by Dave Kranzler, Investment Research Dynamics:
The National Association of Realtors (NAR – existing home sales reports) and the Census Bureau (new home sales reports) report monthly sales on a “seasonally adjusted annualized rate” basis (SAAR). Notwithstanding the reliability – or lack thereof – of the “seasonal adjustments,” it would seem absurd to report monthly home sales on an annualized rate basis.
To the extent the NAR and Census Bureau’s data sausage-grinder is fed inaccurate data and thereby vomits a bad monthly “adjusted” number, annualizing that result magnifies the error. As it turns out, when sales are declining, the regression models used to “seasonally adjust” the data collected overstates actual sales (year over year monthly existing home sales have declined 13 months in a row).
A better measure of real homes sales is to look at actual numbers from companies in the business of pimping used homes or building and selling new homes. Realogy (RLGY) is the perfect laboratory rat for existing home sales. Realogy is the leading provider of real estate services in the U.S. under the brand names of Coldwell Banker, ERA, Sotheby’s, and a few others. Its shares plunged 15% on Thursday as losses from Q4 accelerated in Q1. Revenue declined 9% year-over-year vs a 6.2% in drop in Q4. The culprit was a 4% drop in transaction volume. The actual “same store sales” decline was likely larger because RLGY’s Q1 numbers are skewed by the acquisition and franchising of Corcoran, making the this quarter’s year/year comps irrelevant.
If any business reflects the true condition of the housing market, it’s RLGY. Existing home sales represent 90% of total home sales and RLGY is the largest real estate brokerage concern in the country. Yes, some select areas may still be showing “red embers” of activity. But most of the country is headed into what will ultimately be a severe housing recession. RLGY was down another 8.7% on Friday. It’s now down 33% since reporting its numbers last week.
RLGY may still be worth shorting here. It’s bleeding cash. It lost $135 million on an earnings before taxes basis (the income statement did not show operating income as line item). Its operations burned $103 million. The Company added an additional $100mm in debt, which now stands at $3.3 billion. The bond issue which it floated in Q4 had a coupon of 9.375% – a triple-C rated yield. Triple-c rated companies typically have a high probability of eventually going bankrupt. The tangible book value of the company – i.e. subtracting goodwill – is negative $1.6 billion. I wouldn’t touch RLGY’s bonds any more than I would touch TSLA’s or NFLX’s bonds. RLGY is on track to run out of cash by the end of September.
In the new home sales arena, Beazer (BZH) stock has plunged 18.4% since reporting its latest quarterly numbers on Friday. BZH’s closings were down over 10%, revenue down 4.6% and its gross margin plummeted (sales incentives to move inventory). Even adding back the write-down of California inventory, BZH’s net income was nearly cut in half and new orders were down close to 8% in the first 6 months vs 2018.
Note: it looks like homebuilders will begin the inventory write-down cycle again. It starts slowly and snowballs into an avalanche. So much for the “tight inventory” narrative that shoved down our gullet the NAR’s little con-artist, Larry Yun.