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Long puts on tract home builders? How long?

Bare with me, a lot to uncover.

I work in a drywall company and there has been constant price increases for MATERIAL over the past year starting since almost October of last year.

Drywall, aluminum, lumber, insulation are all receiving price increases from the manufacturers.

Part of the reason we saw material increases was so manufacturers could make up losses from COVID. Seems like they realized how much money they can make off of this and kept up the price increases, even if they broke even with the first increase.

Today, we had our weekly meeting and our boss, owner of the company, was telling us that Mcstain Neighborhoods, a builder in Denver, CO has stopped their building because they weren’t making any money on the last 5 houses they built. According to my boss, they had to write $20,000 checks in order to complete the house, racking up to a whopping $100,000 with just 5 houses.

Here’s why I wanna buy puts (not sure how far out though)

Builders are selling houses BEFORE they’re built, on fixed prices.

But the house is already more expensive to build DURING production, resulting in a profit loss from the builder because they are now paying to build this house.

Example:

– Buyer picks a house model. Cost to build this house is $250,000

– House sold at $400,000 – builder can’t change price.

– Constant price increases changed the build cost from $250,000 to $420,000.

– Builder pays $20,000 to finish the house.

Here we see one builder slow down its building because they are losing money when the house is closed. Building permits are DOWN 35% from last year. Building has been slowing down and it’s only a matter of time until it comes to a halt.

How many more builders are going to follow?

How many builders right NOW are talking about slowing down building?

Is this priced in?!?!??

Every month, there is a new price for our drywall, EVERY MONTH.

My prediction: Builders will come to a halt sometime in the next year, I’d be surprised if it hasn’t stopped by April of next year. These houses are getting too expensive to build and the builders who own all the land, are stopping production.

Many things are going to happen here.

Materials for building will lose demand. Very very fast.

People are going to temporarily lose jobs until prices come back down.

Profits are gonna be off the table, who’s making money if there’s no work happening?!? Builders don’t wanna pay that expensive Material! No material. No House.

BUT, is this infrastructure bill only going to cause more inflation? Is every aspect of building going to be affected by the infrastructure bill? Only a few?

Please, be my guest and throw down some tract home builders, commercial builders, any that have a public traded stock.

So far, we work with Century Communities (CCS) , they are one of our builders with a publicly traded stock. Their price is sitting at $70.

I would like to buy 6-8 month put contracts on this stock because im expecting building to slow down, and im expecting profits to fall off.

But is this already priced in?

There’s money to be made during this transition of builders fighting against manufacturer pricing, but I would like some input on where you guys would put your money if building does happen to come to a halt.

Side note: if you looked at my profile, you’d see I’ve made some dumb investments that my 19 year old self isn’t too proud of. But I do eventually hope to seek a good understanding of the market and here I am witnessing the fuse getting closer to the bomb and trying to make money off of it.

TLDR; Materials to build a house is getting expensive. Builders are starting to slow down their building until prices come back down. This may create a domino effect and cause many jobs to be off the grid temporarily. Puts on builder companies, material manufacturers, and all those rich corporations that build is my guess, not financial advice.

What do you think?

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9 Comments

  1. As said above, this is not the case. I work in the industry and 1. Some material costs have come down and 2. The largest tract builders have stipulations in the contract that can raise the price due to rising costs of materials + contractors/laborers. U.S.-wide, we’re only about 40% of new homes built per year compared to 2006 causing demand that cannot be fulfilled.

  2. There’s a whole world outside of Denver kiddo. You maybe paying attention to the markets but how they intermingle is a bigger picture that many have a hard time getting a head of. If anything you have highlighted a loop hole that developers can use to ensure they profit by giving themself a way out of contractual limits and tacking on a few extra percentage points to increase margins. If people find a way to take advantage of others they will do it. Just a matter of when.

  3. My only issue with this is that if the cost of building the house is X dollars based on the current price of materials then materials increase in price then the cost of building the house should now reflect the increased cost of materials. This obviously becomes an issue when the builder sells jobs say 6 months to a year out based on previous materials cost that’s because materials prices seem to be increasing at a quicker pace than in the past few years. It seems to me the best way forward for builders is to price future builds based on expected future materials prices based on the rate of increase..

  4. Materials are only part of the cost of building a house. Pretty hard to imagine a major homebuilder not hedging materials costs. And if the market is hot enough to keep materials costs high, then builders have pricing power. I can see them getting upside down on a project now and then, but as long as the market stays hot they should do fine. If real estate crashes however building dries up and there are a lot of bks.

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