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.

Quote of the Day- "From the House's Mouth"

"Everyone's looking at subprime. The rock they aren't looking under are the adjustable rate mortgages and teaser rates and low money-down loans. It's going to affect prime as well." - Mark Kiesel, a portfolio manager for Pacific Investment Management Co., the world's biggest bond manager. (Fox News, Apr. 1st)

Real Estate Sales and House Prices

• Mortgage Crisis Hits Million Dollar Homes (Fox News, Apr. 1st): "Bergen County, New Jersey: Homes sold on the auction block for as much as $852,000 this month — more than quadruple the median home price in the United States… Early signs that the explosion of subprime loans made to mostly poorer borrowers is reaching higher ground… Realty Trac: In the last three months, the percentage of foreclosures for U.S. homes valued at more than $750,000 has climbed to 2.5%, the highest since early 2005… Just as more expensive homes are beginning to fall through the cracks, the fear is higher-rated bonds within CDO structures may be vulnerable. Lehman Brothers: The declining performance of subprime loans have resulted in CDOs losing about $20 billion in market value."

Foreclosure Impact

• Mortgage Defaults in Hawaii Lag Nation (Star Bulletin, Mar. 31st): "Mortgage loan delinquencies and foreclosures in Hawaii rose in Q4'06, but still remain far below the national average. The delinquency rate for loans on one- to four-bedroom homes grew to 2.40% in Q4 from 1.97% a year earlier… Loans in foreclosure at the end of the quarter increased to 0.34%, up from 0.21%. Russell Miyashiro, president, Mortgage Bankers Association of Hawaii: "We are coming off a period of extremely low delinquencies, so nearly all the statistics are showing a rise." However, Hawaii's delinquency rate was about half the national rate of 5.31% last quarter."

• Mortgage Foreclosures Rise Dramatically in Dakota County (This Week Online, Mar. 30th): "Compared to Q1'06, mortgage foreclosures in Dakota County have grown by 204%. According to County Recorder Joel Beckman, 299 mortgage foreclosures have been recorded from Jan. 1 to March 21 [2007]. In comparison, 146 foreclosures were filed during Q1'06, and 105 foreclosures were filed in Q1'05… The actual number of people unable to pay their mortgages may be even higher than records show. An October 2006 report produced by Dakota County found about 80% of homeowners sell their home to another party before a sheriff’s sale occurs, or they sign the title over to the bank, usually at a loss."

• Foreclosures Have Moved to Suburbs in Ohio (Western Star, Mar. 30th): "Ohio's home foreclosure crisis, already a near epidemic in some urban neighborhoods, has moved to the suburbs. A new report released Thursday showed that 73% of the subprime loans that have ignited the crisis were made in middle and upper income areas — often suburbs — in 2005, while just 27% were made in low and moderate income areas… The trend applied in all area counties. Warren County had the highest percentage in the area — 87% in middle and upper income areas. Overall, subprime loans account for just 18% of all outstanding Ohio mortgages but 63% of the foreclosure filings."

Real Estate Investing and Sentiment

• For Girls, It’s Be Yourself, and Be Perfect, Too (NY Times, Apr. 1st): "Parents view Newton’s expensive real estate — the median house price in 2006 was $730,000 — and high taxes as the price of admission to the prized public schools… There is something about the lives these girls lead — their jam-packed schedules, the amped-up multitasking, the focus on a narrow group of the nation’s most selective colleges — that speaks of a profound anxiety in the young people, but perhaps even more so in their parents, about the ability of the next generation to afford to raise their families in a place like Newton."

• In Real Estate, Bad News Can be Good (Seattle P.I., Mar. 30th): "Tenant-in-common properties are a relatively new phenomenon. These properties provide investors with passive cash flow. For a base investment of $100,000, TIC owners get access to otherwise unaffordable properties such as office buildings, shopping centers, apartment complexes or hotels in various geographic regions. But prospective investors need to be careful. The properties can be good long-term investments for those with an adequate reserve of capital and an understanding of the risks involved, but they're inappropriate for short-term, risk-averse or cash-poor investors."

Mortgates, Real Estate Lending and Subprime Fallout

• Subprime Problem Likely Will Work Itself Out (Delaware Online, Apr. 2nd): "Wharton faculty who've studied the mortgage market and past government bailouts: Joseph Gyourko, professor of real estate and finance at Wharton: "Bailouts can make people more reckless in the future… Any regulation is probably going to be wrong or imprecise… The market is already correcting the problem. Lenders have dramatically cut their offerings of the most hazardous products…Ken Thomas, a lecturer on finance at Wharton: "When we had the last big financial meltdown with stocks in 2001, did we consider bailing out those who lost money in the dot-com crash? Markets [should] regulate, not the government. Markets do a much better job."

• The Battle for a Mortgage (NY Times, Apr. 1st): "Doug Duncan, chief economist at the Mortgage Bankers Association: "In the next 6-9 months, the pendulum is probably going to swing too far in the other direction before it settles." In many cases, economists say, borrowers are going to be treated like subprime and Alt-A borrowers for what would seem to be fairly common mistakes, like not paying a few bills on time or carrying a lot of debt. Duncan: “One of the myths is that subprime is a province of the poor… Subprime is a province of people who don’t manage credit well,” regardless of their incomes."

• Wachovia Expects Growth in Option ARMs (South Florida Business Journal, Mar. 31st): "Wachovia Bank said it expects its offices this year will significantly increase their origination of option ARMs, a loan product it added after buying World Savings Bank… David Pope, chief administrative officer for Wachovia Mortgage, the bank's mortgage division, said World Savings' underwriting of option ARMs has always been conservative. World Savings - and now Wachovia - permit those loans' monthly payments to rise a maximum 7.5% a year, and deferred interest can grow to a maximum 25% of original loan value. Both numbers are lower than those of some other lenders."

• Harney: Subprime Borrowers Hurt by Lack of Escrow Accounts (Mercury News, Mar. 31st): "A majority of subprime mortgages closed during the housing boom years carried no escrows for property taxes and hazard insurance. [A] stark contrast to the prime mortgage market for consumers with good credit, where mandatory escrow accounts are routine… Escrow accounts are set up by lenders to guarantee the timely payment of property-tax bills and insurance premiums. On top of principal and interest charges for the mortgage every month, the lender also collects pro-rata amounts of money to be paid when tax bills and insurance premiums come due during the year… A safety net for homeowners and lenders alike."

• Credit Fiasco Could Spread To Downey Financial (Colin Peterson in Seeking Alpha, Mar. 30th): "Downey Financial (DSL), a California savings and loan, is a possible short play… DSL focuses on residential mortgage lending. 1) As of June 2006, 89% of DSL’s approximate $15.4 billion residential real estate portfolio was secured by properties located in southern California. 2) 78% of the residential mortgages were based on borrower stated income. 10% were underwritten with no verification of borrower income and/or assets. 3) 85% of its residential portfolio consists of adjustable rate mortgages… 4) For every dollar's worth of assets, the company has $0.91 cents in debt… A 9% depreciation will wipe the company's equity out. Risks: 1) Trades at about 1.3 times book value. Publicly traded S&L's trade at about 2.9x BV and financials at about 3x… It's a takeover candidate. 2) High short interest. 3) The real estate market might have bottomed. Downey has fallen only 15.5% from its all time high."

• Subprime Woes Delay Block Mortgage Unit Sale (Kansas City Business Journal, Mar. 30th): "Michael Millman, an analyst for Soleil Securities Corp.: "The tax business still has significant value. The mortgage business also does, though maybe not right now. People shouldn't panic and dump the stock…"We think the board can't be happy, and suspect there will be either changes in management, or sale of the company." Option One operates within the subprime market, which is suffering from rising interest rates, shrinking margins and increasing default rates. Option One posted a loss of $69.7 million, or $0.22/share, in Q3."

• Credit Suisse Unit Sues Subprime Mortgage Lender (Washington Post, Mar. 31st): "Credit Suisse's DLJ Mortgage Capital unit has sued Sunset Direct Lending, a subprime mortgage lender in Oregon, for failing to buy back $24 million in bad loans. Sunset Direct, which is privately held, failed to repurchase loans that were 30 days or more delinquent within three months after they closed, according to the lawsuit… In December, DLJ Mortgage sued Infinity Home Mortgage for failure to repurchase $3 million in bad loans. EMC Mortgage, a unit of Bear Stearns, sued MortgageIT in February 2006 over about $69.8 million in bad loans the lender failed to repurchase."

• 30-year Mortgages Holding Steady at Rate of 6.16% (Baltimore Sun, Mar. 30th): "Frank E. Nothaft, chief economist for Freddie Mac, said the troubles in the subprime real estate market, which provides loans to borrowers with weak credit, did not seem to be having an impact on mortgage rates so far. "Despite concerns about possible spillovers from the troubles in the subprime market, rates on 30-year, fixed-rate mortgages remained stable," he said. Rates on 15-year, fixed-rate mortgages, a popular choice for refinancing, dipped slightly this week to 5.86%, down from 5.90%."

• Subprime Fallout Hits San Jose (San Jose Business Journal, Mar. 30th): "Brea-based Fremont Investment & Loan, whose subprime home-mortgage business is the primary subject of a 23-page cease-and-desist order issued by FDIC on March 7, is also being told in the same directive to diversify its commercial real estate loan portfolio and to limit the number of loans it writes to finance high-rise condo development.

• Mapping the Subprime Mess (Tim Iacono in Seeking Alpha, Mar. 29th): "In parts of California, the rate of increase in default activity is now growing rapidly, appearing ready to eclipse the 1996 highs that preceded the technology boom. According to a report in the San Diego Union Tribune, default notices are up four times from year ago levels and foreclosures have tripled… Higher home prices and larger "equity cushions" are not going to save California homeowners… The often heard "they were able to refinance or sell when they got into trouble" seems to no longer be an option for struggling subprime borrowers in many parts of the California and Massachusetts."

• California Investigates Subprime Mortgage Lending Industry (Bloomberg, Mar. 29th) California Attorney General Jerry Brown is investigating the collapsing subprime mortgage industry in the state, the largest U.S. market for high-risk home loans… Half of the 20 biggest U.S. subprime lenders, including No. 2 New Century Financial Corp., which is trying to avoid bankruptcy, are located in California, according to Inside Mortgage Finance. The industry is under scrutiny by regulators after delinquencies on subprime mortgages rose to 13.3% last quarter, the highest since September 2002. Mortgage Bankers Association: About 13% of the U.S.'s subprime loans are in California."

Global Alternatives To The Housing Slump

• Mon Dieu! Americans Behind Europe Record-Breaker (New York Observer, Mar. 30th): "Global real estate consultant Cushman & Wakefield has advised Lehman Brothers Real Estate and its French partner the private company Atemi on the largest single-asset deal in Europe, the purchase of the Coeur Defense office complex in Paris. Earlier this year, Cushman & Wakefield arranged the $1.8 billion sale of 666 Fifth Avenue in New York from Tishman Speyer to Kushner Companies, which was the world's largest single-building sale. Coeur Defense was sold by French real estate investment trust Unibail and Goldman Sachs' Whitehall Funds for $2.8bn. The transaction reflects a gross yield of 4.8%."

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

• State's Economy Expected to Slow (Mercury News, Apr. 2nd): "Quarterly UCLA Anderson Forecast: "Forecasts a significant slowing of the California economy in 2007, as the double whammy from construction and mortgage finance creates drag on the rest of the economy." In March, the state Employment Development Department revised its jobs growth figures up by 52,000 for 2006, from a tepid growth rate of 1.1% to 1.8%... Construction job loss was revised down from December estimates from 15,700 to 2,700 jobs, employment decreases at non-bank mortgage lenders and the broader real estate category led to a revision of the financial activities sector from 10,200 new jobs to a loss of 1,600 positions."

• When Good Real Estate Goes Bad (BusinessWeek, Apr. 2nd): "Recent rounds of massive layoffs at the Big Three carmakers have stifled a long period of unwavering confidence in [wealthy Detroit suburbs]. Michigan MLS: Sales have averaged a 4.1% decline over a four-year period… New constructions… have stopped altogether… RealtyTrac: In 2006, one in every 92 households in the U.S. filed for foreclosure, while the whole of Detroit claimed one foreclosure for every 21 households—the highest rate of any metro area… A surprising number of these were high-end homes. In West Bloomfield about one in every 126 households is under foreclosure. Single industry towns get hit the hardest."

• Anderson Report: More Housing Carnage to Come, but No Recession (Seeking Alpha, Apr. 2nd): "Today's UCLA Quarterly Anderson Report forecasts the housing market will likely decline even further as the subprime mortgage market continues to implode. The report does not, however, foresee a recession… Senior economist David Shulman forecasts that housing starts will reach 1.33 million units this year, down from an earlier forecast of 1.48m units. "For a housing market that has already witnessed housing starts decline by 36%, this is not good news," he wrote. The report nevertheless forecasts a softening of the economy... GDP growth is projected in the 1.7-2.5% range for the first three quarters of 2007 and should average 3.25% in 2008."

• Average Seattle Worker Can't Afford to Live Here (Seattle P.I., Apr. 2nd): "Last year, the typical single person in Seattle earned enough to buy a home for just under $200,000 while the typical family of four had enough to pay just over $280,000, according to the U.S. Department of Housing and Urban Development. The median prices were about $450,000 for a house and $290,000 for a condo."

• Furniture Firms see Buyouts, Mergers Picking Up (Reuters, Mar. 30th): "Furniture makers… expect more industry consolidation as slumping sales put pressure on some manufacturers and retailers to combine their operations… In February, Hooker Furniture Corp. (HOFT) agreed to buy chair maker Sam Moore Furniture from La-Z-Boy Inc. (LZB), which plans to sell off several non-core business… This year, an affiliate of Florida-based [private equity firm] Sun Capital bought [bankrupt] Rowe Furniture... Sun Capital owns manufacturer Lexington Home Brands [and] several furniture retailers… [Recently] speculation rose that Furniture Brands International Inc. (FBN) could be an acquisition candidate when Sun Capital Partners disclosed… a 5% stake in the company."

• Housing and Recession: Does it Really Matter? (Roger Nusbaum in Seeking Alpha, Mar. 30th): "The Case/Schiller Home price index's negative reading… matters more to the state of the overall economy than to most individuals… If you are not trying to sell your home or get equity out, a decline of some single-digit magnitude will not really impact you. To the extent that homes sales (new and existing) and demand for homes helps drive the economy, it is a negative… An analogy: if there is a recession but you don't lose your job or have your pay cut are you really affected by the recession? This is debatable. Nonetheless, I expect… a recession."

Homebuilders And Housing Stocks

• Centex Cuts its Area Staff in Half (News Press.com, Mar. 31st): "Homebuilder Centex… has eliminated 141 jobs, from Naples to Sarasota… Half of the company’s work force in the region. The cuts are across the board, from construction crews to office staff. Centex: "We had to decrease volume to match the declining demand." Last year… WCI Communities eliminated almost 600 workers and First Home Builders, Lee County’s largest builder of single-family homes, laid off about 75 workers… Home construction fell sharply in February.... Cape Coral reported 98 permits issued — down 79.7% from 482 in February 2006. For Lee County… the number fell 60.3% from 754 to 299."

• Standard Pacific's Book Value Impairment Scenario (Colin Peterson in Seeking Alpha, Mar. 30th): "Homebuilder Standard Pacific (SPF) [See chart:] 1) Top four markets: CA, FL, AZ, and TX. 2) Goodwill writeoff: -$1.59/sh. 2. 13,850 JV lots to get rid of. If the value of the JVs' assets only depreciates 10% further, and they are only levered 5:1? That's a 50% haircut to the $310M balance sheet entry. -$2.41/sh 3) SPF's outright land purchases are most likely in the most overheated markets. A 20% writedown... is -$6.6/sh. 4) Homes completed: Perhaps a 10% off sale to get these out the door? -$1.77/sh 5) Lot options are probably leveraged 10 or 20 to 1. SPF is likely just going to walk away from the deposits because they… likely don't have hundreds of millions in cash needed to exercise them. -$3.16/sh. Total impairments of $16.35/sh = $11.04 - a 45% discount to yesterday's $20.90 market value."

• Beazer, Builders Under a Microscope (Business Week, Mar. 28th): "This… raises the question of whether Beazer’s troubles are isolated. Increasingly, homebuilders have relied on in-house mortgage arms as part of their sales techniques. There’s nothing inherently wrong with that approach. But with the entire housing industry under a microscope, some regulators are taking a closer look at such relationships. Mark Pearce, North Carolina’s deputy banking commissioner, sent a letter in early March to all lenders and brokers in the state, including Beazer, saying his office was scrutinizing the industry’s dealings with builders as part of a broader examination of mortgage practices."

Commercial Real Estate and REITs

• Top-Performing Real-Estate Fund Changes Course (Seattle Times, Apr. 1st)Kenneth Heebner, co-founder of Capital Growth Management, has been selling shares of REIT's that buy apartments because they are no longer cheap. At year-end his CGM Realty Fund had 35% of its assets in REITs. He's made a "significant reduction…" Morningstar: The $1.5 billion Realty fund returned an average of 20% over the past 10 years, the most of any real-estate fund... While Heebner's view on apartment REITs may have soured, he's more optimistic about the prospects of those investing in offices, especially SL Green Realty, New York's biggest office landlord."

• Why REIT Shoppers Are Heading to the Malls (NY Times, Apr. 1st): "REIT's that own regional malls and shopping centers… offer among the highest returns of all REIT categories, yet are still considered… undervalued… Many industry analysts predict that they will outpace the market this year, even as the over all REIT growth… is expected to decelerate after a seven-year run. National Association of REIT's: From the beginning of the year through last Thursday, REITs owning regional malls and shopping centers returned 11.98% and 5.23%, respectively, and REITs owning free-standing stores, another subsector, were up 1.34%. The retail REIT sector as a whole was up 8.31%... Equity REITs over all… returned 2.14%"

• Commercial Real Estate Hot in County (The Wilton Villager, Apr. 1st): "Rent prices for commercial real estate throughout Fairfield County — including Norwalk — are expected to rise, while availability should shrink. Norwalk has already seen the increase in activity with GE Real Estate and Xerox recently announcing their intentions to move to Norwalk.

• $1.15B for 230 Park (New York Post, Mar. 28th): "Dubai-based investment holding company Istithmar has reached an agreement to sell the Helmsley Building at 230 Park Ave. back to Anthony Westreich of Monday Properties and Goldman Sachs for $1.15 billion… The 1.336 million Sq.ft building, which straddles Park Avenue between 45th and 46th streets, was purchased from investor Robert Bass at the end of 2005 for $705 million… At $840 per foot, the sale is in line with other Midtown sales."

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