U.S. Housing: The Only Positive Sign I've Seen

When the boys at Brookfield Asset (BAM) are buying, I am intrigued.

August 08, 2009 David Friend
THE CANADIAN PRESS
Executives at investment giant Brookfield Asset Management Inc. are confident they can scour the international market for distressed assets and acquisition deals for at least two more years, even if the economy starts to recover and the U.S. housing market rebounds.

"While the capital markets are more positive than they have been for a long period of time, that doesn't mean that people who overfinance their properties – or are in extreme distress – are fixed," chief executive Bruce Flatt said on a conference call. "There are still a lot of opportunities out there, and we think there will be for 24 months minimum. I don't think we feel any rush to be doing anything."

Flatt told analysts that the company has spent the last year and a half buying out partners, acquiring rights offerings and making other deals for distressed assets. "We still believe this is one of the greatest investment periods for these type of assets that we've seen in a long time," he said. He also said Toronto-based company wants to put capital into "distressed opportunities as we find them, and where we have an operating base."

Brookfield said profits in the second quarter rose by 33 per cent to $147 million (U.S.), or 24 cents per share for the quarter ended June 30, up from a year-earlier profit of $110 million or 17 cents per share. Cash flow from operations declined during the period to $276 million or 46 cents per share, compared to $378 million or 62 cents. Brookfield said last year's cash flow was boosted by special items. Total quarterly revenue fell to $3 billion from $3.4 billion a year ago.

Brookfield's massive office property portfolio – including Brookfield Place and the Exchange Tower in Toronto, Bankers Hall in Calgary, New York's World Financial Center in and Bank of America Plaza in Los Angeles – is 95 per cent occupied. The company reported that it has also contracted about 80 per cent of its renewable power generation until the end of 2010.
Chief financial officer Brian Lawson expressed some optimism for the company's residential business.

"The results from our number of our shorter duration businesses, such as our residential operations, appear to have bottomed out, albeit at pretty low levels," he said. Flatt said Brookfield has spent the past six months buying residential land, and invested $250 million in its U.S. residential business. "We believe we are past the worst of the down cycle in housing," he said. "While we don't expect a robust return, we believe we have or will soon see a bottom in many of the key U.S. housing markets."

Brookfield controls Fraser Papers Inc., wood panel producer Norbord Inc., Great Lakes Hydro Income Fund and the Brookfield Real Estate Services Fund, that includes Royal LePage and other brands. The holding company's forestry assets have been battered by the global economic downturn, with Fraser Papers being forced to file for creditor protection in Canada and the United States in June. Fraser Papers reported that it lost $8 million or 36 cents a share for the quarter ended June 30, down from $15.6 million or 31 cents a share for the same 2008 period.
During the second quarter, Fraser booked a net gain of $12.5 million from unwinding its foreign exchange hedging program.

Shares in the company gained 12 cents to close at $21.86 yesterday on the Toronto Stock Exchange.

What does it all mean? Notice what he said "the next 12-24 months". No matter what anyone says, housing NEVER has a "V" recovery. It is a Nike Swoosh recovery. A steep fall followed by a long bottom and then a very gradual climb out. What Flatt is saying is that we are nearing that bottom part and will enter the prolonged bottom dredge.

This goes along withwhat we have been saying here for a while, 2010 will be the bottom in housing and then we will sit and then begin the climb out.

Why is all this positive? It means the dramatic price falls are a thing of the past. We more than likely have some more downside 10%-15% and then we flatline before climbing out. When do prices recover to 2006-07 levels? If history tells us, it will be 7 years based on the 1990-91 housing bust. Now, it should be noted that fall was from far less lofty levels than this one. Because of that 7-10 years would seem to be the more realistic scenario.

Disclosure: No position

Comments

[markfl:]

I agree with every other sentence in the last paragraph except this one: "Why is all this positive?" What in the final paragraph is positive? Another 10-15% is not inconsequential. You've got to understand that few non-economist minded householders are even remotely prepared to wait a decade to retrace 2006-07 home values. It is reality, but the psychology isn't there.

I understand that BAM is taking the long view, but I'm not seeing the enthusiasm in the article that the headline would seem to suggest.

Aug 12 04:34 AM

[Davewmart:]

10-15% further drop would likely mean that the banks would be back cap in hand to the Government, whose own ability to support the financial structure would be under increasing question.
The number of properties going underwater would also greatly increase, which would have knock-on effects throughout the economy, with unknown further effects on house prices.
Not much sign of a bottom in any of that.

Aug 12 08:02 AM

[OptimizedPrime:]

Wow, you are the first blogger I've seen actually try to predict a "return" to the 2007 Bubble levels.

I assume you mean on an inflation-adjusted basis.

You said it would be 10 years. How do you figure? The run-ups (200-300% in many areas) were caused exclusively by financing, not growth in wages.

If history--and simple logic--are to apply here, you would predict that house prices will return to 2007 levels (again, adjusted for inflation) when real wages double.

So when will wages in the US double on an inflation adjusted basis? I personally don't see that happening in my lifetime.


OP

Aug 12 10:41 AM

[HardwoodFlo...:]

Todd your usually so pragmatic. This is a major shift your commentary. However, I think this is nuts- and I mean Cramer nuts-to think this is over. Not with the lending situation that still exists. You can’t get a JUMBO if you make $1MM a year. Just aint gonna happen. The banks only will underwrite FHA loans. Until that mess get's straightened out things might even get worse.

I also don't understand the people that are recommending the wall Street builders. when this market does come back they will be forced to sell crappy homes below the $400 mark. This means softer sales and decreased margins. Not like the old market, which by they way they totally screwed up, which was McMansions (for them the cost per square foot actually goes down the bigger the house which = bigger margins) this drove up average selling prices.

The Wall Street builders (a phenomenon of the late 90s early 2000s) sold themselves on the idea that they had "in-house" market research and economists and would not make the same mistakes of "mom & pop" builders for that reason and would not over build. Well that was all well and good until they started managing their business qtr by qtr and watching how that correlated to their stock price.

What is the future of the big builders in a recovery? I don't know I see people building to design, using architects and small builders. Not the crap put on the market by Wall Street builders

Aug 12 01:53 PM

[Troyhector:]

I completely agree with the statement "No matter what anyone says, housing NEVER has a "V" recovery. A steep fall followed by a long bottom and then a very gradual climb out."

However, I am not sure whether housing market would reach its bottom in 2010 or not. But it is surely not going to bottom out in 2009.

Read More: www.housingnewslive.co...

Aug 12 03:27 PM