1 minute readLike it or not, the axis is unambiguous although the progression is far from inevitable: Jobs, household wherewithal, sales volume, prices, broken deals, distress.
Repeatedly, early last year, when we began asking about the likelihood of land impairments hitting homebuilders’ books and business as we played out the impacts of a Federal Reserve looking to eradicate inflation, we were told, “no, it won’t come to that.”
Now, with Selling Season in the front windshield, a big question mark suggests a different response.
Appreciating meaningful sales declines, accelerating homebuilder incentives/ discounts and outright price reductions starting in 2H22, a central focus of ours in the homebuilding sector is whether Impairments are a clear and present danger to future Book Value and homebuilder profitability. Obviously, the Great Housing Recession Impairment experience only serves to amplify our sensitivity, and rightly so, to this controversy as the public homebuilders from 2006 through 2011 wrote- off ~$32B of land pre-tax (65% of ’05 land inventory), or a combined after-tax 61% of 2005’s Book Value at the onset of the downturn. Moreover, the carnage was widespread with individual builder write-downs ranging from 36% to 99% of 2005 equity.” – Truman Patterson, CFA, Wolfe Research
The Pandemic Wake cycle – economic, business, investment, housing – enters yet another test of intestinal fortitude in the next three-to-nine months as what’s “perfectly obvious” contests and contrasts sharply with what’s “common sense.”
Today’s release of a December 2022 More will be revealed.
