BearishInactive · since Nov 11IndustrialsBuilding Products & Equipment · opened Oct 12
Falling home prices cut builder margins, forcing them to start fewer homes and buy less from suppliers
3.7Early
7 sources · last evidence 24 days ago
Trade thesis
Housing demand is fading, with four in 10 builders cutting prices, single-family starts plunging, permits at a 3-1/2-year low and Fitch turning its Lennar outlook negative. The shares have moved the other way, edging up while the S&P 500 fell. Nothing in the last month argued against it, and the main risk is builders keeping their pace on thinner margins, tested October 29 when Builders FirstSource reports.
Updated Oct 21
What's new?
Oct 20ForSingle-family housing starts plunged and building permits hit a 3-1/2-year low, so suppliers like Builders FirstSource face fewer orders.
Oct 19ForFour in 10 builders are cutting prices as buyer traffic hits a 14-year low, squeezing margins while construction costs rise.
Oct 13ForFitch turned its Lennar outlook negative on shrinking margins and demand risks, an early sign builders may cut back.
Who gets hurt
Building Products & Equipment, Residential Construction
The reasoning of the connection that opened this thesis. It is not updated.
The bull case
Builders FirstSource's revenue had already fallen 9% in the June quarter, and its shares fell 6.0% in the five trading days to October 9. Builders' margin squeeze was also visible before the report: Lennar's earnings fell roughly 48% in the quarter to August 31. The price cuts are therefore an added signal rather than a new shock. They could also be local rather than national, leaving overall construction little changed. Lennar has said it is keeping its sales pace rather than cutting volume, which works against the step from thinner margins to fewer starts.