JC & Associates with RE/MAX Gold keeps its fingers on the market's pulse-and its latest assessment gives the 2007 market a big thumbs up. JC & Associates, in fact, sees current conditions as "virtually ideal" for buying now.

In addition, there is an unprecedented array of low-rate mortgages available to finance a home purchase, including loan programs that require no down payment. The market climate for finding and affording that dream home may never again be this favorable.

Not only have prices stabilized at attractive levels... (with this chart at the top of the article)

Real estate activity has picked up in the last few months and we expect the pace of home sales to quicken even more as the traditionally busy spring market gains steam. Given this uptick in activity, making a home purchase sooner in 2007 rather than later may well prove to be the savviest financial move you could make this year.

Honestly, I could have put up the entire article as it is filled with these senseless quotes. Somehow having a real estate license allows people to start proclaiming they are experts.

Jimmy may want to revise his article since many of the sub-prime lenders are going kaput and the major mortgage originators are becoming more selective in their loan approvals by reducing/eliminating 100% LTV (loan-to-value) financing, piggyback 2nd mortgages, and many of the loans classisfied as sub-prime.

3 Day Blinds (and More?)

I was recently reminded about an incident at a "3 Day Blinds" while in Rancho Cordova to pick up artwork I had framed at Michaels.

Three years ago I worked with a woman that needed to have some blinds ordered for her home. Since there was a "3 Day Blinds and More" located in the Target shopping center in Rancho, she went there during her lunch break. When she came back, I asked her how the purchase went. Well, it didn't, and here's why.

When my co-worker tried to confirm her order would be available for pick-up in 3 days, she was told it would take longer. This prompted her to ask why the chain was called "3 Day Blinds"? The answer was a bit ridiculous and funny. The salesperson responded to her by saying the store is called "3 Day Blinds and More". And this would be a situation where it would be "and More". Some more back-and-forth ensued with my co-worker finally leaving without purchasing any blinds.

With driving past this same store last week, I noticed the "and More" portion of the store sign was no longer there. Either too many people complained about the ridiculous "and More" clause in product delivery or these stores no longer carry items beyond blinds.

Update 2 - 3/09 Sutter Hill Gas Prices

An article by Liz MacLeod in the Ledger-Dispatch prompted me to provide the latest follow-up on gas prices in Amador County. For the past week, gas prices have increased on a near daily basis. As of today, 3/09, Safeway has bubbled their price for regular unleaded gasoline to an all-time Safeway high of $2.94, while the Chevron and Shell nearby are priced at $3.21 and $3.09, respectively. Without further adieu, the latest chart:


The Chevron is 23 cents higher than the average in Folsom, located in the Sacramento Valley. A 23 cent difference equates to a 7.2% higher pump price at the Chevron compared to the Folsom average. Amador County residents usually mention the pump prices have been historically 10% higher than the Valley. If the highest priced dealer in Amador is pricing only 7.2% higher rather than the mythical 10% difference, then Safeway is starting to make a dent in the prices in Amador, but there is still a ways to go.

Home Builders' Cancellation Rates and Impairments

Part 1 - Cancellation Rates

I'm going to pick on Robert Toll, CEO of Toll Brothers Inc, the luxury home builder. If you remember, Toll put on his swami hat late last year and called the housing market bottom to be in Q1 of 2007. Toll had to then eat his words a few weeks ago when the bottom was still not in sight.

Baghdad Bob Toll struck again during a March 7th webcast during a Citigroup-sponsored conference by saying "the company's cancellation rate has recently moved down to 16% from a peak of 36%."

Ok, great Bob! How about reporting the number of contracts signed during this same period? Those statistics by themselves tell us absolutely nothing. For academic giggles, let's make up some numbers that Bob has thoughtfully omitted. If Toll Brothers had 100 buyers under contract in the previous period and only 33 buyers under contract this period (based purely on the 67% drop in Q4 earnings), the number would shake out as such:

• Previous period > 100 buyers * (1 - 0.36) = 64 buyers
• This period > 33 buyers * (1 - 0.16) = ~28 buyers

The bottom line numbers are totally ignored when Bob only mentions the cancellation rates. How the mainstream media (MSM) doesn't call Bob out for his smoke and mirrors tactics is pathetic. I can't be the only person who questions these soundbites the MSM latches onto, can I?

Part 2 - Land Impairment Figures

...to be continued.

Viability of Jackson Hills Development

This entry regarding Jackson Hills Golf Community will not discuss the environmental and economic impact to the city of Jackson or Amador County. The entry is also not to skewer the developement company behind the Jackson Hills project, New Faze Development. In fact, from what I have read, I'm rather in favor of the infill projects New Faze has taken on in the past.

Rather, let's focus on whether it makes economic sense to put in another golf course community in Amador County. As a golf course destination, the county already has Mace Meadows and Castle Oaks. Within a 30 minute drive are a plethora of other golf courses in Sacramento. There were rumors, at one point, that Jackson Rancheria was looking into building a golf course on their property, but that talk seems to have diminished. If a deep pocketed tribal casino in the county does not go forward with a golf course because the numbers don't make sense, why should another course be built.


Next, let's look at housing market. For all intensive purposes, the housing bubble has popped. I don't need to go into the figures that have been put out by all the other blogs. If you need some numbers, please click on the recommended blog links and go from there. Home sales have slowed to almost a screeching halt, mortgage lending standards are beginning to tighten, and Amador County is not immune to any of these factors, just about 6 months lagging.

So do we have a crystal ball for how home sales may fare for Jackson Hills? Possibly. What about Castle Oaks in Ione? Castle Oaks is also a golf course community in Amador County. The lots currently in development are through JTS Communities. Since sales began in late 2005 for their mid-range Premiere and high-end Masters Series homes, their sales numbers are as follows:

• Premier Series - Phase 1 - 81 lots / 26 sales / 3 spec homes = 32% sold in 16 months
• Masters Series - Phase 1 - 59 lots / 17 sales / 5 spec homes = 28.8% sold in 16 months

In fact, JTS has begun construction on 7 additional spec homes on the Masters lots. Perhaps one of the ways JTS has protected itself from the housing collapse has been its "built to order" methodology. They don't build unless a buyer places a deposit on a lot, which makes me wonder why they are putting up 7 Masters spec homes. It's clear from the numbers above that Castle Oaks isn't the booming success JTS has grown used to from their flipper friendly developments in Lincoln, West Sacramento, and Rancho Cordova.

I wonder if New Faze will go about planning the Jackson Hills development as most home builders do. That is, phases are planned and built out with the expectation of buyers. With the current housing market condition, and no signs of improvement in the near future, New Faze could be sitting on quite a bit of standing home inventory.

Not only does the Jackson Hills development have to compete with the on-going 7-10 year Castle Oaks development, there are also plans for a 1,334 home Gold Rush and a 588 home Wicklow Way project in Amador County.

New Faze should realize that the housing bubble has burst. They should also look at the difficulty JTS has had in Castle Oaks as a barometer for additional golf course communities in Amador County.

Boost Mobile with GPS, are you serious?

New commercials with Oompa Loompa wannabes have been hitting the airwaves advertising Boost Loopt. In a nutshell, it's a cell phone with GPS capability. Your friends and family can broadcast their location within a user defined private network. You cannot find out the location of your friends and family at your request. They must update their location regularly or all you'll see is their last broadcast location and when it was broadcast.

Sure, there are the questions regarding user privacy. Law enforcement can probably get a subpoena and track exactly where you are.

The real question is... would you be offended if your spouse, boy/girlfriend gave you this phone? It's almost like having your own private eye on your significant other. I can see some real advantages for college students, friends, parents to have this phone.

Before you buy this phone for your spouse or significant other, prepare yourself for strange looks or conversations about trust. Really think before you act.

Cannibalization of Starbucks

Now, you may read the title of this post and think that I'm going to start on some rant about the Starbucks density in my neighborhood. I'm sorry to disappoint you. There are many blogs and articles serving that capacity. In fact, a quick Google search acknowledges this.

No, rather I wish to discuss the newer phenomenon of having two Starbucks within the same suburban shopping center, notably a stand-alone Starbucks competing with a Starbucks-within-a-supermarket (SwiS). In the Sacramento area, these SwiS version are located with Safeways. A search through the Starbucks locator reveals the existence of SwiS in Albertsons stores also.

Now, I shouldn't be questioning the economics of the Starbucks versus SwiS phenomenon since I'm sure Starbucks corporate bean counter have already done the analysis. I'm more interested as to why as a consumer I would choose going to a Starbuck rather than a SwiS. For instance, at a Safeway SwiS, by using my club card, I am awarded a free coffee drink of my choice after 7 coffee purchases. Let's do some simple math here, if I am purely a regular coffee drinker (at a price point of $1.50), I would be enjoying 8 cups of coffee at the price of 7.

7 / 8 = .875, so that is a 12.5% discount

For a drinker of regular coffee, you'd save 18.75 cents per cup.
For a drinker of Venti Frapp, you'd save 56.25 cents per cup.

Of course, the math doesn't take into account if you plan on "gaming" the system by normally ordering regular coffee and splurging your free drink on a Venti Frapp. Or normally ordering a Tall or Grande, but utilizing a Venti for the free drink. Or adding shots to the free order when you normally don't. Or doing a run for your office mates and giving yourself the free one.

I suppose if you're a person of means and don't care to save 18-60 cents each time you need a Starbucks hit, you've probably stopped reading this post long ago. Otherwise, why choose the Starbucks over the SwiS? Is it the ambiance? The big comfy chairs? You need the location for a business meeting? Ok, I have to question your business if you hold meetings at a Starbucks. It's not really a "business" meeting. It's you having a social get-together.

Anyhow, I'm guessing the business lost to the Starbucks is gained by the customers that might not have been customers if the SwiS was not so conveniently located inside the supermarket. Perhaps there is a licensing fee or per cup fee that is paid to Starbucks corporate. Anyone have any insight?