Housing Bubble and Real Estate Market Tracker

by: Judy Weil

Here's our summary of articles and data points on the housing market. It's part of Seeking Alpha's coverage of the real estate market and homebuilder stocks. Like all other topics and stock coverage from Seeking Alpha, you can get this sent to your Blackberry or desktop email by signing up for our no-spam free email subscription service.

Real Estate Sales and House Prices

  • Pinal County Home Sales Continue to Fall (Phoenix Business Journal, Feb. 5th): "Since hitting a high of nearly 1,785 sales in Q2'05, the Pinal County resale market declined to 720 transactions in Q4'06. Total 2006 sales were 3,860, compared with 6,115 sales for 2005. The median price has steadily eroded from $220,000 in Q4'05 to $191,500 for Q4'06… Director of Realty Studies at Arizona State University: "While Pinal County has a limited job base and commercial real estate sector, people were willing to drive increasingly longer distances to find affordable housing… Even though affordability has improved, higher gasoline prices and more congested highways have begun to limit the housing market in Pinal County."
  • 2006 New York Housing Market Was Third Best on Record (The Evening Times, Feb. 5th): "NY State Ass'n of Realtors: Preliminary single-family sales [show] median price decrease of 2.8% ($248,500) compared to 2005 ($255,675). The 2006 statewide annual sales total of 101,131 represents a decrease of 6.3% from the 2005 record-setting total of 107,909… Sales gains were reported in 16 of the 59 reporting counties compared to 2005, while 47 reported median sales price growth compared to 2005… Purchasing a home in New York is often less affordable than in other states because of state and local taxes on real estate transactions… Hopefully Gov. Spitzer’s structural [property tax] reforms and increased aid to localities will help."
  • “A Settling Market” In Colorado (Housing Bubble Blog, Feb. 5th): "Colorado Association of Realtors: There were 5,033 single-family homes sold statewide in December, off 17.8% from December, 2005… The statewide median home price sank 4.8% between December 2005 and December 2006, falling from $245,517 to $233,854… The steepest decline in median home price occurred in the Pagosa Springs area (near the border with New Mexico), where the median fell from $332,143 in December 2005 to $269,231 in December 2006, an 18.9% drop."
  • S&P Case-Shiller Index Reveals Continued Erosion of Home Price Gains (Max Hougan in Seeking Alpha, Feb. 3rd): "The (November) release of data from the S&P Case-Shiller Home Prices Indexes shows continued erosion: From 2004-2005, the average home price jumped 15.7% in November; this year, price gains declined to just 1.7%... Fully 17 of the 20 cities covered by the recently expanded home price indexes showed m/o/m declines from October, with only Charlotte (0.3%), Miami (0.5%) and Seattle (0.4%) posting gains. Prices in Boston - which have led the collapse, and are actually down 5% y/o/y - fell by 1.8%... The house price trends make clear… that prices are driven by local economies as much as national trends."

Real Estate Investing and Sentiment

  • Nearly Half of Consumers Say Housing Price Collapse Likely (Originator Times, Feb. 5th): "Experian-Gallup Personal Credit IndexSM survey: Nearly half of all consumers (47%) say they think a housing bubble and collapse of housing prices is very likely (16%) or somewhat likely (31%) in their local residential real-estate market within the next three years. This is up from the 37% in May 2005 and 42% in April 2006… Consumers with annual household incomes of $75,000 or more are somewhat less fearful of a collapse in housing prices (42 %) than are those with annual incomes between $40,000-$75,000 (50%) or those making less than $40,000 a year (48%)."

Mortgates and Real Estate Lending

  • First American RES, CoreLogic in Merger (Inman News, Feb. 5th): "The First American Corp. announced today a merger of its First American Real Estate Solutions division with CoreLogic Systems Inc., a developer of mortgage risk assessment and fraud detection software... "This merger is a major milestone in our strategy to revolutionize the mortgage risk management process," said Parker S. Kennedy, CEO of First American Corp. "This transaction unlocks value by creating a single, unified company with the unique data and predicative analytics resources that lenders, investors and consumers need throughout the mortgage lending and securitization process."
  • Fitch Affirms 18 Classes from 3 Sequoia Mortgage Trusts (Business Wire, Feb. 5th): "The underlying collateral for the above transactions consists of 30-year traditional and hybrid adjustable-rates mortgages extended to prime borrowers. The loans are acquired from various originators by a subsidiary of Redwood Trust, a mortgage REIT that invests in residential real estate loans and securities… The affirmations reflect a satisfactory relationship between credit enhancement [CE] and future loss expectations and affect approximately $373.01 million of outstanding certificates. All classes in the transactions detailed above have experienced some growth in CE since closing, and there have been no or minor collateral losses to date."
  • Capital Alliance Income Trust Addresses Recent Organizational Changes and 2007's Operational Challenges (Yahoo! Finance, Feb. 2nd): "As we enter 2007, approximately 34% of CAIT's mortgage loans are non-performing assets (mortgage payment delinquencies in excess of 60 days). Due to the partial financing of the mortgage loan portfolio with debt, non-performing mortgage loan balances are currently estimated at approximately 51% of total shareholder equity and approximately 95% of common shareholder equity… Q4'06's financial results will require additional loan loss expenses (reserves) to account for the mortgage portfolio's identified losses. If the residential housing market continues to soften… during 2007, additional reserves may be needed. Management expects 2007's financial performance to improve, although the operating environment will remain challenging."

Global Alternatives To The Housing Slump

  • Real Estate Goes Global (Kiplinger.com, Feb. 5th): "European real estate securities jumped an average of 53% in dollar terms, while Asian property shares rose 28%... Fueling the surge are three trends: raging development in Europe and Asia; the spread of real estate investment trusts to Asia and Britain and soon to Germany and Italy; and abundant liquidity… A sagging dollar has also helped… RREEF, a realty research and investment firm: Asia is the most attractive region, particularly Taiwan, Hong Kong, Japan, Singapore and parts of China. Rents are rising and land is scarce, so buildings are gaining value… Also Europe because REITs are taking root there."
  • Ocean Real Estate: The Next Boom? (CNN Money, Feb. 2nd): "One day we'll be living on and under the oceans... Hydropolis is a $500 million-plus, 220-room hotel under development near Dubai in the Persian Gulf. Billed as the world's first underwater hotel, the Hydropolis will be located, if all goes according to plan, 60 feet below sea level and cost $1,500 a night. Among other amenities, the Hydropolis will also feature a missile defense system to guard against terrorists, a shopping mall, and three bars.

Macro Impact, And Will The Housing Slump Cause A Recession?

  • Prediction: More Pain for Homeowners (CNN Money, Feb. 5th): "Merrill Lynch: Unseasonably warm weather in December - typically a slow period for home sales - likely spurred the 4.9% sales jump... [But] a Commerce Department report showed the homeowner vacancy rate rose to 2.7% in Q4, suggesting a glut of almost 1 million homes sitting vacant, which will likely pressure selling prices for an extended period… Goldman Sachs: The vacancy rate had fluctuated between about 1% and 2% for the past 50 years. By itself, this would point to a fairly enormous supply overhang and little prospect of a bottom any time soon."
  • Vacant Homes for Sale Cloud Hopes for Housing Recovery (Sun Sentinel, Feb. 5th): "Census bureau: The national homeowner vacancy rate is 2.7%, up from 2.0% a year earlier… Economists fear that many vacant homes are owned by speculators who are stuck with investment properties that they can't sell and may be under increasing pressure to drop their prices… Not surprisingly, buildings with five or more units - which include condos that were magnets for speculators - had the highest rate of vacancy. The vacancy rate among these units rose to 11% in Q4 from 7% in Q1. For single-family homes, the vacancy rate rose to 2.3% in Q4 from 1.8% in the first quarter."
  • Spendthrift Nation (Barron's, Feb. 5th): "MacroMavens: "The… cash cushion vs. household debt is at a record low! [And] households with the cash (and assets) "are not the ones with the debt…" The top 1% of householders hold 30% of the assets and 7% of the debt, while the bottom 50% hold a mere 6% of assets but… 24% of the debt… Just as "the story in 2005-2006 was the cash buildup on corporate balance sheets," the story for 2007-2008 might conceivably be "a similar increase in saving by households, as they endeavor to repair the damage inflicted by the burst of the housing bubble."
  • Most agree: Housing Crunch Isn't Over Yet (USA Today, Feb. 4th): "Thus far, the [macro] fallout has been small. NAR: The economy grew at a faster pace in 2006 than in 2005 even though sales of previously owned homes fell 8.2%, the biggest drop in 17 years. But the economy may not be able to shrug off further declines. A.G. Edwards & Sons: Lower energy prices and a strong job market have thus far helped consumers weather the housing downturn. But… may not be big enough to offset further weakening… Wachovia: Recent upbeat housing data… has been skewed by warmer-than-usual weather. That brought out a few more buyers and allowed for more building in the Northeast… Come spring, housing activity will be slower than normal."

Homebuilders And Housing Stocks

  • Lowe's: Expect Superior Growth vs. Home Depot (Hilary Kramer in Seeking Alpha, Feb. 6th): "High level executive departures… could be good for (NYSE:HD)… but I'd still stay away… My (Q2'06) objections to HD were its terrible customer service… and that the slowing housing market would mean lesser demand for HD's wares. Q3 profits dropped 3%... [Though recovering,] Home Depot isn't going to get much higher… A poor Q4 could send it down below $40… I don't think the housing market will grow in any serious way that will really help Home Depot... Lowe's Companies (NYSE:LOW) [is] a better run store, and it's going to see superior growth to The Home Depot."
  • Mohawk is Ready for a Housing Recovery – Barron's (Seeking Alpha, Feb. 4th): "Carpet and flooring manufacturer Mohawk Industries (NYSE:MHK) has been punished by the housing slump fallout and summertime energy prices spikes, as oil is a critical component in manufacturing polyurethane carpet bases. With a $5.8 billion market cap, a low 14 P/E and 27% of the $13.9b U.S. market, MHK's shares are finally recovering from July's $62.80 low to $85.80 on Friday. SunTrust Robinson Humphrey: MHK will show $7.25/share earnings, where even $6/share and a 15 P/E will send shares to $90. Ariel Capital forecasts $120, because of… Optimism that the housing slump is over..."

Housing Related Industries

  • Red Kite Fund Lost 30% on Metals Bet, Investors Say (Bloomberg, Feb. 5th): "Red Kite Metals, part of a $1 billion hedge fund run by RK Capital Management LLP, lost about 30% in January as metals prices tumbled... The slump followed a 9.4% decline in copper last month… RK Capital, co-founded two years ago by Michael Farmer, was one of the best-performing commodity funds in 2006 as prices for copper, zinc and related metals surged, the result of expanding economies in Asia. Copper and zinc sank on Feb. 2 on concern Red Kite investors would demand their money, forcing the hedge fund to sell contracts to raise cash and driving prices even lower."
  • Q4 2006 USG Earnings Conference Call (Insurance News Net, Feb. 5th): "Housing starts fell from… nearly 2 million units a year at the beginning of the year to about 1.6 million at the end of the year, a 20% drop… Industry wallboard shipments were up 6% in the first six months of 2006 y/o/y. They were down 17% in the last six months y/o/y… During 2007, we expect USG and industry wallboard volumes to be below last year's levels, and we foresee a further pullback in selling prices… We have taken out more than 2 billion Sq.ft of capacity by laying off shifts and reducing work weeks at higher-cost facilities. [And] permanently closed two older, high-cost lines, one in Florida and one in Southern California, eliminating an additional 400 million Sq.ft. of capacity… Surplus capacity is an industrywide problem."
  • MMM (Minnesota Mining & Manufacturing) Conference Call Notes (Motley Fool, Feb. 5th): "Housing Market Impact: U.S. growth was hurt by slow-downs in the housing and auto industry… Shingle manufacturers basically shut off orders during the quarter. Also, saw impacts on retail do-it-yourself establishments (Home Depot), appliances, automotive, and elsewhere… MMM notes that it gained share in some areas during the slow-down but not enough to make up for the volume loss."

Commercial Real Estate and REITs

  • A Look At Plum Creek’s Shift Toward More Real Estate (New West Missoula, Feb. 5th): "Plum Creek Timber Co. moved from being simply timber-based to expanding into the real estate and development industries. The company, which is the largest private timberland owner in the county, is reclassifying its lands based on what it perceives to be the maximum amount it can make off of each acre. Beyond timber, lands are now slated for sale to developers, development, recreation and conservation… In 1999, Plum Creek converted to a REIT, which allowed to it trade publicly for more money and raise more cash to buy more land… to diversify its timber holdings."
  • The Case for Avoiding REITS (AOL BloggingStocks, Feb 5th): "The yield of 3.78% on REITs is less than 5.25% that you can get in a savings account... By law, REITs must pay out at least 90% of their taxable income back to shareholders as dividends, and many of these funds have payout ratios over 100%, meaning that they aren't earning enough to cover their dividends. So these funds will not be able to grow organically by reinvesting earnings (they're paying it all back to shareholders). Their only means of growth will be taking on additional debt… or seeing a rise in property values and rental prices for the properties they currently own and manage... In essence, REITs, which were once a source of income, are now a speculative bet on a rise in real estate prices."
  • There's Still Room for Real Estate Funds to Roam (USA Today, Feb. 2nd): "REITs are good portfolio diversifiers… and offer dividend yields of 3.78%, vs. the average S&P stock yield of 1.8%...[Yet] if the idea behind investing is to buy low and sell high: REIT's have nearly doubled in three years…. [Still,] in a robust economy — such as we have now — commercial real estate typically fares well… Lots of hot money is flowing into REITs and real estate funds. Investors poured an estimated $10 billion into REIT's last year… Assets in real estate funds have swollen to $84.3 billion, up from $54.1 billion at the start of 2006… Private equity funds, which pool money to buy companies, have been snapping up REITs. Three of the five largest REIT buyouts last year were by private equity firms."
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