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Beazer Homes Can't Build Hope


There are plenty of better places to invest your money for the next decade.

Yesterday, biz TV went ga-ga over Toll Brothers (TOL) order numbers and the "unbelievable" 6.9% cancellation rate. Similarly, on Tuesday Beazer Homes (BZH) reported a shockingly bullish profit for the quarter. Time for me to throw a couple of wet blankets on these parades.

Let me first get to the Toll Brothers cancellation issue. With Average Selling Prices (ASP) above $500,000, and presumably not many of the underlying loans qualifying for the 3% down, "no-skin-in-the-game" GSE loans (but wait, didn't Senator Chris Dodd underpin much of his financial reform bill on the concept of investors having "skin in the game"? I digress.), it's not a stretch to venture that buyers would be reluctant to walk away from 10% to 15% deposits.

In fact, back of the envelope, I calculate that Toll Brothers average forfeited deposit in the third quarter at a little less than $70,000.

The fact that even 7% of the buyers are willing to walk away from that kind of money is hardly something to write home about.

Move outside the $70,000 deposit market, and Beazer Homes' cancellation rate came in at 35%, which reflects the appetite for bailing on contracts where buyers have to put down an anorexic 3% deposit -- for Beazer Homes, about $7,500 of its $223,000 ASP.

Speaking of Beazer Homes and its "stunning" quarterly profit, let's get real for a second. Beazer Homes reported net income of $35 million, of which $89 million consisted of a gain on extinguishment of debt. In other words, Beazer Homes "made" $89 million by buying back its debt at just north of $0.70 on the dollar from bondholders who thought that $0.70 now may be a whole lot better than what they may fetch later.

So, from building and selling houses, Beazer Homes lost $20 million, plus an additional $30 million loss from writing down property values.

If you get giddy over that kind of business model, you shouldn't have to look too far to find plenty.
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