Barron's: "Home Builder Euphoria on Shaky Ground"

"[W]e think that even though home prices have stabilized, the rebound will be too modest and protracted to justify the current lofty valuations of Lennar and its peers. While the long, slow slog toward normalcy in the housing market continues, the data also indicate that the industry has a long way to go yet, making a bet on pricey homemakers likely premature.
[...]
Therefore, if Lennar, one of the sector's standouts, still seems like a pricey and uncertain bet, it doesn't seem that shakier home builders will be able to hang onto recent gains."

Although detractors believed that the word "normalcy" was a neologism as well as a malapropism coined by Harding (as opposed to the more accepted term normality), there was contemporary discussion and evidence found that normalcy had been listed in dictionaries as far back as 1857.

Backlog and Market Cap to Debt Ratios for Major Homebuilders

Following up on posts One and Two about homebuilder ratios.

Debt-to-backlog. Having debt that is a higher multiple of backlog (the dollar amount of outstanding orders for homes) is troublesome. Consider that the amount of cash for paying down debt is going to be a fraction of the backlog

Debt-to-market cap. A measure of the amount of financial leverage.


One thing to keep in mind is that the data not consider off-balance sheet debt, so the amount of debt is understated. The understatement is not necessarily equal - certain builders use more joint ventures to control land. Also, certain builders have more contingent liability for their off-balance sheet debt.

Also, significant numbers of orders in the backlogs will probably cancel. Some builders are better than others at converting the backlog into cash.

Homebuilder Ratio Analysis

In September, I put together a ranking of public homebuilders by their debt to backlog, enterprise value to market cap, debt to market cap, and Altman Z-Score ratios.

I am going to update that ranking, but first I wanted to measure its efficacy at predicting changes in stock prices.

This is a scatter plot of the relationship between the debt to market cap ratio on September 18, and the decline in price since then.


Similar scatter plot showing the relationship between price decline and debt to backlog ratio.

Lennar Sells 11,000 Lots to Morgan at a 60% Discount

Lennar Corp said on Friday it formed an investment venture with Morgan Stanley Real Estate and sold the venture $525 million in properties.

The properties acquired by the new entity consist of about 11,000 homesites in 32 communities across the United States, it said.

As of September 30, the acquired properties had a net book value of $1.3 billion, it said.

The land portfolio includes a mix of raw land as well as partially and fully developed homesites in both active and future communities. The communities are located in California, Colorado, Florida, Illinois, Maryland, Massachusetts, Nevada and New Jersey.