This is combined for HOV and BZH and explained in fairly simple terms for everyone here but with my opinion added.
How do home builders work? They buy land up to years in advance, they build houses in communities, they advertise and sell those houses. From the time they buy the land until the house is sold and money is in their account the homebuilders take out loans for the value they put into the homes. Homebuilding works great in a rising economy especially if you couple it with increasing housing prices. Imagine this. You are a homebuilder, you project 2 years out the $150 K investment per home will gross you a $200K home sale. Prices for homes go up 20% and that $200K gross becomes $240K gross. Multiply that by your homes and that is a lot of profit.
What happened a few years ago? With the housing crash not only did the prices of housing go down but oversupply happened due to foreclosed homes. Homebuilders got hit heavily. Imagine it costs you $150K to build that same house but the economy tanks and that $200K projected for a new home becomes just $160K. If you add to that foreclosed homes that were bought at $200K 2 years ago and now at just 2 years old sell at "firesale" prices of $130-$140K and you have a recipe for disaster as a homebuilder. You either choose to wait it out and pay interest or lower your new homes to compete with these almost brand new homes by offering sales incentives up to and including selling at a small loss just to get rid of inventory. HOV stock, on the luxury end of the market, almost went bankrupt from what I saw a few years back.
What is going on right now? Home prices are rebounding. Some high growth areas have seen 15% or more home appreciation per year recently. Foreclosed home inventories are drying up. Mortgage rates are relatively low still. Unemployment is going down. People want to buy and the overall sales for the economy seem to be going up. Great recipe for homebuilders? Short term I would agree 100%.
One of the best indicators of preprofitability is purchases of land as you need land first to get to the final sale of the home process. HOV did a large deal with Blackstone and bought land on credit awaiting expansion. Short term 3-5 months HOV will see much higher appreciation than BZH in my opinion. Especially if you couple it with the fact that HOV at the luxury end has a presence in those markets that have more luxury homes and also are some of the highest housing increase percentages in housing costs lately showing rebounds. Beazer is looking to expand into those same markets and has a more long term 1-3 years price increase trend. HOV's greatest weakness is it's very high leverage. If the economy turns again and/or housing price increases cool down a bit in these markets HOV will be in for a rough ride. Some estimates have HOV is already projecting more than 10% /year increases in the final selling prices of the homes it's just buying the land for now and that is why it paints a pretty picture going forward. People will buy you up as a homebuilder when you paint them a good picture down the road in 2 years and show them the good faith by "sticking your neck out" and making the large land purchases now. With increases in mortgage rates and other risk factors will HOV deliver by 2016? My bet is , something will come up, something bad with a higher than 50% probability. Short term I see HOV getting higher faster than BZH my May.
BZH from the news I see is looking to expand into some of these growing markets HOV has but is slower on making additional investments in new land. It is waiting out the market instead of being a market leader/early adopter of trends like HOV. Long term I see them having fewer risks than HOV even if economy turns worse again but a slower growth both short term and long term (if economy stays good).
With the rising mortgage rates, past May/June timeframe it is unknown where housing will go. If I was long term, if the economy stayed relatively stable and mortgage rates did not go to say 7% 30 yr by September I would consider holding on to BZH for 1-2 yrs and reevaluating monthly on HOV.
I could have listed articles but I thought this common sense explanation was a little better understood by any investor.
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