Quote of the Day- "From the House's Mouth"
"Do you want your money back? Your contract for purchase of a new house or condominium may be illegal...To see if you are entitled to a refund, call us for a free consultation."- A recent ad in a Palm Beach newspaper taken out by a savvy local lawyer, taking advantage of the current trend of buyers who are increasingly backing out of home closings and looking for ways out of their contracts so as not to lose their sizable down payments. (Yahoo! Finance, May 9th)
Real Estate Sales and House Prices
- Tug of War: Owners Don't Budge as Houses Sit Unsold (Palm Beach Post, May 14th): "The median price of an existing single-family home in Palm Beach County fell from $388,000 in January to $375,100 in March. In the Treasure Coast, however, prices have barely budged since Jan. 1, remaining at a median of $239,700 in March. (April home sales figures come out next week.) Illustrated Properties Real Estate: The number of unsold homes on the market from Boca Raton to Vero Beach has been steadily rising, surging to a record 24,028 homes for sale in March… That's a 27-month supply at the March sales pace. March 2006, there were 18,178 unsold homes."
- Regional Real Estate Market Remains Solid (Farmington, New Mexico Daily Times, May 14th): "San Juan County Board of Realtors: The median price has lingered around $175,000 and it takes between 70-90 days… for a home to sell. Roughly 75… homes for sale in December,  in March. The average selling price for homes, which can be skewed by a few high-priced sales, ranged from $190,000 to $210,000… Durango Area Association of Realtors: Q1 median home values within La Plata County dropped from $345,000 last year to $328,000 this year. The average home price in La Plata County also dropped from $425,000 to $412,000… Homes remain on the market an average of 192 days."
- Southwest Idaho Has Large Jump in Number of Homes Put Up for Sale (The Olympian, May 12th): "Experts say investors trying to unload houses in highly populated southwestern Idaho have likely boosted the number of homes on the market… a recent drop in median home prices might have triggered the sales rush. Nearly 8,000 homes are for sale in the area... Ada County saw a 1.3% drop in median home prices in March, the first decline in 10 months... Heinrich Wiebe, co-founder of Genius Realty, says he doesn't see any recovery. "About 63% of the homes in the region now up for sale are owned by investors."
- Buyers Dampen House Prices (Milwaukee Journal Sentinel, May 11th): "Milwaukee MLS: More than 14,000 properties hit the market Jan-April, 2007 - nearly three times the 4,989 recorded sales. April, typically a banner sales month, produced just one sale more than March - 1,493 - as 4,014 newly listed properties joined unsold inventory in Milwaukee, Waukesha, Washington and Ozaukee Counties… As of April 30, metro Milwaukee's supply of newly listed properties for sale was 7.9% higher than a year earlier, demand sank 8.6% lower… Lowball offers, typically… 10% or more below asking price, have lost their historic status as a deal-stopping insult… Bargain hunters are walking out on deals these days, [as] are sellers."
- Home Prices Down, Sales Still Slow (Sacramento Business Journal, May 10th): "California's new home sales fell 3.7% in March compared with February, the California Building Industry Association said Thursday. The association tracks major new home communities across the state using data from Hanley Wood Market Intelligence. It calculated that the median asking price for new construction in March was $449,227, a drop of about 3.4% from February. Compared with March of last year, sales are off 37%. While sales are down in all categories, the association found homes in the middle price ranges are selling slower than entry-level and luxury homes."
Real Estate Investing and Sentiment
- Developer Kettler May Have Found the Magic Formula (Washington Post, May 14th): "All the Kettler projects in development or pre-development [equals] 20,000 housing units, 11 hotels and a couple of million sf of retail and office space. The land it owns or controls, more than 5,000 acres, is probably the biggest private portfolio of developable land in the region. By any measure, that's an enormous bet on the Washington area real estate market at a time when overall housing prices are falling and economic growth is slowing nationally… Real estate developers, in response to political realities, are busy shifting their focus from exurban sprawl to urban and suburban infill projects."
- As Market Cools, Home Buyers Seek a Way Out (Yahoo! Finance, May 9th): "Typically, buyers of new homes and condos put down a cash deposit when they decide to buy, then pay the balance when the home closes and is ready to occupy. But condo buyers, in particular, have a lot to lose by walking away from their contracts because their deposits can total as high as 20% -- and some buy multiple units. Consequently, some condo buyers are aggressively seeking ways to back out… Hovnanian took a charge of $175 million in Q4'06 and Q1'07 related to the Fort Myers market, partly because it had to lower prices on the First Home Builders homes."
- New York City Renters Cope With Squeeze (NY Times, May 10th): "Property and Portfolio Research: The vacancy rate for Manhattan rentals is now estimated at 3.7%... It is expected to shrink to 3.3% by the end of this year and to 2.9% by 2011. Renters without high salaries… are squeezing in extra roommates or making alterations... The rents for one-bedroom apartments in Manhattan average $2,567 a month, and two-bedrooms average $3,854 a month, according to data from Citi Habitats. Because landlords typically require renters to earn 40 times their monthly rent in annual income, renters of those average apartments would need to earn at least $102,680, individually or combined, to qualify for a one-bedroom and $154,160 to afford a two-bedroom."
Mortgates and Real Estate Lending
- LendingTree Plans To Lay Off 440 Workers (Wall St. Journal, May 14th): "IAC/InterActiveCorp's LendingTree unit is laying off 440 workers, or about a fifth of its staff… Spokeswoman Rebecca Anderson said the company needs to get costs in line "with the current realities in the market." Mortgage lending has declined in recent months as lenders tighten standards amid a surge in defaults. LendingTree collects fees from lenders reaching consumers via the company's Web site. Ms. Anderson said lenders are turning down more loans, and that has squeezed profit margins at LendingTree."
Subprime Fallout and Foreclosure Impact
- NovaStar Rises, Says Subprime Market Is Recovering (Reuters.uk, May 14th): "NovaStar Financial Inc. (NFI), a subprime mortgage lender that put itself up for sale last month… said the environment for providers of home loans to people with poor credit histories appeared to have bottomed in March... NFI posted a Q1 loss Thursday, of $39.8 million, or $1.06/share, excluding a $84.2m gain from dropping its tax-friendly REIT status. Results were lowered by about $0.90/share because NovaStar set aside more for loan losses and wrote down some securities… Q1 loan fundings at NovaStar fell 21% to $1.44 billion. April fundings slid further, down 66% to $262.5m. In March, the company fired 350 workers, or 17%, to cope with the contracting market."
- Foreclosures Part of Same Old Cycle (News Press.com, May 14th) Southwest Florida: "In Q3'06 mortgage foreclosures breached the 100-per-month mark. In Q4'06 we averaged 300 a month in new filings. January 2007, almost 500. February 2007 was 555. March and April were over 700. While these numbers seem high, there are almost 250,000 pieces of property in Lee County… 30% of the foreclosures are homesteaded properties. If the ratio was higher towards full-time residents it would be time to worry. Most of these foreclosures are speculators who entered the market too late and got caught up in the downturn... It's not the end of the world."
- American Dream Goes Wrong (Shreveport Times, May 13th): "Shreveport-Bossier City area: Realty Trac: In Caddo Parish, the number of foreclosures jumped from six in March 2006 to 46 a year later… Up from 45 reported for February. Foreclosures reported for Bossier Parish jumped from one in March 2006 to 17 for March 2007, up by two from February. However, RealtyTrac showed reported foreclosure activity in Louisiana went against the national trend for March by dropping about 25% from the prior month, landing at one foreclosure for every 3,252 households for a total of 579 for March… "Only 13.9% of the Louisiana market was subprime."
- 1,300 Jobs Slashed, Accredited Reports (Sign on San Diego, May 12th): "Troubled subprime mortgage originator Accredited Home Lenders (LEND) said yesterday that it expects “significant losses” during Q1 and that it has slashed 1,300 jobs nationwide… since Dec. 31. Last year, the company reported net income of $35.6 million for Q1. In October, Accredited acquired Aames Investment Corp… Accredited originated $1.9 billion in mortgage loans during Q1'07, down 47% from $3.6b for March 2006. Delinquent loans made up 8.96% of the portfolio of loans the company services, compared with 2.85% during Q1'06. Accredited has more than $350m of available cash on hand, [from] a $230m, high-interest loan from Farallon Capital Management."
- Foreclosures Plaguing Terre Haute (The Tribune Star, May 12th): "Cy Marlow, of L.J. Michaels: Already has listed 63 foreclosed properties in 2007 and sold 248 foreclosed homes, known as REO (Real Estate Owned) properties listings last year… Realty Trac ranked Indiana 11th in foreclosures in the nation… While foreclosures are up, economist Alan Reynolds of the Cato Institute notes that more than 95% of even subprime homes are not being returned to lenders. He also believes that weak local economies have contributed to the rise in foreclosures, not the other way around."
- Bear Stearns' Subprime IPO (Business Week, May 11th): "Everquest, a financial-services company, has been buying up equity interests in risky bonds backed by subprime mortgages from… Bear Stearns (NYSE:BSC)... [Everquest's] IPO… will "provide attractive risk-adjusted returns" to shareholders by investing in collateralized debt obligations [CDOs]... Everquest's portfolio of CDOs has been valued by BSC at about $720 million... SEC filing: A "substantial majority" of the CDOs are backed by [subprime] mortgages…A deterioration in the assets collateralizing the asset-backed securities held by our CDOs could negatively affect the cash flows..." If Bear Stearns can find buyers for Everquest shares… other Wall Street banks with big exposure to the subprime market may follow."
- San Diego Foreclosures Hit an All-Time High in April (San Diego Predatory Lending.com, May 9th): "April 2007 foreclosures hit a record 604 in San Diego County… I honestly must say I did not expect this day to happen until June or July. The last record was set in July 1996 at 589… This is an 18% increase from March, [similar] to the other statistic I track: Countrywide REO inventory, [which] increased 19% statewide in March… The steepness of this “correction” is much greater than in the past. My guess is that foreclosure cycle will top somewhere above 1,000 per month, but who knows when?" Click on charts to enlarge
- Subprime Woes Hit Buyers (Boston Globe, May 10th): "Due to a rash of defaults by subprime borrowers, mortgage companies have tightened lending to clients with good credit as well. These are typically buyers who once easily got 90-100% financing for a home, but now either have trouble getting loans or are paying more for them. "It's a knee jerk reaction to what happened with the subprime market," said Rosella Campion, loan officer for Summit Mortgage in Boston. "It's made it much more difficult and much more expensive for the people who are the starters or marginally financed people."
Global Impact and Alternatives To The Housing Slump
- Inflation May Have Topped Bank of England Target for 12th Month (Bloomberg, May 14th): "U.K. inflation may have exceeded the Bank of England's 2% target for a 12th month in April, a sign higher interest rates have yet to cool the economy, a survey of economists shows… There are signs that higher interest rates are starting to cool the economy. Mortgage approvals fell to 113,000 in March, the lowest in 11 months, suggesting the housing market may slow later this year. Personal insolvencies reached a record last quarter as some consumers struggled to pay off a record debt burden of 1.3 trillion pounds ($2.6 trillion)."
- New Zealand House Price Inflation Accelerated to 10.6% in April (Bloomberg, May 14th): "New Zealand house prices rose at the fastest pace in nine months in April, buoyed by jobs growth and immigration, suggesting the central bank will keep interest rates at a record high this year. Government valuation agency Quotable Value New Zealand: House prices surged 10.6% in April from a year earlier... The largest increase since an 11.1% gain in July. Rising house prices may encourage consumers to borrow more, which could fan spending and inflation. Reserve Bank Governor Alan Bollard raised the official cash rate in April to a record 7.75%, saying a housing boom, rising immigration and a tight labor market were stoking demand in the economy."
Macro Impact, And Will The Housing Slump Cause A Recession?
- Profit Growth in U.S Tops 10 Percent Again, Surprising Analysts (Bloomberg, May 14th): "Q1 earnings advanced four times faster than analysts had projected as of April 13, as 76% of the 444 companies in the S&P 500 that reported through May 11 met or topped projections. 27% beat estimates by at least 10%. Earnings grew in most industries, led by telecommunications services and information technology. One exception was the consumer discretionary group, which includes homebuilders such as D.R. Horton Inc. and automaker General Motors Corp., whose earnings were dragged down by bad loans at its finance unit."
- Fuel Prices Affecting More Than Gas (KKTV, May 13th): "Gas price increases might be costing you extra in places you don't expect, like the floor. "Most carpet fibers are actually made out of petroleum products," said Candy Birgers of Carpet One. Birgers says, naturally, as gas prices have risen, the price of carpet has too. "I would say it's gone up 10-20%," said Birgers, adding shipping costs for carpet have also gone up. Even so, she says customers are still walking on the carpet inside her store."
- April Proves the Cruelest Month (The News Tribune, May 11th): "The nation’s retailers reported one of their worst monthly sales performances ever, raising concerns that higher gas prices and a weakening housing market are eating away at consumer spending… Wal-Mart Stores Inc. recorded a rare drop – the weakest performance [in 27 years]… The housing market slump, which had already hurt sales of home-related goods over the past year, seems to be having a greater impact on retail sales. For years, shoppers had tapped into home equity as a source for cash, but rising interest rates have curbed that practice, and rising mortgage defaults might be spooking consumers."
- Forbes on Inflation: Impact, Process Misunderstood (Russell Wood in Seeking Alpha, May 10th): "Steve Forbes on inflation and the housing market: Housing construction was crackling before 2004 because of Congress' virtual elimination of the capital gains tax on primary residences in 1997. But the Fed-fed inflation fired up the housing boom to white-hot levels… Lenders lowered loan standards… Fraud blossomed… Speculators paid people to file mortgage applications to buy houses and apartments and quickly flip them… Fraud and other problems in the housing market… are the misguided attempts of market participants to respond to the Fed's inflation. We also see these negatives as much less important that the fiscal incentive that launched the boom."
Homebuilders And Housing Stocks
- Don't Just Swoon Over the Granite Countertops -- Do Your Homework (Chron.com, May 14th): "Recently Brookfield Homes mailed a flier to my home… touting $100,000 in incentives on its single-family houses in Virginia: Financing at 1.5% interest, two years of paid homeowners association dues or upgrades such as a finished basement or finer floor coverings. When that kind of money is at stake, does using the builder's preferred lender really remain optional? Ryland Homes (NYSE:RYL) has an in-house mortgage company, Ryland Mortgage, which deals only with people borrowing to buy a home built by Ryland. Brookfield Homes, the company offering as much as $100,000 in concessions, owns a mortgage subsidiary called the Mortgage Group."
- Company Sets Course to Survive Slump (Contra Costa Times, May 13th): "Simpson Manufacturing (NYSE:SSD)… makes fasteners, ties and other gear that construction workers use to join the wooden parts of homes and small commercial buildings… In Q1, Simpson earned $17.3 million on sales of $193.2m. Compared with Q1'06, sales were down 10% and profits plunged 31%... Construction Industry Research Board's Howard Roth: In Q1'07, housing construction dropped 34% annually from 2006… Simpson's products can be used in small office and retail buildings, and commercial real estate is enjoying brisk development and leasing activity. Simpson has widened its presence in Europe and established a beachhead in Asia... Simpson… reports increased sales to home improvement retail outlets."
- $782 Million Offered for KB's Stake Bidder wants builder's 49% of Paris-based Kaufman &Broad (OC Register, May 12th): "KB Home… received a $782 million bid for its stake in French homebuilder Kaufman & Broad SA and is considering other options for the unit… KB Home owns a 49% stake in the Paris-based builder, or 10.9 million shares... The bid for KB Home's remaining stake in the French company it founded in 1968 comes as U.S. homebuilders struggle through their worst slump in 16 years. KB Home's fiscal Q1 profit tumbled 84%.. Its backlog of ordered houses slid 46% in the U.S., while in France it rose 27%."
- Earnings Report (Sun-Sentinel, May 10th): "Levitt Corp. on Thursday reported net income of $1.3 million, or $0.6/share… Levitt had a net loss of $660,000, or $0.3/share, in Q1'07. In response to the housing slowdown, Levitt said it reduced home prices, invested in sales and marketing initiatives and cut operating costs [firing employees]. In February, TOUSA laid off 89 employees, or about 16% of its homebuilding workforce… Its Q1 loss… of $66 million, or $1.11/share... compares with a profit of $55m, or $0.92/share, for Q1'06. TOUSA said it had $78.9m in pre-tax losses relating to the potential restructuring of a joint venture. Also affecting profit was $42 million of pre-tax charges, including the writing off of deposits."
- Jim Cramer's Mad Money In-Depth Stock Picks, May 10 (Miriam Metzinger in Seeking Alpha, May 11th): "Cramer's 12 stocks which are going to have an upside and should be purchased on bad days: Whirlpool (NYSE:WHR): With only 73.9 million shares, Cramer thinks WHR is behaving like a small cap. It has a big business in Brazil, and has been down for decades but is currently "on fire." Black and Decker (BDK): With only 64.8 million shares, this company, like any name with less than 100 million shares, also trades like a small cap, and keeps shrinking... American Standard (ASD): Since ASD is splitting into three companies, it is a "buy one, get two free" situation… ASD has only 176 million shares for sale."
Commercial Real Estate and REITs
- Triple Net Healthcare REIT Picks Up Two More Offices (Orange County Business Journal, May 14th): "Triple Net Properties LLC, a real estate investor known for buying office buildings, has picked up more medical buildings and land. Triple Net’s NNN Healthcare/Office REIT Inc. bought a building and two land parcels at the Lenox Office Park in Memphis… The medical office and land buy was part of a larger portfolio acquisition by Triple Net, including office and other buildings… Last week, Triple Net’s parent—Santa Ana-based NNN Realty Advisors Inc.—filed initial plans with the SEC to raise up to $423 million in an IPO."
- Northstar Realty Finance Corp: Shining Through the Volatility (Daniel Webster in Seeking Alpha, May 11th): "Commercial lending REIT Northstar Realty Finance (NYSE:NRF) just reported Adjusted Funds From Operations [AFFO] of $0.39/share for Q1'07… Beating analysts estimates of $0.34/share. They previously increased their dividend to $0.36/share from $0.35… Northstar [is] the first among their peers to adjust the prices of their debt obligations in response to interest rate increases, [they've] raised prices without losing business… [They have] a strong credit rating [through] an impressive zero losses due to bad debt… REITs have lagged recently. However, with a 165% y/o/y increase in revenue and a 9.5% dividend yield, I don't expect it will hang around its 200 dma much longer."
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