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 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"

"We're seeing more investors from the mainstream - single guys, dentists, women executives - all looking to build up portfolios with real estate while it's cheap," said Dave Webb, a principal at Hudson & Marshall, the nation's largest auctioneer of foreclosed homes. (NY Post, May 28th)

Real Estate Sales and House Prices

• Strong Demand for High-End Real Estate in the Hamptons (PR Newswire, May 30th): "Research firm Engel & Volkers: There is insufficient supply to meet potential demand in prime locations… In the village of East Hampton… house prices increased last year by one third, on average, to $3.4 million… In Sagaponack the average home price increased by more than 40% to $5.5 million last year… Even in the less sought-after locations, values have doubled or even tripled... Leaving aside waterfront or Estate properties, however, the price increase is slowing down. Local realtor: "We take the view that this is a re-adjustment of the real estate market caused by a generally cooler US economy."

• Santa Monica Sticker Shock: Passing the $5 Million Mark (LA Times, May 29th): "Westside Bubble reports prices in Santa Monica are busting through the $5 million mark -- and this house is not close to the beach. From Westside Bubble: "Asking over $5 million north of Montana, east of 7th. I remember when $3M was high-end, then $4M, now they're trying to pass $5M. It's at 333 20th, 5 bed/6.5 bath, asking $5,095K, featuring all the usual stuff. For an ordinary-looking house on a 60' lot. Aren't you supposed to get a faux chateau for that? (Actually 127 17th crossed the $5M line first, asking $5,395K, sold in March, but I think that's a double lot with tennis court.)"

• In a City Known for Its Renters, a Record Number Now Own Their Homes (NY Times, May 27th): "NY Times/Queens College analysis: Propelled by a building boom, co-op and condominium conversions, the lifting of rent regulations and the availability of low-interest and risky subprime mortgages, the rate of homeownership in the city increased more from 2000-2005 than during all of the 1990s… Census Bureau: In 1990, 28.7% of New Yorkers owned their homes... In 2000, 30.2% did, and five years later, according to the Census Bureau’s 2005 American Community Survey, 33.2% were homeowners… The increases spanned all major racial and ethnic groups in the city, and the steepest jumps occurred in some of the poorest neighborhoods."

Real Estate Investing and Sentiment

• Bonner Springs to Require Safe Rooms in New Homes (Kansas City Kansan, May 31st): "For new homes in Bonner Springs, a “safe room” will now be required to be built during the construction of the house. The amendment will require the building of a room providing protection for the homeowner from natural disasters such, as tornadoes… The amendment will apply to both single family and multi-family homes slated for construction in the future… The additional fees for construction of a safe room for every new house permit is $4,000-6,000. However, the additional costs are not expected to run off any business."

• Younger U.S. Families Investing in Second Houses (Stamford Times, May 30th): "From New York's Catskill Mountains to Oregon's rocky coast, younger couples who might otherwise be focused on building a nest egg instead are buying a lakefront house or country cabin that they hope to one day use in retirement. For these younger buyers, this isn't an extension of the real-estate investment bug that bit a few years ago and is now fading as home prices flag in many markets. And they're not throwing financial caution to the wind just because they want a second home. Instead, they're crunching the numbers and making hard decisions about their personal finances."

• RealtyTrac Introduces New Rooftop View Photos of Foreclosure Properties Nationwide (PR Newswire, May 30th): "RealtyTrac the online marketplace for foreclosure properties… announced a new feature called RealtyTrac Rooftop Views, [with] flyover photos of foreclosure properties nationwide -- allowing users to see what a property looks like before they approach homeowners in default, bid at public auction or negotiate with foreclosing lenders. The new… technology matches street addresses from RealtyTrac's foreclosure database with Microsoft Virtual Earth images to provide up to four photos of each property, zoomed in and… in clear detail -- and from multiple angles. In areas where overhead aerial photos are not available, RealtyTrac displays satellite photos."

Mortgates and Real Estate Lending

• Alt-A Lending Performance Getting Worse (David Merkel in Seeking Alpha, May 31st): "Although this press release from Fitch is only dealing with one set of securitizations, Residential Accredit Loan, Inc., [RALI], it is interesting to see how many 2005 and 2006 deals are experiencing poor performance, and as a result, the lowest classes in those deals are being downgraded. Just a reminder that the stress in lending is not limited to only subprime lending. All non-prime lending is affected. This is just a straw blowing in the wind… but I would lighten up on financial stocks with significant commitments to Alt-A lending relative to their overall book of business."

• Hanging Up On Lenders (Seacoast Online, May 30th): "These days, mortgage shoppers like Adryenn Ashley are supreme telemarketing targets, thanks to "trigger leads" that the credit reporting bureaus sell to lenders the instant a consumer's credit file is pulled by a loan officer. So when Ashley's lender checked her credit to prepare her loan, dozens of other mortgage companies were tipped off. These alerts can be had for a few bucks per name if bought in bulk. This is legal — though not necessarily for much longer. A few states have been exploring restrictions on the practice, and last week Minnesota's governor approved a block on most trigger leads. A ban is pending in Massachusetts. Potential congressional action is brewing as well."

• Adjustable Rate Mortgages Losing Luster (Originator Times, May 30th): "Freddie Mac (FRE): In Q1'07, 89% of borrowers who originally had a 1-year adjustable-rate mortgage [ARM] chose a new fixed-rate mortgage when they refinanced and 84% of borrowers that initially had a hybrid ARM did so as well… The Refinance Product Transition Report indicates that refinancing into the 30-year fixed-rate mortgage [FRM] among borrowers who originally had a different loan product decreased in Q1'07 relative to Q4'06. However, 82% of borrowers originally holding 30-year FRMs decided to refinance back into the same product, compared to 81% in Q4'06, and 77% a year ago, in Q1'06."

Subprime Fallout and Foreclosure Impact

• 'Subprime' Aftermath: Losing the Family Home (Wall St. Journal, May 30th): "First American Loan Performance [analysis]: In 2006 alone, subprime investors from all over the world injected more than a billion dollars into 22 ZIP Codes in Detroit, where home values were falling, unemployment was rising and the foreclosure rate was already the nation's highest…. Fourteen ZIP Codes in Memphis, Tenn., attracted an estimated $460 million. Seventeen ZIP Codes in Newark, N.J., pulled in about $1.5 billion. In all of those ZIP Codes, subprime mortgages comprised more than half of all home loans made… [Subprime] investors cared much more about the broader qualities of the securities -- things like the average credit score and overall geographic distribution -- than exactly where and to whom the loans were being made."

• Lawyer eyes Ameriquest: Clients: Home Loan Paperwork Faulty (Boston Herald, May 31st): "Attorney Christopher Lefebvre said he is representing clients suing subprime lender Ameriquest to undo their mortgages… [Lefebvre's angle:] About half of Lefebvre’s Ameriquest cases involve the company’s policy of giving homeowners a seven-day period in which to cancel their loan. That document was provided alongside a federal notice informing the would-be borrower of a three-day cancellation period. The two different documents created confusion among borrowers, with the terms seeming to clash. In some cases, the Ameriquest notice did not spell out the start and end dates of the seven-day period."

• Auction of Bank-Owned Homes Planned (Sacramento Bee, May 30th): "Home loan lenders, stuck with rising numbers of repossessed homes, will auction 242 houses next month to bidders in Sacramento, Modesto and San Mateo. It's the biggest home auction in Northern California in the wake of a five-year housing boom. At least one real estate tracker, though, doubts the auction will dampen area home values. Large-scale auctions with rich promotion budgets and big crowds often trigger bidding frenzies and relatively high offers, said Alexis McGee, president of Foreclosures.com, a Web site for investors. "They're doing the banks a favor," McGee said. "The banks are not taking a big bath."

• Fitch Downgrades NovaStar's Subprime Servicers Rating To 'RPS3+' (Business Wire, May 30th): "Fitch Ratings has downgraded NovaStar Mortgage, Inc.'s residential primary servicer rating for subprime product to 'RPS3+' from 'RPS2-' and removed it from Rating Watch Negative. In addition, Fitch has assigned NovaStar… a subsidiary of NovaStar Financial (NFI), its 'RSS3+' special servicer rating... On March 26, 2007, NFI's 10K that the company may fail to satisfy the profitability covenant under one of its warehouse repurchase facilities if the company's GAAP net income, determined on a pre-tax basis, was not greater than $1 [by] March 31, 2007, and that the company was seeking a waiver of the covenant… NFI [has] hired Deutsche Bank to explore strategic alternatives, including a sale of the company."

• Big Garage Sale (NY Post, May 28th): "Investors… are snapping up distressed assets and foreclosed properties, ranging from four-bedroom homes and mini-malls to trashed Wall Street mortgage bonds, eyeing double-digit returns. [New] firms… buy out homeowners facing foreclosure, such as Rivertown Financial in default-heavy Albany: A homeowner sells to Rivertown and leases the house back… paying off the mortgage with a goal to repurchase the home in a future refinancing. One music publishing company facing hard times, Firesky Media, is… acquiring Calif. homebuilder Downey Construction, for its valuable real estate assets… Some sophisticated portfolios are… betting on synthetic derivatives drawn from troubled mortgage bonds at Wall Street banks."

Global Impact and Alternatives To The Housing Slump

• Morgan Stanley in $12.5bn Property Spree (FT Alphaville, May 31st): "Morgan Stanley has agreed to buy Investa Property Group, Australia’s largest publicly traded office building manager, for A$4.7billion ($3.9b), in the biggest overseas acquisition of an Australian REIT… Morgan Stanley has now announced $12.5b of real estate acquisitions in the past two weeks, including debt. Also on Wednesday, Morgan Stanley’s real estate unit acquired a 3% stake, worth about $1.4b, in Mitsubishi Estate, Japan’s second-largest real estate group and an owner of prime assets in Tokyo’s Marunouchi business district."

• Investing in Prague Real Estate (Int'l Herald Tribune, May 30th): "John Breaux, acquisitions director of Czechoslovakia's first real estate fund for small investors: "[Prague housing market investors] are seeing capital appreciation of about 5% now. A few years ago, it was more like 8%/year..." The reduced returns are due mostly to a larger supply of apartments, at least in the lower and middle ranges of the market. In 2005, a record 33,000 apartments were completed in the Czech Republic, almost 20% of them in Prague… In contrast… luxury apartments in Prague are selling for 60,000 crowns/sq.m, about $265/sf, or more because there is a "significantly limited" supply."

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

• Fed Sees Housing Damping Growth Longer Than Expected (Bloomberg, May 31st): "Minutes from Federal Reserve OPMC meeting, May 9th: "The correction of the housing sector was likely to continue to weigh heavily on economic activity through most of this year -- somewhat longer than previously expected… "downside risks" to the expansion have "diminished slightly.'' Inflation that's too high for officials' comfort, combined with the housing slump, suggests the Fed may not adjust interest rates in coming months. The committee [said] the economy will expand a "little below'' the "trend rate of growth through the remainder of this year and then pick up to a rate broadly in line with the economy's trend rate [estimated 3%] in 2008."

• Plywood Makers: Pass Tougher Trade Laws (ForexTV, May 31st): "U.S. manufacturers of hardwood plywood used in kitchen cabinets and furniture [said] they are in danger of being driven out of business by Chinese panels that are not only cheaper, but also often made of toxic glue and timber harvested illegally. Speaking before the Senate Subcommittee on Public Lands and Forests, Joseph H. Gonyea III, COO of Timber Products Co., and Phill Guay, VP of Columbia Forest Products, called for tougher enforcement of trade laws and closer inspection of Chinese plywood coming into the United States."

• An ATM That's Out of Money (Washington Post, May 28th): "Already, a small slowdown in the growth of consumer spending and a big plunge in home construction helped cool U.S. economic growth to a weak 1.3% annual rate in Q1'07. The nation's retail sales fell in April, and many retailers are reporting disappointing sales so far this month... Rising home foreclosures and tightening lending standards [could] prolong the housing downturn. As consumers and businesses curtail spending, unemployment is expected to rise above 5% by year-end from a low 4.5% now… Consumer spending did slow in Q1, but to a strong 3.8% annual rate of increase from a torrid 4.2% pace at the end of 2006. Now many analysts expect consumer spending to… rise at a pace below 3% in coming months, [not] severe enough [a] pullback to pitch the nation into a recession."

Homebuilders And Housing Stocks

• DiVosta Consolidation to Cost Treasure Coast Jobs (TC Palm, May 31st): "DiVosta Building Corp. said Wednesday it will consolidate its Treasure Coast and Palm Beach operations to an office in Orlando and lay off an unspecified number of local employees… Pulte Homes (PHM) [is] the parent company of DiVosta… the fourth largest builder on the Treasure Coast. Since December, the company's South Florida operation announced three separate layoffs totaling 266 employees… PHM spokesman: The company's restructuring is part of a larger nationwide plan to reduce its work force by 16% or 1,900 employees. The company's current projects in Palm Beach County and the Treasure Coast will proceed on schedule."

• Building Materials: Chapman Capital Discloses 7.4% Stake, Urges Sale (Lon Juricic in Seeking Alpha, May 30th): "Building Materials Holding (BLG) 13D filing: Chapman Capital disclosed a 7.4% stake in the company and recommended the company engage financial advisors to explore the complete or divisional sale of the Company… Chapman Capital's Robert L. Chapman, Jr.: "I can convey an extremely high level of interest from both private equity and strategic building supply players in the acquisition of the Company… The stock market is ascribing virtually no value to SelectBuild, making it imperative that BMHC management and the Board rectify this deficiency both via operating margin improvement and subsequent change-of-control premium offered for BMHC or its divisions by financial or strategic acquirers."

• NVR Chief Executive Paul C. Saville Sells 5,000 Shares (Canadian Business, May 30th): "The chief executive of [Virginia-based] homebuilder NVR Inc. (NVR) sold 5,000 shares of common stock, according to a form 4 SEC filing. On Tuesday, Paul C. Saville reported exercised options for the shares Thursday for $47.63 apiece and then sold all of them the same day for $835.08 apiece. Insiders file Form 4s with the SEC to report transactions in their companies' shares. Open market purchases and sales must be reported within two business days of the transaction."

• Lowe's Is Becoming Enticing (Todd Sullivan in Seeking Alpha, May 30th): "Lowe's (LOW) recently increased its market share in 17 of 19 business categories last quarter; it's increasing its dividend 60% and [is] adding $3 billion to their share buyback program. Last quarter Lowe's repurchased $650 million of shares and could buy more… [The new buyback] will take 7% of shares off the market… with very little impact on operations or by adding any additional debt… Lowe's will yield about 1%... The only thing stopping me from buying share now is the anemic dividend… But, were shares to get hit and dive under $30, they would be very tempting for me."

• Milwaukee's Lawsuit Over Lead Paint Goes to Trial (Gazette Xtra, May 30th): "Milwaukee's lawsuit against NL Industries, formerly National Lead Co., is the second lead-paint case in the nation to go to trial. The State of Rhode Island won a verdict against three manufacturers in February 2006. The city also sued Madison-based Mautz Paint, now owned by Sherwin-Williams (SHW), but that part of the lawsuit was severed for this trial… Richard Lewis, lead prosecution lawyer: "Milwaukee has spent $53 million on lead abatement in about 11,000 homes, and the Milwaukee Health Department "has been left holding the bag for a problem they did not create."

• Centex, DR Horton, Pulte May Bust Bond Terms -S&P (Reuters, May 29th): "Centex Corp. (CTX) , D.R. Horton Inc. (DHI) and Pulte Homes Inc. (PHM) are three of six home builders whose debt rating outlooks were revised on Thursday to negative from stable by S&P. S&P analyst Jim Fielding: The three are "all close" to breaking bond covenants [on $11 billion in debt], which typically require that earnings before interest, taxes, depreciation and amortization are equal to at least twice the amount of interest owed on the bonds… Home builders are already seeking waivers to covenants following rapid declines in their earnings... Creditors are usually flexible on covenants with the higher rated lenders. But one lower rated builder, Technical Olympic USA Inc. (TOA), had to put up collateral against its debt as it revised its covenants several months ago… S&P in April placed Technical Olympic's "B-" senior unsecured debt rating on review for downgrade.

Commercial Real Estate and REITs

• Mid-America Takeover Hinted (Memphis Commercial Appeal, May 31st): "The Archstone-Smith Trust [buyout] raised speculation Wednesday about a takeover of Memphis-based Mid-America Apartment Communities… CEO Eric Bolton played down the possibilities. "What the transaction really signals is the fact there is a lot of private equity capital out there looking for places to get invested." Morgan Keegan & Co… reaffirmed its outperform rating on the stock Wednesday… [despite that] Mid-America's apartments are concentrated in the Sun Belt… Archstone has $4.5b worth of projects in development, including $2b under construction, while Mid-America does little development. Bolton sees good prospects for apartments and Mid-America over the next several years."

• Menin Scraps Village Center in PSL (TC Palm, May 31st): "Main Street Village, a planned 260,000-square-foot lifestyle center at PGA Village, has been scrapped. Menin executives and… Kolter Communities, the developer of PGA Village and owner of the 22-acre site at St. Lucie West Boulevard and Interstate 95, declined to comment… It is unclear as to why or when Menin decided to cancel the project… The cause was not likely market-driven, said Chris Klein, president and broker of Treasure Coast Commercial Real Estate Inc., who is not connected to the project. "We haven't seen any cracks in retail in Port St. Lucie."

• Premature Return of Equity REITs? (David Merkel in Seeking Alpha, May 31st): "After the purchase of EOP, I felt that equity REITs had reached valuation levels [for] eternity... With the purchases of Archstone Smith (ASN) and the Pennsylvania REIT (PEI), we are at valuation levels near those at the EOP purchase. My metric is equity REIT dividend yields versus the 10-year treasury yield. When one has to give up 1.2% in yield to move from safe Treasuries to risky REIT equity, there is something amiss. The valuation levels embed significant assumptions for growth in rents, which is particularly dangerous when the bull cycle in commercial real estate is so extended."

• Fitch Puts Archstone on Negative Watch (Hemscott, May 30th): "Fitch Ratings on Wednesday placed Archstone-Smith Trust's (ASN) investment grade ratings on negative watch, saying the apartment REITs potential buyout could lower its financial profile. The action affects the Englewood, Colo.-based REIT's issuer default rating of 'A-,' and its preferred stock rating of 'BBB+,' as well as its operating trust's ratings. Fitch: "If the transaction closes, the surviving entity will undertake a significantly more aggressive financial profile than Archstone has traditionally utilized." Specifically, Fitch anticipates the REIT's leverage and secured debt to increase substantially, which could affect its liquidity and financial flexibility. If this occurs, Fitch may downgrade Archstone-Smith's ratings."

• Bullish On Kimco (Long Island Business News, May 30th): "Deutsche Bank analyst Lou Taylor [said,] upgraded his ratings to "Buy" from "Hold" for apartment REITs Apartment Investment & Management (AIV). and AvalonBay Communities (AVB); for industrial and office REITs Boston Properties Inc. (BXP) and Kilroy Realty Corp.; and for retail REITs Developers Diversified Realty Corp. (DDR), Kimco Realty Corp. (KIM), Macerich Co. and Simon Property Group (SPG). Taylor: "After… the past three months, as funds flows turned negative and investors pursued other alternatives, we are turning slightly more positive to [apartment REITs] on the heels of the Archstone announcement. These stocks have the most meaningful upside potential from current levels to our targets."

• Pennsylvania REIT Ripe for Buyout (Forbes, May 30th): "Shares of Pennsylvania Real Estate Investment Trust shot through the roof after Barry Vinocur’s REIT WRAP, a real estate industry watcher, published a rumor that LaSalle Investment Management offered to buy the company. The alleged offer comes less than a week after Vinocur correctly speculated that a takeover of Archstone-Smith Trust, the apartment investment firm, by Tishman Speyer Properties was in the pipeline… UBS RE analyst James Feldman: The real estate sector was ripe for mergers and acquisitions… The apartment sector, the mall sector and the office sector are all trading at 15% below their net asset value."

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Comments

[Ralph F]

Totally agree with David Merkel's point about REIT valuations. But there's so much momentum in this market that the private equity guys who bought EQO now look smart.

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