Housing Bubble and Real Estate Market Tracker

Includes: AIG, HRB, LEN, NL, SHW
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 have 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"

“The crisis in the subprime sector has infected other parts of the mortgage market as well as consumer psychology, and as a result the housing outlook has deteriorated We’re now projecting that home sales and housing production will not begin improving until late this year, and we’re expecting the early stages of the subsequent recovery to be quite sluggish. There still are tremendous uncertainties regarding our baseline forecast going forward, owing largely to the subprime crisis that is having widespread effects throughout the mortgage market.”- NAHB Chief Economist David Seiders. (NAHB press release, May 16th)

Real Estate Sales and House Prices

  • Maryland Area Leads Nation in Housing Cost Increase (Express Star, May 18th): "National Association of Realtors: Cumberland area, Maryland and West Virginia, saw an increase in housing prices of 17% from Q1'06 to Q1'07… The median home price in the Cumberland area was around $100,000 in Q1, up from $85,400 in Q1'06. The figures can be misleading… since the median price first jumped to $100,000 in Q2'06 and has since remained [comparable]. The median price in Q4'06 was $98,000… Beaumont-Port Arthur, Texas, house prices increased 16.5% at $115,800 and a 15.7% increase in the Gulfport-Biloxi area of Mississippi at $153,700. The Hagerstown-Martinsburg area decreased by 5.6% at a median of $209,000."
  • OC Starter Homes a Little More Affordable (OC Register, May 18th): "California Association of Realtors: At a time when home prices fell to early 2006 levels [and] while incomes rose slightly... 25% of OC households had incomes high enough to afford a typical first home… up from 24%... in Q4'06 and 23% in Q1'06. Statewide, the percentage of households able to afford starter homes decreased to 25% from 26% in Q1'06… OC affordability rates typically are lower since home prices here are among the highest in the nation. Local affordability rates have fallen from a high of 43% in Q1'03."
  • San Francisco Home Sales Drop, Median Sales Price Up (Socket Site, May 16th): "DataQuick: The median sales price for existing homes in San Francisco was $790,000 last month, up 1.4% compared to a revised April ’06 ($779,000), and up significantly (4.9%) compared to the month prior. Sales volume, however, was down (3.9%) y/o/y (568 sales in April ’07 versus a revised 591 sales in April ’06) and fell (11.3%) compared to the month prior (640 recorded sales in March ‘07)… For the greater Bay Area, the recorded median sales price in April was $659,000 (a 3.8% y/o/y increase) and sales volume was 7,447 (down 18.4% from a revised 9,129 sales in April ’06)… Sonoma recorded an 8.5% y/o/y reduction in median sales price, while Marin recorded a 8.8% y/o/y gain; and y/o/y sales volume continued to plummet in both Contra Costa (down 28.2%) and Solano (down 37.2%) counties."
  • Bradenton-Sarasota Home Sales Surge (Bradenton-Herald, May 16th): "The Bradenton-Sarasota housing market [had] an increase in sales in Q1'07, compared to Q1'06. Florida Association of Realtors: Existing home sales were up 6%. The median price slid 12% to a median of $290,500... During Q1'06, the median price was $331,100… Locally, condos appreciated by 15% in Q1, with the median price at $312,600… RE/MAX: During the height of the real estate boom, there was only a 1.7-month supply of homes on the market, but… [Now it's] a 10-month supply. That tide is finally turning. Currently, there is a 9.7-month supply of homes and with more than 500 sales pending in Manatee County, further declines are expected."

Mortgates and Real Estate Lending

  • Next Subprime Wave Brings More Bad News (Inman News, May 16th): "Housing needs a constant stream of mortgage money to stay healthy… The real estate market will be left with three money sources for marginal home buyers: the Fannie Mae/Freddie Mac duo; the Federal Housing Administration (FHA); and finance companies. Mortgage brokers will sell to any of them but will operate under many added federal restrictions. FHA wants to get into the act because their market share plummeted when subprime came on the scene. Three things would have to happen: 1) Congress would have to raise the loan ceilings to match Fannie and Freddie; 2) FHA premiums need to be adjusted to the increased risk, possibly making them less competitive; and 3) FHA has to be easy to do business with. The bureaucracy lives there."
  • Mortgage Raters Grapple With Subprime Piggy-Backs (Reuters, May 16th): "More securities backed by second-lien subprime mortgages are expected to be downgraded in coming months as overstretched borrowers struggle to keep up with multiple mortgage payments… First-lien mortgage holders have first claim to [a] property and any proceeds from a foreclosure sale. Second-lien loans have the highest likelihood of default as lenders will typically write them off. Sarbashis Ghosh, home equity ABS analyst at Merrill Lynch: "If there is no home price appreciation then there is almost no recovery on these loans. 2006 (asset-backed securities) deals contain the worst collateral attributes."

Subprime Fallout and Foreclosure Impact

  • H&R's Subprime Lending Unit Option One to Cut Jobs (Reuters.uk, May 18th): "H&R Block Inc. (NYSE:HRB) said Thursday its money-losing subprime lending unit, Option One Mortgage, would eliminate about 615 jobs, triggering a $19 million pretax charge. [The] restructuring plan… comes in response to sharply lower origination volumes of risky mortgages to people with weak credit. Last month, H&R Block… agreed to sell Option One to private equity firm Cerberus Capital Management. H&R Block, the No. 1 U.S. tax preparer, said the charge includes about $11m in one-time termination benefits and about $6m to exit leases. H&R Block [wanted] $1.3 billion for Option One, but… the final price… may be well below $1 billion.
  • Housing Slump Driving Major Increase in Auction Sales (Chicago Tribune, May 16th): "The number of properties sold on the block has doubled from last year for Inland Real Estate Auctions CEO Frank Diliberto: "Now there's an oversupply of pretty much everything, including luxury housing. For higher-priced housing, there may be less inventory, but there are fewer buyers." Inland auctioned approximately 100 units of land, houses or condominiums during Q1, up from about 50 units in 2006. For Q2, Inland had a preliminary list of 300 residential units for possible auction, with 50-75% likely to go on the block.Until 18 months ago, most of the company's Midwest activity involved commercial property."
  • Foreclosures Fuel State's Rising Bankruptcy Rate (Birmingham News, May 16th): "The number of personal bankruptcies in Alabama fell to 19,420 in 2006, down from 47,515 a year earlier… But the state's bankruptcy rate, measured in terms of the number of households for each filing, rose to No. 3 last year from No. 8 in 2005. Only Tennessee and Georgia had worse rates… RealtyTrac: Alabama reported 4,348 foreclosure filings last year, up 1%,… though filings in the state accelerated in Q4. Foreclosure activity in Alabama increased nearly 466% in November alone, the fastest growth rate in the nation."
  • Subprime Mess May Force National Licensing For Brokers (Originator Times, May 16th): "Congressional Democrats seem ready to bring mortgage brokers and non-bank lenders… under some sort of federal regulation. More difficult [is] how to make Wall Street share some of the responsibility for bad home loans that are pooled together and sold to investors as mortgage bonds? Lenders are going to get explicit federal guidance about riskier home loans. [But] key Republicans and the White House are cool to the idea of new regulation legislation. "Industry-based solutions are preferred to government intervention when addressing problems in the private marketplace," said Sen. Richard Shelby, R-Ala., the ranking Republican on the Senate Banking Committee."
  • Feds Work With Lenders to Refinance Subprime Loans Instead of Foreclosing (AZ Star Net, May 16th): "Federal banking regulators are negotiating with lenders to restructure high-interest mortgage loans made to home buyers with poor credit… While it may also result in accounting charges on quarterly earnings reports of public companies with mortgage lending units later this year, it could limit any broad economic damage from the risky mortgage practices of the past few years. Experts say it could also save lenders money in the long run because… the Federal Reserve estimates that it costs a bank $50,000 to foreclose on a home, and houses sold at foreclosure auctions fetch well below appraised values. American International Group (NYSE:AIG) disclosed last week that it took a $128 million charge in the first quarter for higher-priced, or subprime, mortgages issued by a bank it owns."
  • 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…Percentage of Mortgages with Piggyback LoansPrice to Earnings Ratios for Apartments in Top AreasOver 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."

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

  • Is the Housing Market on the Road to Recovery? (James Picerno in Seeking Alpha, May 17th): "Wednesday's report on April housing starts offers statistical [optimism]. Seasonally adjusted… housing starts in April rose by 2.5% over the March tally… No one will confuse the "rebound…" with a new bull market in housing… The former decline cut starts by nearly 40% in 12 months from January 2006's peak to the trough a year later… There are still reasons to worry… David Resler, Nomura Securities: The "milder weather appears to have enabled builders in the Northeast to catch up on projects that had been delayed during the winter months… The region may continue the catch-up process for another month… Especially worrisome, Resler continued, is the 8.9% fall in building permits in April."
  • Leading Indicators Report Begs the Question: Has Housing Really Bottomed? (Ticker Sense in Seeking Alpha, May 17th): "Numbers for the U.S. Leading Economic Indicators composite were released at 10:00 this morning. Ticker Sense Leading Indicators ChartThe table for the current calendar year appears below. The number came in at -0.5% (rounded up from 0.45%); less than expectations of 0%. We noticed that the decrease in Building Permits accounted for more than half of the total decline. So we ask, has housing bottomed out yet?"
  • CPI Gives A Clearer Read on Retail (Barry Ritholtz in Seeking Alpha, May 16th): "Paul Kasriel: "Inflation-adjusted retail sales fell in both March and April." Kasriel deflates nominal retail sales by the CPI for commodities to determine real sales volume, rather than merely measure inflation driven price increases. "Revised March nominal retail sales increased 0.97%. The CPI for commodities increased 1.22% in March,'' which means real sales fell. April's nominal decline of 0.2% will translate into a decline in inflation-adjusted retail sales as well. "Although two consecutive months of contracting real retail sales is not the rarest event, in conjunction with falling house prices, I would conclude that it's not good.''
  • OECD Meeting: IMF Says Housing Market to Continue Weighing on US Growth (Forex TV, May 16th): "The slowdown in the US housing market will continue to weigh on US growth in the next few quarters, IMF deputy managing director John Lipsky said. "The weakness of the housing sector is going to put downward pressure on the economy for the next few quarters," he told a news briefing on the sidelines of the OECD annual ministerial meeting. But he said the IMF is keeping its forecast for US growth this year at 2.2%."
  • Housing Permits Tumble, Starts Improve (Seeking Alpha, May 16th): "The Department of Commerce: Construction permits fell to a ten-year low of 1.429 million. The 8.9% drop was the most severe in 17 years, and was well below the seasonally adjusted rate of 1.51 million forecasted by economists. Conversely, housing starts were unexpectedly up 2.5% to a seasonally adjusted annual rate of 1.528 million, ahead the 1.48 million pace forecasted. Over the past year, permits have dropped 28%, while starts are down 16%. Economists say buyers are delaying buying homes in anticipation further price drops, while stricter lending rules mean less people are able to finance purchases."
  • Utah Economy is Going Strong (Desert News, May 16th): "Mark Knold, Department of Workforce Services report: Not much Utah money went into the speculative housing market… The growth the Utah [housing] market is seeing now, has more to do with demographics than [making money]… All but one of the 11 job categories measured by the department reported y/o/y growth. Construction added 14,000 jobs, followed by the trade, transportation and utilities sector, which brought on 9,500 new workers over the past 12 months… Knold: The construction industry should continue in its lead position for at least the next few years, even as the industry shifts from residential to commercial construction."
  • What Could Save the Housing Market (Voice of San Diego, May 16th): "One factor that could aid housing market is government intervention… The Federal Reserve will want to lower their short-term federal funds rate. In the case of a housing bust, lower short-term rate would be of key importance to the hordes of adjustable-rate mortgage holders who are facing higher payments once their loans reset. Jamming short-term rates back down to 2003 levels would certainly prevent a lot of foreclosures… there will likely be tremendous downward pressure on home prices, it's important to acknowledge that there could be some forces putting pretty serious pressure in the other direction."

Homebuilders And Housing Stocks

  • Fitch Leaves KB Home Ratings Unchanged (Hemscott, May 18th): "Fitch Ratings on Thursday left unchanged its ratings on debt issued by KB Home (NYSE:KBH) after the homebuilder [announced negotiations] to sell its stake in a French builder. But Fitch said any changes in the ratings for the company will depend on how it uses any proceeds and free cash flow [this] year… PAI Partners offered more than $800 million for its 49% stake in Kaufman & Broad SA. The unit delivered 69% of KB's pretax construction income in 2006… KBH's default rating is 'BB+.' The outlook for any potential changes to the ratings is currently at 'stable.'"
  • Martha to Offer Lineup of Homes in Denver (Chicago Tribune, May 18th): "KB Home, the fifth-largest American homebuilder, and Martha Stewart Living Omnimedia plan to build homes in Denver, their first project together in Colorado. The properties will be designed by Stewart and constructed in the Stapleton neighborhood [and] will be priced starting in the mid- $300,000 range… John Burns Real Estate Consulting: "It's a marketing thing, really… Martha Stewart homes are "much less than 1%" of KB Home's business." Housingmetrics: Job growth in the Denver area has helped support the price range of the houses KB Home plans to sell in Denver."
  • Jim Cramer's Wall St. Confidential Picks (Miriam Metzinger in Seeking Alpha, May 16th): "Cramer thinks retail stocks will improve with the weather and should rise in the summer. April was stormy for consumer spending, gas prices, and housing, and it was also, well, stormy; Cramer noted that when the weather improved the last 10 days of April, so did the stocks…Cramer was worried that a bad report and a negative forecast from Home Depot (NYSE:HD) would bring down the rest of the sector, but he did not expect the macro number and the healthy consumer price index to give the market momentum. Since the number indicated inflation is not a major problem, Cramer declares a Fed rate cut is "back on the table."
  • Builders, Realtors Square Off on Transfer Fees (Inman News, May 16th): "The Realtor association's Senate Bill 670… rejected last week, sought major restrictions on the use of… private real estate transfer fees [which allow builders to raise money while preserving public land]. Lennar Homes (NYSE:LEN) has directed revenue from transfer fees in Orange County to homeless shelter NPO's… Realtor group officials… worry that builders will increasingly use transfer fees with new developments, and that these fees will harm future home sales. Colleen Badagliacco, CAR president: Builders have "created an unholy alliance with some of the environmental groups, using (transfer fees) as a way to evade certain environmental mitigation" by passing those costs on to consumers."
  • R.I.: Lead Paint Cleanup Plan Due Sept. (Forbes, May 16th): "Three former lead paint manufacturers who lost a landmark lawsuit last year could learn by mid-September what the state wants them to do to clean up contaminated properties in Rhode Island - a process that is estimated to cost billions… A jury in February 2006 found three manufacturers - Sherwin-Williams Co. (NYSE:SHW), NL Industries (NYSE:NL), and Millennium Holdings LLC - liable for creating a public nuisance by manufacturing and selling a toxic product."
  • Ingersoll-Rand Contemplates Parting With Bobcat, Construction Units (Seeking Alpha, May 16th): "Ingersoll-Rand Company (NYSE:IR) is considering selling its Bobcat construction unit as well as other construction related units, saying the businesses "no longer fit" its long-term strategic outlook. A spinoff is also a possibility… The businesses in question accounted for combined revenue of $2.6 billion last fiscal year, out of total revenue at Ingersoll-Rand of $11.4b. The construction units have been suffering as a result of the housing slowdown; Wednesday, Bobcat competitor Deere & Co. reported earnings fell 16% in Q1 on the continuing housing slump. Ingersoll-Rand shares gained $2.68, or 5.75%, to $49.29 on heavy volume of nearly 12 million shares."

Commercial Real Estate and REITs

  • Commercial Real Estate Money Plentiful … For Now (Colorado Springs Business Journal, May 18th): "A Q3'06 survey of more than 600 developers, investors, brokers, consultants and lenders by Urban Land Institute and PricewaterhouseCoopers indicated the commercial real estate cycle appears to have reached its peak and will begin pulling back this year… That shift might also mean that the “easy lending of the past several years will tighten… Officials at the U.S. Department of the Treasury and the Federal Reserve issued guidelines last year for commercial lending institutions in response to the increasing number of commercial real estate projects in the lender’s portfolios."
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