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Quote of the Day- "From the House's Mouth"
"There are 3.5 million people supposed to be moving into Southern California the next 10 years," he said. "They're coming out here. Gas prices are still not scaring people and there are still plenty of jobs. At this point, at least, San Bernardino County housing is recession-proof." - Bill Velto, manager of Tarbell Realtors in Upland, Southern California. (San Bernardino County Sun, May 16th)
Real Estate Sales and House Prices
- Report Says Median Home Sale Prices up in Wisconsin (Winona Daily News, May 17th): " National Association of Realtors: Median home sales price climbed 1.1% to $160,000 in Wisconsin during Q1'07, although the national median price slipped 1.8% to $212,300… The U.S. Office of Federal Housing Enterprise Oversight said housing prices rose 36.4% in Wisconsin during the five years that ended Dec. 31, compared with 55.2% nationally… Existing-homes sales in Q1'07 totaled 1.6 million nationwide and 28,425 in Wisconsin… That is a 6.6% y/o/y drop in the nation and 6.5% decline in the state."
- Single-Family Construction Lags Here, Too (Independent Online, May 17th) Colorado: "Single-family homes are being built in Massillon at almost a third of the pace they were in 2006… Through Wednesday, only two permits had been issued this month… just a fraction of the dozen permits issued in May 2006…Last year, 64 homes were built here, less than half of the 124 single-family homes built in 2005. Local realtor: Buyers are viewing sometimes between 20 and 30 homes in their search, compared to under 10 in recent years… Record-high gasoline prices are also discouraging buyers from building in smaller communities and commuting to work in places like Cleveland or Akron."
- Marin is 1st Calif. County With Million-Buck Median Homes (Jon Lansner's OC Register Blog, May 16th): "Marin County's median for resale houses reached $1,010,000 last month, the first time any California county passed the million-dollar mark… The median price paid for a Bay Area home increased last month to $659,000, a new peak. That was up 3.1% from $639,000 for March, and up 3.8% from $635,000 for April 2006… Prices have increased the last three months. DataQuick: "With sales this slow, prices would decline if there were a huge number of motivated sellers listing their homes. That doesn't appear to be the case. It's likely that potential buyers are biding their time, as are sellers."
- SoCal Home Sales Reach 12-year Low (SB Sun, May 15th): "Southern California home sales fell to a 12-year low in April… DataQuick Information Systems: The biggest declines came in San Bernardino and Riverside counties, with sales in San Bernardino County off 46.7% from a year earlier and Riverside County down 45.1%… Prices, however, still haven't dropped much and may not fall too far the rest of the year. The median price of an existing home in the two-county area went from roughly $175,000 in February 2003 to $390,000 four years later. In April, the median price in San Bernardino County was $370,000. It was $409,000 in Riverside County."
- Downtown Condo Sales Down 46% in First Quarter (Chicago Business, May 14th): "Appraisal Research Counselors: Buyers signed contracts for 1,207 downtown condos and townhomes in Q1, a 46% plunge from 2,243 in Q1'06. It was the seventh straight quarter of declining sales and the biggest quarterly percentage drop so far… The good news: The supply of unsold new condos held steady in Q1 after ballooning last year. Developers started marketing condo projects with 1,218 units in Q1, roughly matching the sales for the period — a positive sign for those worried about a glut. Uncertain about the direction of the market, some developers decided to “sit on the sidelines” in Q1."
Real Estate Investing and Sentiment
- Junk Bonds May Repeat Crash of 2002, Investors Fear (International Herald Tribune, May 16th): "Univision Communications, the Spanish-language broadcaster, and Realogy, the real estate broker, financed takeovers in part with so-called toggle bonds, which give the issuer the option to pay interest with more bonds. Univision sold $1.5 billion of toggle notes in March. The notes pay cash interest of 9.75% and a pay-in-kind coupon rate of 10.5%. Realogy sold $550 million of the securities in April with an 11% cash coupon and an 11.75% rate if paid in extra notes. S&P: There have been 10 sales of toggle bonds this year, amounting to $5.14b, the most ever."
Mortgates and Real Estate Lending
- The Next Home Equity Surge (Todd Sullivan in Seeking Alpha, May 17th): "REX & Co, backed by a subsidiary of American International Group, Inc. (NYSE:AIG), has… a novel product giving homeowners cash for their equity in return for a portion of the proceeds from the eventual sale of the home… Up to 2% mortgage broker fees, and homeowners will have to commit to hold the home for a set number of years or face "early exit" fees or 5% to 25%... What this product essentially does is allow current homeowners to borrow "future equity" in their homes and not pay interest charges."
- National Mortgage Alliance Achieves Record Loan Production in April (EMedia, May 16th): "National Mortgage Alliance, a division of Georgia Banking Co… today announced record monthly loan production in April, realizing a 35% increase over March, and y/o/y growth of 113%... National Mortgage Alliance specializes in delivering low cost mortgage loans… Borrowers have the ability to complete the entire mortgage process online, from searching mortgage rates to choosing a loan product and completing their application… The company provides borrowers with access to customer support through live chat, email and toll free telephone lines. The company's professional Loan Advisors are not compensated based on loan fees."
- Mortgage Applications Fell Last Week (MSN Money, May 16th): "The Mortgage Bankers Association reported the Market Composite Index, which measures home loan application volume, fell 0.8% to 675.5 last week. Fewer applications for loans to buy houses offset an acceleration in applications to refinance existing mortgages... Some mortgage lenders that don't issue subprime loans are reporting problems with borrowers with credit better than subprime."
Subprime Fallout and Foreclosure Impact
- Healthy Housing Market Cushions Area from Foreclosures (Nashville City Paper, May 17th): "RealtyTrac: In terms of the number of foreclosures, Tennessee ranked 13th in the nation with a total of 3,397 foreclosures in April 2007 alone – one foreclosure for every 722 households. That’s a 30% increase over the same period last year… Richard Courtney, president of the Greater Nashville Association of Realtors:. “Nashville hasn’t suffered as much as the rest of the country,” said Courtney, who writes a residential real estate column for The City Paper. “Our prices are still appreciating. If [a homeowner] gets in trouble in our area, they can usually sell in a year or two."
- Subprime Shakeout: Where Do We Go From Here? (Morningstar, May 16th): "Morningstar: Subprime is a necessary and profitable business over the longer term. In 2006, $600 billion, or 24%, of total mortgage loans originated were subprime mortgage loans… We see opportunities [in] firms that maintain a strong balance sheet with plenty of liquidity and a diversified business: Countrywide Financial (CFC)… operates a diverse business model with more than $200 billion in assets… We believe [in] Washington Mutual's (NYSE:WM) diversified business platform... with more than 6,200 banking and mortgage lending offices in the U.S. and abroad and $482 billion in assets… Wells Fargo (NYSE:WFC) operates more than 80 businesses, with the goal of serving all of its customers' needs by gaining 100% of their assets."
- More Face Auction of Homes (Boston Globe, May 16th): "The number of Massachusetts homeowners facing an auction of their homes from foreclosure jumped 54% in April, the fourth consecutive monthly increase… Warren Group: 1,712 foreclosure auctions scheduled for April… the highest since the early 1990s and up from 1,111 in March... 19,487 Massachusetts homeowners [were] delinquent on mortgage payments last year, surpassing 1991 real estate recession delinquencies… Through [April], lenders had scheduled 4,830 auctions on foreclosed properties, triple the amount for the same period in 2006. The number of new foreclosure proceedings initiated by lenders against Massachusetts homeowners decreased in April, the second monthly decline."
- New Century Loan Servicing Unit Sells for $188 Mln (Reuters, May 16th): "New Century Financial Corp. (PINK:NEWC.PK) said on Wednesday that hedge fund Carrington Capital Management won an auction to buy its loan servicing operations for $188 million... A hearing to approve the sale is scheduled for May 21, and expects the transaction to close by the end of June. Irvine, California-based New Century was one of the largest U.S. providers of home loans to people with poor credit histories before collapsing amid the U.S. housing slowdown."
- Ohio AG Seeks Wall St. Tie to Subprime Fraud (Reuters, May 15th): "Ohio's attorney general Marc Dann said on Tuesday he won't hesitate to file civil racketeering charges against Wall Street investment banks if his investigation finds they had a hand in fraudulent subprime lending… "Legal action could be taken as early as the end of summer. We're going to try to find a way to hold them accountable… The folks that were securitizing these loans and raising additional capital to loan more should have known loans were being fraudulently obtained from Ohio homeowners."
- Mortgage Lenders Licensure Bill Heads to Governor (SIT News Alaska, May 15th): "The Alaska Senate on Monday unanimously passed HB 162, a bill that will regulate and license mortgage lenders, brokers and loan originators working in Alaska... The bill will provide a higher level of consumer protection for the thousands of Alaskans who obtain financing for home and property loans… The bill sets up a fee schedule for the license, and requires an applicant to pass a competency exam to confirm that he or she has a basic understanding of loan industry duties, laws, regulations, and general knowledge of the loan process."
- San Francisco: 40% of Last Year's Loans are IO or Neg-Am (California Housing Forecast, May 14th): "Chart 1 shows 40% of all refinances and purchases in San Francisco in 2006, were made by people who couldn't afford to pay the principal on their loan…Over half are piggyback loans… The second chart shows how much out of whack the house prices are compared to rents. A house P/E [like a stock] is its price divided by the rent or earnings stream… Desireable areas have higher ratios. Historically, a house in San Francisco costs 24x annual rent, but now we are at 42. That is a big drop in prices, to return to trend. Any rational investor will stay out of the San Francisco market until prices revert to 24x rent."
Global Impact and Alternatives To The Housing Slump
- Istithmar in Talks to Buy $250m Asia Real Estate (Gulf Daily News, May 17th): "Dubai investment firm Istithmar is in talks to buy at least $250 million worth of real estate assets in Asia... Managing director Richard Johnson: "(The deals) we are actively considering could double the size of our Asian investments this year… [Mainly] in North Asia, in particular China… [and] includes residential, offices, hotels and retail." Istithmar, the private equity arm of the Dubai government, has a global real estate portfolio valued at $7-8 billion. About half of those assets are in the US, with the Middle East and Europe accounting for 20% and 15% respectively."
- High, Low and In Between (NY Times, May 17th): "This year’s Kitchen and Bath Industry Show, held last week in Las Vegas, brought together more than 1,000 manufacturers from around the world… Hundreds of small, independent Asian manufacturers turned up — for the first time, a whole pavilion was formally dedicated to the Chinese — offering components and products generally aimed at the lower end of the market, even when their styling suggested higher ambitions… There were nearly 50% more Chinese companies there this year than last."
- Spain Risks Crisis Over Vanishing Reserves (Telegraph.uk, May 17th): "Spain's foreign reserves have plummeted… leaving the country exposed to a possible banking crisis if the property market busts… The Banco de Espana's holdings of foreign currencies and gold have fallen to €13.2 billion… from €41.5b in early 2002… [apparently] to help finance the current account deficit, which has ballooned to 9.5% of GDP, reaching €8.6b in January alone… Prof. Tim Congdon, an expert on monetary policy: "This gets serious is if there is a property collapse in Spain and the banks get into trouble." Morgan Stanley: Construction accounts for 17.7% of GDP, even higher than the 15% peak reached in Germany after reunification - a boom-bust saga that left German banks prostrate for years."
- The Global Real Estate Market is Forecast to Reach a Value of about $450 Billion by 2008 (BusinessWire, May 14th): "Europe and the US together account for over 65% of the global real estate market. Accelerated growth has been associated with European Union accession in Eastern Europe and the ongoing rise of Latin and South America as the outsourced beneficiaries of US corporates. It is expected that 2007 will witness a better scenario in the North American real estate market. From an investment perspective, capitalization rates may be reduced as interest rates increase. Worldwide, residential property accounts for more than 50% of the real estate market and should continue to drive the demand for real estate with economic development."
Macro Impact, And Will The Housing Slump Cause A Recession?
- California Subprime Mortgage Company to Cut Hundreds of Jobs in Chicago Area (Medill-Northwestern Univ., May 16th): "ACC Capital Holdings Corp., parent company of sub-prime mortgage lender Ameriquest Mortgage Co., will cut hundreds of Chicago area jobs later this month… Part of a final resolution of an investigation in 30 states… for possible predatory lending practices. ACC allocated $295 million dollars for a customer restitution fund. In the Chicago-area, ACC will eliminate 515 jobs at facilities in Schaumburg and Rolling Meadows, starting May 25. ACC: Not all the local layoffs are from Ameriquest, but also include ACC’s other subsidiaries, Argent Mortgage Company, a wholesale mortgage loan operator and AMC Mortgage Services, which handles loan servicing."
- Real Estate, Finance Create 25% of Big U.S. Layoffs (Jon Lansner's OC Register Blog, May 16th): "Wednesday's new federal stats: Real estate and financial businesses -- construction, real estate services and all finance work -- accounted for 25% of all jobs lost in major layoffs nationwide in Q1. These industries combined had 333 major layoffs involving 34,982 workers. The Bureau of Labor Statistics counts major layoffs as events costing 50 or more workers a month or more of lost wages. Data is taken from unemployment insurance claims. Real estate/financial combined for one-quarter of the nation's big cuts. A year earlier – Q1'06 -- real estate/financial was just 14% of the national layoff pie as workers losing jobs in these niches grew by 34% in a year."
- Where's the Inflation? Check the Non-Core Components of the PPI and CPI (Thomas Kee in Seeking Alpha, May 15th): "The housing market… would be devastated by an increase in interest rates. But how else do the FOMC control inflation? Money supply is a measure of liquidity, and the money supply, controlled by the Fed, has been increasing steadily. If the policy decision was to… start to restrict money… inflationary pressures could be controlled without an increase in interest rates… Stocks in general come under pressure when Interest Rates increase. Specifically Interest Rate sensitive stocks will be hurt. Some examples include banks like Bank of America (NYSE:BAC) and American Express (NYSE:AXP), Home builders like Lennar (NYSE:LEN) and KB Home (NYSE:KBH), lenders like Washington Mutual (WM), and dividend paying securities like Reits."
- Rising Exports Putting Dent in Trade Gap (NY Times, May 14th): "Over half of the 9.1 million vehicles General Motors produced last year were sold in foreign countries... With the slumping housing market taking a toll on its business at home, Caterpillar is counting on sales of equipment and diesel engines in Europe, Asia and the Middle East to keep growing… Faster growth in Europe and Asia is helping to cushion the blow of a collapsing housing boom that has hampered domestic consumer spending, creating more demand from elsewhere for goods and services made in the United States."
Homebuilders And Housing Stocks
- Toll Brothers Says Revenues Dropped 19% to $1.7 Billion (TC Palm, May 17th): "Luxury-home builder Toll Brothers (NYSE:TOL) reported revenues for the quarter ended April 30 fell 19% to $1.17 billion from the same period a year earlier. Signed contracts were worth $1.17b, down 25% from the same period in 2006. The luxury homebuilder's projects include Jupiter Country Club, Frenchmen's Reserve in Palm Beach Gardens and communities within Tradition in Port St. Lucie."
- Median House Prices and Homebuilder Confidence Decline (Seeking Alpha, May 16th): "With 147,708 households in some state of foreclosure in April, a 62% jump from April 2006, and resultant tighter lending standards at almost half the U.S. banks, median house and condominium prices in Q1'07 fell 1.8% to $212,300, a 2-year low. Single family home prices fell in 62 of 145 cities. Sales rose 2.4% from 6.2 million units to 6.41 million in Q4'06, down 6.6% from Q1'06. The National Association of Realtors says prices are stabilizing and projects a late 2007 recovery, but the National Association of Homebuilders/Wells Fargo index declined to 30 from 33 in April and showing borrowing difficulties and order cancellations were taking its toll on homebuilder confidence. Economists had predicted a static 33 index reading-- down from last May's 46—but all three index components [Single family homes, 6 month expectations and prospective buyer traffic] declined. However, the consumer price index rose 0.2% as expected. Economists point to falling rental costs as the most significant contributor to a possibly stabilizing CPI."
- Job Description: Residential Estimator/Senior Purchasing Agent (NW Jobs News Source, May 16th): "Quadrant Homes, the #1 Selling Homebuilder in Washington is seeking a Residential Estimator/Senior Purchasing Agent for our Bellevue Corporate office… At Quadrant Homes we are in the business of building the American Dream. We provide more house to more homebuyers for less money than they ever thought possible. Quadrant Homes is committed to enhancing the quality of life in our community, creating economic growth and cultural richness, and to preserving the environment for generations to come."
- Fidelity Betting Big on Growth (and Homebuilders) (Morningstar, May 16th): "As of March 31, 2007, Fidelity stock ownership information filed with the SEC: Interestingly, Fidelity scooped up shares of some homebuilders, such as Lennar (LEN), KB Homes (KBH), Centex (CTX)… Fidelity flashed contrarian stripes in buying beaten-down homebuilder stocks, as Morningstar equity analysts view Lennar, KB Home, and Centex as good buys."
- Deere Reports Second-Quarter Earnings of $624 Million (PR Newswire, May 16th): "Construction & Forestry. U.S. markets for construction and forestry equipment are expected to remain under pressure for the year. While nonresidential spending in the U.S. is forecast for improvement, the outlook for residential construction remains lower than last year. Further, sales to the independent rental channel are expected to decline significantly. In this environment, Deere's worldwide sales of construction and forestry equipment are forecast to decrease by about 11% for the year."
- Home Depot and the Housing Market (Kiplinger.com, May 16th): "Home Depot blames the flagging housing market for the stock's tough going… implying that once… real estate sales prices firm, its shares will rise again…But in 2002, the median sales price of an existing single-family house (the slice of real estate in which buyers are most apt to undertake improvements) rose 7%, while HD shares fell 53%. In 2003, house values gained 8%, while HD stock went up 49%. In 2005, arguably the apex of the last housing boom, with home sales prices up 12% and a record 7 million existing residences changing hands, HD stock fell 4%."
- US Credit-KB Home's Possible French Sale Neutral for Credit (Reuters, May 15th): "The cost to insure KB Home's (KBH) debt with credit default swaps fell by around 13 basis points to around 200, [up] from around 284 basis points a month ago… on news the company was considering the sale of its French subsidiary Kaufman & Broad (KBH.PA). CreditSights: "We do not believe that KBH appears to be in jeopardy of losing its high-BB ratings in light of the company's strong liquidity and solid interest coverage. We would expect (sale) proceeds to be earmarked toward enhancing the company's ailing shareholder returns… as KBH equity has sunk 23.5% over the past year."
- Black & Decker Gen. Counsel Sells Shares (Forbes, May 15th): "SEC filing: The general counsel of tool maker Black & Decker (BDK) sold 2,768 common shares and surrendered an additional 1,882… In a Form 4 filed… Monday, Charles E. Fenton reported he sold the 2,768 shares Friday for $93.27 to $93.57 apiece and surrendered the 1,882 shares Thursday for $92.80 apiece. Insiders can surrender shares as a way to cover either taxes or the cost of exercising options. Insiders file Form 4s with the SEC to report transactions in their companies' shares [and] must be reported within two business days of the transaction."
- Home Depot 1Q Profit Drops 29.5 Percent (Yahoo! Finance, May 15th): "Home Depot cited erratic weather and continued weakness in the housing market as contributors to its Q1 profit drop… Home Depot's shares slipped $0.71 to $38.30 Tuesday [on] the company's bleak [guidance] for the rest of the year… For the three months ended April 29, HD earned $1.05 billion, or $0.53/share, compared with a profit of $1.48b, or $0.70/share, in Q1'06. Analysts… were expecting HD earnings of $0.59/share. Revenue rose 0.6% to $21.59b from Q1'06. But sales at stores open at least a year, a key industry metric, declined 7.6%."
- Champion Enterprises "Buy," Target Price Raised (New Ratings, May 15th): "Analysts at Ferris Baker Watts reiterate their "buy" rating on Champion Enterprises (CHB). The target price has been raised from $12 to $14."
Commercial Real Estate and REITs
- Commercial Real Estate Added $494.8 Billion to Economy in '05, Study Finds (Chicago Tribune, May 15th): " National Association of Industrial and Office Properties Research Foundation Report: Commercial property development and management directly and indirectly pumped a total of $494.8 billion into the U.S. economy in 2005… Among the states, Illinois ranked fifth nationwide in the value of 2005 construction spending. Illinois saw commercial development contribute $6.04b in direct spending for laborers, materials and professional services from architects to lawyers… Nationwide, commercial real estate outlays also supported the equivalent of 4.2 million new jobs in 2005, with personal earnings totaling $155.8b."
- Babcock & Brown Acquires U.S. Regional Mall Portfolio and Asset Manager/Operator (PR Newswire, May 15th): "International investment and advisory firm, Babcock & Brown (BNB), announced today that it has entered into an agreement to acquire both Gregory Greenfield & Associates, a U.S.-based regional mall owner and operator, as well as a portfolio of eight regional malls currently managed and controlled by GG&A. Included in the BNB acquisition of GG&A is the asset management role for six additional malls in GG&A's portfolio currently owned by third party investors… Since its inception in 1998, GG&A has acquired 28 regional retail centres… at an aggregate acquisition cost of roughly $1.5 billion."
- Apartment REITs That Could Come Out Winners (Kiplinger.com, May 15th): "Through April 30, apartment REITs were down 5.4% on average… AvalonBay Communities (NYSE:AVB)… a "blue chip" REIT… shares are down about 18% ($122.24) from their 52-week high and are more than 12% below its portfolio's net asset value… Archstone-Smith Trust (ASN) is concentrated in… high-growth markets… The company [said] smart investments made years ago bode well for outsized gains when the properties are eventually developed. The stock is trading 17% below its 52-week high of $65 and more than 9% below an estimated NAV of $59/share… BRE Properties (NYSE:BRE)… 90% of the company's debt is fixed, at an average rate of 5.7%. BRE's $1.5-billion property development pipeline is growing steadily, with about $509 million under construction…Shares are down 1.38% ($60.65), and yield 3.5%... a 17% discount from a 52-week high of $73, a Camden Property Trust (NYSE:CPT) has $740m worth of property under construction, part of a $2.1b total development pipeline. The stock's… $72.33 price is 11% below the stock's 52-week high and 14% below NAV."
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