CEC's Homebuilder Strategy: 'Show Me'

Missouri, or "Mi-zur-y", as it is pronounced by the residents there is also unofficially known as the “show me” state. The origin of this sobriquet is not certain but it is often attributed to U.S. Congressman Willard Duncan Vandiver, who served in the United States House of Representatives from 1897 to 1903. While a member of the U.S. House Committee on Naval Affairs, Vandiver attended an 1899 naval banquet in Philadelphia. In a speech there, he declared, "I come from a state that raises corn and cotton and cockleburs and Democrats, and frothy eloquence neither convinces nor satisfies me. I am from Missouri. You have got to show me."

Were the entire country to adopt Vandiver’s slogan the reaction to the housing numbers late last week might have been different. On Thursday, MoM Existing Home Sales were expected to come in at -1.5% but were actually down -3.0%. On Friday MoM New Home Sales were expected to be flat but were reported down -0.6%.

The XHB (SPDR S&P Homebuilders ETF)) sold off initially on Thursday’s number but closed in the upper half of its range for the day and was followed on Friday by a solid upside move closing the week at $13.79, a level not seen since the $14.04 close on October 31st of last year. Evidently the market showed those from "Mi-zur-y" and the other 49 states that was and what is expected to be are two quite different things.

The National Association of Realtors (NAR) said that first-time home buyers accounted for half of the existing home sales numbers. This could, to some extent, be the result of the combination of progress being made by the Government in lowering mortgage rates and the first-time home buyers tax credit which is $8,000 nationally as a result of the stimulus bill and an additional $10,000 in California, one of the states hardest hit by the over-building that occurred during the credit boom that came before the credit bust.

A 30-year fixed rate mortgage averaged 4.80% last week; down just 0.02% from the previous week but down 1.23% from the 6.03% seen a year ago. Additionally, “Interest rates for one-year ARM’s exceeded those for 30-year fixed rate mortgages over the last two weeks; this is the first time this has happened since FRE began collecting data for ARMs in January of 1984” Frank Nothaft, FRE’s chief economist said.

MKM’s chief economist sees the effect of lower rates on conventional mortgages filtering through to “jumbo” mortgages as well as rates on the loans over $417,000 and in some areas over $729,000 are down to 6.3% from 7.7%. The difference between conventional and jumbo mortgages used to be 0.25% so while things are not back to where they used to be they are better than they were.

Adam York, not chief, but an economist none the less with Wachovia was a bit more measured in his assessment of last week’s numbers saying,

“If buyers are tentatively walking back into the market-place, it’s certainly a positive sign; but the market remains under severe stress.” In describing the statistics Mr. York thought they weren’t “necessarily more bad news, but it certainly wasn’t better news either.”

The CEC Strategy is long DHI, HD, KBH and LOW in the homebuilder sector. Long positions are a result of narrowing CDS spreads and rising stock prices and that combination has to be evident to initiate positions. There are a total of 21 names in this area of the CEC’s universe. It will take continued negatively correlated movement between these two markets for the long exposure in this area to increase. As in the CEC Strategy, like those from Missouri, it wants to be shown.

Enjoy the week.

Comments

[Ishortyou:]

well the situation is very simple, there is an overwhelming oversupply in housing inventories that needs to clear up, the homebuilders have and MUST come down to their senses in STOP voluntarily (now that politicians won't do it) or put a moratorium on new house starts, putting new home starts on the market will only hurt their business.

Apr 27 07:18 AM

[ksmithdc:]

Interesting read, thanks.

Apr 27 09:32 AM

[Bestsolutio...:]

You Gotta Luv CA.
They have the solution to the Subprime Mortgage Crisis,
all the foreclosures and short sales.To finally stop the falling
home prices and stabilize the housing market.
As per WSJ article( Google:Tax Credit Gives California Builders A Lift )
Some economists state it is doing nothing to help but it also generates
increased TAX revenues as well as Sale tax revenues on household items
and CREATES employment......THIS IS FOR NEW HOMES PURCHASE!!!

PLEASE APPLY THE SAME PRINCIPLE TO ALL THE UNDERWATER,
DEFAULTING AND SOON TO BE DEFAULTING LOANS and turn the "toxic"
bad loans INTO 100% asset based AAA loans.

The "EVERYBODY WINS PLAN" is simple and it is profitable.
A longer term loan at very low interest rates that


MAKE ALL THE HOMES AFFORDABLE.

As in California
They have added $10,000 to the $8,000 credit
to purchase new homes.

WHY NOT USE THE SAME TACTIC TO END
ALL FORECLOSURES AND SHORT SALES
AND TURN THEM INTO AFFORDABLE HOMES.
END THE MASSIVE INVENTORY ON THE MARKET
AND STABILIZE PRICES.

The "EVERYBODY WINS PLAN"

ALL LOANS TO BE MODIFIED AT 105% of
FAIR MARKET VALUE.
NEW LOAN GOES ON THE BOOKS
It is a 10 year loan at 4% with a balloon payment
of the balance.

THE LOAN
PER $100,000 will have a PITI payment of
$467 per month fixed for 120 Months.

YES,a $100,000 home will be an affordable residence
for an American homeowner for $467 per Month
..TOTAL PITI (PRIN. INT. TAXES, INS.

A $200,000 home will be $934
TOTAL PITI.

TOO GOOD TO BE TRUE?????

It just may be true using the California way-
Federal contribution of $100 per month for interest
instead of cash gift up front
and State contribution of $100 per month for taxes
instead of cash gift up front.
Both fed and state will benefit from giving.Yes If loans are
FDIC and Home Bank Loans they would be
"Stimulating the cash flow to banks and firm their assets.
The state will more than increase their tax revenues by
giving.Giving back on the 8% of homes in trouble will INCREASE
the income from the other 92%
EVERYBODY WINS!!!!

Too Good To Be True????

you will have to ask me for details of the "EVERYBODY WINS PLAN"
in order to find out how 120 payments of $467 with $100 (Fed) and $100 (State)
pays a $100,000 Note at 4%.

I await your request for free details: bestsolutionsfl at aol dot com

Carmen Basilovecchio
Best Solutions Fl Real Estate
9804 S Military Trail E-10
Boynton Beach,Fl 33436

Basics:
On new loan of $100,000.
10 years payments (120)
at $467,$100,and $100 equals $80,040
which is applied as follows:
PRIN -$15,000
INT -$40,000
TAXES-$15,000
INS -$10,000
THIS REDUCES THE AMOUNT OWED ON THE HOUSE
PER $100,000 TO $85,000.
THIS BALANCE IS PAID IN FULL with a new 30 year mortgage.
HOW THIS FOR "SMOKE AND MIRROWS:
*$40,000 paid to FDIC insured banks or Home Loan Bank
with no government stock issues
*$15,000 paid in property taxes,a net gain
*and if you really want to help the economy how about
$10,000 IN INSURANCE PRIMEUMS GOING TO AIG
TO HELP GET TAXPAYERS MONEY BACK.
HOW MANY JOBS WOULD BE SAVED AND NEW ONES CREATED.
And do not forget ,about 6 million homeowners with excellent credit with EQUITY
(the ignored part) in their home.What do you think they will do the the most
important part of the economy-CONSUMER SPENDING?

Apr 28 08:00 AM