Macro Tsimmis

intelligently hedged investment

Beazer Homes (BZH) update #7—the vaguaries of shorting

Posted by intelledgement on Thu, 03 Apr 08

Many investors (and speculators) eschew shorting stocks because, in theory, the risk is greater. And speaking of greater risk, the residential real estate developer whose shares we have sold short, Beazer Homes (BZH) is up 30% in the last four days—which means we are sharply down. Live by the macro, die by the macro…the U.S. Senate is seriously considering a bill to provide a smorgasbord of goodies designed to improve residential real estate values:

  • $6B in bailout funds for homebuilders
  • $10B in loans for refinancing through the FHA
  • FHA limit on individual loans to be increased to $550,000
  • $7,000 income tax credit for buying a foreclosed property
  • $500 annual income tax deduction for property tax payers

Real estate company investors have been giddy in the last week at the prospect of this bill passing. The huge runup in BZH here has moved our position from black ink to red. OK…if this bill actually passes, and if it is as good as advertised, and if the House agrees and the President signs it into law, is it likely to rescue the residential real estate market in general and Beazer in particular? Should we hit the eject button here and cut our—theoretically unlimited—losses?

We think the basic problem here is that both home buyers and home builders made decisions and commitments based on bubble real estate values, and simply providing money for refiancing and encouraging the purchase of foreclosed homes does not address the main problem: too many owners under water with loans that exceed the value of their homes. The only way to keep many of those homes off the market as foreclosures is to renegotiate—not merely refiance—those loans at a reduced principal amount. But “moral hazard” objections and cost considerations—it would take a lot more than $10B to address this problem—make it unlikely Congress will go down this road.

Therefore, while this “buying panic” in the real estate sector provides a good example of the sort of risks one faces when shorting a stock, it does not constitute a refutation of our sell thesis. We still say Beazer is going down (and if you are looking to speculate and are not yet short, here you can get in at a better price than us!).

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