Housing Bubble and Real Estate Market Tracker

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

• Real Estate View (Montecito Journal, Feb. 22nd): Appleton-Young: Statewide foreclosures are up 140% but from a very low base. Plus, the 1995-1997 job loss totals helped contribute to foreclosures and that situation is not occurring today. A strong commercial market points to a healthy business environment and high employment. The difference between the California and U.S. median sales price in 1970 was about $400, with the median somewhere below $50,000... In 2005, the U.S. median was $219,600 while California leaped to $524,000... 2006 saw a 23% drop in the number of sales in California, but a 7% increase in the median price."

• Home Sales in State Hit 10-Year Low During ’06 (New Haven Register, Feb. 22nd): "The Warren Group: Last year, 37,337 single-family homes were sold in Connecticut, the fewest since 1996… and a 14% drop from 2005, when 43,418 homes sold... While the number of homes sold dropped, the median sales price changed little from 2005. Last year, homes statewide sold for a median $275,000, up 0.7% from $273,000 the previous year. The median sales price in New Haven County rose 6%, from $238,500 in 2005 to $253,000 in 2006. But the number of homes sold county-wide fell 13%, from 9,764 in 2005 to 8,453 last year."

Real Estate Investing and Sentiment

• A Tsunami of Cash and Cap-Rate Compression (Palm Beach Post, Feb. 22nd): "Mark Dotzour, Texas A&M economist: "A tsunami of capital is trying to get into [commercial] real estate…" Along with the rising demand comes lowered expectations, [or] "cap rate compression". In typical times, investors look for a capitalization rate, or return on investment, of 10%. But in recent deals, cap rates have dipped as low as 5%... A portfolio of apartments in Phoenix just sold for an unheard of cap rate of 3.8%. That’s less than investors could get from a CD. Just as in the housing boom, investors are counting on price appreciation rather than rental income to keep them in the black."

• Will The Housing Bubble Burst in 2007? (Time.com, Feb. 22nd): "Our real estate search and browsing patterns provide a window into the minds of buyers and sellers… about the current market… As of the week ending February 17th [when bad news was building in the market], [internet] searches for "housing bubble" reached a two year low... A media frenzy around a pending correction occurred that very same week, which demonstrates just how suggestible we are…. On the supply side, bad real estate news is met with increased visits to websites that calculate home values based on comparable sales, such as housevalues.com and zillow.com."

• Real Estate Data Security Embraces Text Messaging (Inman News, Feb. 21st): "A new security product that aims to protect real estate data by eliminating password theft debuted last week. Clareity Security has launched a new authenticator device for use with its SafeMLS product. TEXT-pass… delivers one-time passwords to the end-user's mobile phone as a text (or SMS) message. It is now available to the real estate, mortgage, title and settlement services industries… PRO members currently use the keychain-sized SAFEMLS token device to generate one-time passwords for MLS access. TEXT-pass users requested passwords via text message instead of using the token device."

Mortgates and Real Estate Lending

• Wells Cuts 70 East Bay Mortgage Jobs (San Francisco Business Times, Feb. 22nd): "Wells Fargo (WFC) is cutting 70 jobs in its Concord subprime mortgage office… In addition to 250 jobs Wells (WFC) is eliminating in Fort Mill, S.C… WFC spokesman: "There are 70 positions that have been impacted as a result of WFC's tightening [some] credit standards"… Earlier this month, Wells Fargo COO, John Stumpf, told investors… WFC was insulated from the problems roiling the subprime mortgage industry, as the majority of its subprime mortgages were "co-issued" with Wall Street banks, which also gave Wells the opportunity to grow its loan servicing portfolio and cross-sell other products."

• NovaStar Stirs Subprimes (Wall St. Journal, Feb. 22nd): "Spurred on by a disappointing earnings report from NovaStar Financial, option traders pushed expectations for volatility in shares of other so-called subprime lenders higher. Late Tuesday, NovaStar joined the chorus of companies that make loans to consumers with weak credit reporting far worse-than-expected earnings and painting a grim picture of the future. Option traders took the news and the stock market's reaction as a cue that their expectations for movement in other subprime lenders' stocks might not be high enough, and pushed these targets higher."

• Subprime Mortgages Scare Wall Street (Mortgage 101, Feb. 21st): "JP Morgan: Approximately 35% of all subprime mortgage borrowers could have a difficult time meeting their loan obligations when their adjustable-rate mortgages hit their first adjustment period. "These are consumers who were getting into 100% loans when home prices were softening." Flanagan's research revealed that 10% to 15% of all new loans originated in Q4'05 and all of 2006 were subprime loans… And, if capital market players like JP Morgan find mortgage securities no longer attractive, the result could be higher mortgage interest rates. The amount of money at stake could be $200 billion, with as many as 500,000 to 1 million consumers in potential jeopardy."

• The Mortgage Market Debacle: It's All in the Incentives (Michael Panzner in Seeking Alpha, Feb. 22nd): "Fed Governor Susan Bies: "The subprime adjustable rate mortgages segment of this market is... a sliver, 7-8% of all outstanding mortgages... Bies' remarks played down the risk that mounting problems in the subprime market was having a broader impact on homeowners, which could have serious implications for spending and growth. "I don't think there will be a large impact (from subprime market risks) on the prime mortgage industry…" In reality, it seems likely that the same incentives that encouraged risky behavior in the subprime mortgage market influenced most, if not all, of the credit-granting decisions that were made in recent years."

• Home Lenders Hit by Higher Default Rates (NY Times, Feb. 22nd): "Rising default rates and the related financial troubles of mortgage companies could hurt a broad segment of the American housing market. Among them will be the largely poor and minority home buyers who will see interest rates on adjustable mortgages rise, as well as investors in mortgage-backed securities who poured billions of dollars into these loans… Defaults [rose] in 2006 as lenders allowed more borrowers to take out loans without documenting their incomes or making a down payment… Many subprime lenders were not obligated to follow the tougher regulations that apply to commercial banks."

• Only the Strongest Sub-Prime Lenders Will Survive (Prakash Kolli in Seeking Alpha, Feb. 21st): "New Century Financial (NEW) is being forced to repurchase previously packaged and sold loans to investors … Countrywide Financial (CFC) is the largest originator of sub-prime mortgages and is stronger financially, but deterioration of credit quality from 0.24% delinquencies in 2005 to 0.67% in 2006 will pressure CFC… Novastar (NFI) shares are down approximately 62% YTD… Fremont General (FMT) is down 18% YTD.... Novastar's dividend yield is ~56%, NEW's is ~42%... With credit quality deteriorating, investors forcing the repurchase of packaged loans and reducing purchases of new ones, originations slowing down, lawsuits, and interest rates trending up, only the strongest lenders will survive."

• Investing: Asia Investors Support U.S. Mortgage Bonds (International Herald Tribune, Feb. 20th): "Government-chartered Freddie Mac said demand among Asian investors would support the market for the mortgage finance company's bonds. Freddie Mac VP investments and capital markets: "There's strong, steady demand for Freddie Mac securities in this area of the world." Central banks in Asia hold $3.1 trillion, or about two-thirds, of the world's foreign reserves… National Mortgage Association's Freddie Mac and Fannie Mae... own or guarantee about 40% of the $10.5 trillion U.S. residential mortgage market."

• Apollo Management Offers About 1 Billion Pounds for Countrywide (Bloomberg, Feb. 21st) Apollo Management LP, the U.S. buyout firm run by Leon Black, offered about 1 billion pounds ($1.9 billion) for Countrywide Plc, the second bid in five months for the U.K.'s largest residential real estate broker. Apollo, based in New York, offered 505 pence per Countrywide share plus shares in the U.K. company's Rightmove Plc unit… On Jan. 26, Countrywide shareholders blocked a cash-and- stock bid from 3i Group Plc that was worth about 569 pence per share."

Global Alternatives To The Housing Slump

• Cerberus set to help China, India take flight-Snow (Sign on San Diego, Feb. 22nd): "Cerberus is the latest in a string of large U.S. funds to set up shop in Hong Kong. In January, both the Blackstone Group and Providence Equity Partners made big-name hires to boost deal-making in Asia. Consequently, many players in alternative investment fear that too much capital is chasing too few deals, artificially inflating prices and creating a bubble. Snow noted that Cerberus can invest in anything from auto financing to housing, so it will be well placed when the bubble bursts."

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

• Slumping U.S. Housing Market Hurts B.C. Mills (Canada Financial Post, Feb. 22nd): "Wood industry report: Western Canadian sawmills dependent on the U.S. housing market will have less work this year…"The builders don't think the worst is over… The top 10 builders collectively wrote off $1.4 billion from their balance sheets for Q4'06… You don't write off future opportunity unless you don't believe there is an economic opportunity there… Shrinking lumber demand in the U.S. has already resulted in European sawmillers focusing on their own market and Asia. There has been a slight 3% drop in Canadian shipments to the U.S. U.S… domestic shipments were off 9%."

• 'Housing Hangover' Killing Jobs (Arizona Central, Feb. 21st): "Labor Dept.: U.S. furniture makers fired 28,000 workers in the past year… Homebuilders have cut 24,000 jobs in the past three months alone. The U.K.'s Wolseley Plc, the world's biggest distributor of plumbing and heating equipment, has eliminated about 4,500 positions in the U.S., about the same number that Whirlpool plans to shed. Masco, maker of Behr paint and Delta faucets, is firing 8,000 people, or about 16% of its U.S. workforce... Emerson Electric… cut 230 jobs at a plant that makes furnace components and Stanley Furniture… fired half the workers at one of its factories."

• Housing Decline and Recession: A Proposed Relationship (Jeff Miller in Seeking Alpha, Feb. 21st): "The popular bearish argument is that a decline in housing will weaken the economy enough to cause a recession. In Floyd Norris's examples the recessions all occurred either before or (once) contemporaneously with the housing decline. Are we surprised that during a recession, spending on housing -- and many other things-- is reduced? The housing decline is associated with the recession. Association does not show causation. If one had to guess, the housing decline is probably a result, not a cause in Norris's examples, both from logic and the timing."

• Interface Reports Fourth Quarter and Full Year 2006 Results (PR Newswire, Feb. 21st): "Sales for Q4'06 increased 20.4% to $295.9 million from sales of $245.7m in the year ago period… CEO Daniel T. Hendrix "We are pleased to report one of the best Q4's in our history, finishing a year of continuously improving performance… We remain very optimistic about the ongoing recovery we see in the office market, especially in the U.S. and Europe... Through the first seven weeks of our first quarter, which is seasonally our weakest, business has remained robust."

Homebuilders And Housing Stocks

• Toll Brothers F1Q07 (Qtr End 1/31/07) Earnings Call Transcript (Seeking Alpha, Feb. 22nd): "There are too many soft markets at this stage of the selling season to call a general upturn in the new home market. Demand varies greatly from week to week in individual markets… We believe that pent-up demand is building in many markets as potential buyers bide their time until they are confident prices have firmed… We had a total of 55% of our can rates from agreements that are more than a year old. Presumably as we catch up with production and shaking out those agreements [with investors] that were entered into during the absolute top of the cycle or near there to, the can rates should go down."

• Including Restricted Stock, KB Home CEO Earned $5.9 Million (AP Wire, Feb. 21st): "The KB Home CEO earned around $5.9 million in total compensation last year, including $2 million in restricted stock awards, according to a preliminary proxy filed Wednesday. Jeffrey T. Mezger received a $568,750 salary, a $2.5 million cash bonus and $80,357 for expenses related to transportation expenses, financial planning, tax preparation services and flight costs for the use of company aircraft for him and his wife… Mezger's base salary was boosted to $1 million in December. In the year ending Nov. 30, 2005, Mezger earned a base salary of $498,333 and a cash bonus of $2.5 million. His total compensation for the fiscal year, including restricted stock awards and other long-term compensation, was around $12.8 million."

• High-risk Lenders Take a Hit from Investors (MSN Money, Feb. 21st): "Investors punished the stocks of US companies involved in mortgage lending to risky "subprime" borrowers on Wednesday amid signs that the shake-out in the industry is far from over. A key derivative index that tracks the credit risk of high-risk mortgage-backed bonds hovered near record levels. Traders also reported brisk activity in the derivatives market for insurance against subprime defaults, providing another indication of concerns over late payments and defaults on mortgages extended last year… In contrast, the overall credit market and other sectors of the US mortgage market remained buoyant, suggesting that investors believed the damage would be contained to the high-risk industry."

• Toll Brothers: Earnings Drop 67%, Beat Estimates (Seeking Alpha, Feb. 21st): "Toll Brothers, the #1 U.S. luxury homebuilder, said Thursday Q1 2007 profits fell 67% from $163.9 million to $54.3m on a 19% drop in revenues from $1.34 billion to $1.09b—including land write-downs of $59m and goodwill impairment of $5m… TOL expects to deliver 6,000-7,000 homes in 2007, resulting in revenues of $4.2-$4.95b -- down from its previous 6,300-7,300 home forecast which was itself reduced. It gave 2007 earnings guidance of $1.46-1.85/share, including predicted $60m writedowns in Q2 and Q3. Earlier guidance was for $1.58-2.08/share, down from $4.17 in 2006."

Commercial Real Estate and REITs

• Local Industries Take In Tax Plans (TBO.com, Feb. 22nd): "Legislators unveiled radical proposals to overhaul Florida's tax laws… CB Richard Ellis: On the commercial real estate front, landlords and developers have seen property tax rates escalate during the past five years along with property insurance rates… Lowering property taxes would remove one of the wild cards commercial real estate officials deal with when they're trying to calculate rental rates and development costs."

• New JV To Focus on Medical Acquisitions (Globe St., Feb. 21st): "ING Clarion Partners and Montecito Medical Investment Co. have joined forces to acquire medical office facilities throughout the US. The JV has already purchased four properties for a total investment of more than $90 million…The JV will continue to acquire medical office properties… The move to acquire medical office buildings is fueled in part by the country’s aging population, the move of technology-based services out of hospitals and the increase in out-patient care."

• Buildings Shun Eyesore Reputation and End Up Looking More like Hotels than Warehouses (Chron.com, Feb. 19th): "Even storing your stuff in Hawaii can be upscale, as the newest self-storage facilities resemble small resorts and hotels on some of the islands' priciest real estate. With 24-hour access, air-conditioned hallways, fancy business centers and WiFi Internet, storage companies are catering to customers as the industry becomes more competitive… Self-storage is a booming $21 billion business nationwide that has nearly doubled the space for rent during the past decade, with one in every 11 households renting space in nearly 50,000 self-storage outlets nationwide — including about 3,000 new sites that opened last year."

Quote of the Day: From the House's Mouth

“When there is good home price appreciation, you can get away with a lot of mistakes." -- Zach Gast, an analyst with the Center for Financial Research and Analysis, a forensics accounting firm in Washington that has been studying the subprime market."

Tracking the Housing Market and Homebuilder Stocks You can track developments in the housing market and homebuilder stocks by bookmarking our Housing coverage or subscribing to our free email service. If you have a blog or website of your own, you can track developments in the sector and provide great content for your readers with our Housing Market widget (left). It's simple to add -- just select "Housing Market" from the drop-down menu here.