The Denver Post published an article last week titled, “Major cold front slams Denver housing market in September” (note, weather-wise, September was one of the warmest and driest in many years). Single-family home sales in September plunged 30.5% from August and 21.7% from September 2017. Condo sales fell off a cliff, dropping 43% from August and 17.3% from August 2017. Normally inventory drops slightly in September. This year inventory in September soared. The median price of homes sold fell 3.8%. The article said the high-end of the market – homes worth over $1 million – fell 44.4% from August to September.
In terms of economic trends, Denver historically has been representative of the same economic and demographic trends nationwide. Based on subscriber emails and articles I’ve read from around the country, the activity in the housing market nationwide is similar to Denver’s.
New home sales for August, which were released last week, showed another year-over-year decline on a SAAR basis and missed the Street’s expectations. In addition, the 627,000 SAAR print for July was revised down 3% from 627,000 to 608,000. Revisions for June and July together were taken down by 39,000. The fact that new homebuilders are sitting on a near-record level of inventory (measured both by value and units) contradicts the NAR’s contention that home sales are declining because of a lack of affordable inventory. Recent results from lower-end, lower-priced homes (Beazer, DR Horton and Pulte) show demand for “affordable” homes is waning.
One indicator supporting my view is the response of KBH’s stock after it reported earnings on September 25th . The past several quarters KBH stock staged a multi-day rally after it reported earnings. Although KBH reported a revenue and net income “beat” and spiked up at the open the next day, the stock closed down 3% from Tuesday’s close. KBH’s stock closed 5.8% lower on the week.
While KBH’s revenues, operation income and units delivered showed impressive gains over the same quarter last year, its new orders showed very little growth and the value of the new orders declined year-over-year for the quarter. Furthermore, the Company’s order cancellation rate increased to 26% from 25% in the year earlier quarter. While KBH’s income statement looks impressive in the “rear-view” mirror, the operating statistics that give us insight into future quarters are showing a definitive slow-down.
KBH is trading at a 14x P/E ratio. Historically, homebuilders trade with a 5-8x P/E when they actually manage to generate “E.” I believe it’s safe to assume that KBH’s earnings will decline for at least the next several quarters. This means that KBH’s stock price will drop from both lower earnings and P/E ratio compression. In fact, I believe this will occur with all the homebuilder stocks.
KBH stock is down 37% from high in mid-January this year. I believe over the next 12-24 months, the stock price will be at least cut in half.
The commentary above is an excerpt from the latest Short Seller’s Journal. My subscribers and I have made easy money shorting KBH and other homebuilders. This week I feature a little-known homebuilder and explain why its disclosure last week shoots a hole in the National Association of Realtors’ propaganda that the falling home sales is attributable to low inventory. I also feature two other great short ideas – one in retail and one in auto finance. You can learn more about this newsletter here: Short Seller’s Journal information.