Quote of the Day- "From the House's Mouth"
"For us to go in and audit how they act on their mortgage applications would have been a huge effort, and it's not clear to me we would have found anything that would have been worthwhile." - Former Chairman of the Federal Reserve Alan Greenspan, reportedly told the Wall St. Journal he doesn't remember specifically discussing subprime lenders during his tenure as Fed chief, but that he was against regulating and policing subprime lenders then. (CNBC, June 10th)
Real Estate Sales and House Prices
- Misfortune With A Happy Ending (The Post Journal, June 11th): "National Association of Realtors Q1 existing single-family homes data: The advantage is shifting to buyers... Modest annual declines have been seen in cities such as San Diego, Boston, Las Vegas, Phoenix and Honolulu… Price gains of just 1.4% or less were reported in New York, Chicago and Washington, D.C… Many people [are] trying to "time" the market to take advantage of the slump… The market forces that helped drive the housing boom — affordable financing and the alluring prospect of escalating home values — are no longer a given. Potential price breaks could be wiped out if interest rates rise any higher."
- Townhomes a Steal in Fort Myers (Wink News, June 11th) Southwest Florida: "In Fort Myers… a 3BR townhome previously priced at $310,000 sold for about $180,000! First time home buyer Brandon Quarterman, a student at Florida Gulf Coast University, was the lucky bidder… The two and three bedroom townhouses in the San Simeon development… were selling for prices we haven't seen in Southwest Florida in quite some time… Marketing reps with the developer, Levitt and Sons, say they're trying to quickly unload the fifty homes. Most of them were left over after people and investors backed out of deals when the housing market changed."
- Yes, Real Estate Prices Can Drop in Half--Even in Manhattan (Of Two Minds, June 8th): "In the last real estate decline in the 90s, Manhattan prices fell 40% nominally and 60% when adjusted for inflation… If we extrapolate from history… then we can expect Manhattan property--yes, every "prime" square inch of it--to decline 40% to 50% in nominal terms and from 50% to 60% in inflation-adjusted terms. Any way you slice it, that's serious money being lost… This data begs one nagging question: if "prime real estate" is set to drop in half, then how far will less-than-prime real estate drop?
Real Estate Investing and Sentiment
- Wired To Sell (NY Times, June 10th): "Sophisticated smart-home technology is increasingly available and includes automation systems that allow residents to control lighting, raise and lower window shades and change a room’s climate, via computers… In apartment buildings, automation systems can link to concierge services, enabling residents to make restaurant reservations without picking up a phone. Enhanced systems with integrated closed-circuit televisions allow residents to see what’s going on inside and outside their homes from another location… [Like] to see if there are washing machines available in the laundry room... This sort of technology [is] the latest must-have amenity in condos at every price level that are being built in and around New York City."
- One City’s Home Sellers Do Better on Their Own (NY Times, June 8th): "In a Northwestern university study… based on home-sales data from 1998 to 2004 in Madison, Wis., found that people in that city who sold their homes through real estate agents typically did not get a higher sale price than people who sold their homes themselves. When the agent’s commission is factored in, the for-sale-by-owner people came out ahead financially… Madison is home to one of the biggest for-sale-by-owner Web sites in the country… The National Association of Realtors has said that houses sold via its members’ local multiple listing services get a 16% premium over homes sold by their owners."
- NAR and Housing Forecasts (Barry Ritholtz in Seeking Alpha, June 8th): "Investech's Jim Stack has disabused the group of its forecasting accuracy. In a June 1st commentary, Stack looked at his Housing Bellwether chart, and plotted some of the more outrageous/egregious comments from former NAR Chief Economist… By being such dishonest brokers of information, the NAR has now made themselves look ridiculous. No one knows what the future will bring, but consistently absurd spin offered up by the Realtor group not only does a disservice to the public, but is now working against the interest of Realtors themselves."
Mortgates and Real Estate Lending
- What Do Mortgages Have To Do With Bond Yields? (Barry Ritholtz in Seeking Alpha, June 10th): "When Treasury yields rise, yields on bonds backed by mortgages tend to rise more. Higher mortgage rates make it less likely homeowners will either refinance their mortgage or buy a new home. Fewer prepayments mean mortgage investors risk holding more mortgages on their books than they expected. To counter that, they readjust by either selling mortgages or selling Treasuries as a hedge. Both of those things drive Treasury yields and mortgage rates higher -- and can push more mortgage investors to sell… If rates stay high… the recovery in the housing market… could get pushed back."
Subprime Fallout and Foreclosure Impact
- How to Fix, Not Break Up, the Subprime Business (Washington Post, June 9th): "Jack Guttentag, Wharton professor of finance: Borrowers with better credentials that are still not good enough for the mainstream market are still being served… For every subprime borrower in foreclosure, there are at least 10 others who became successful homeowners who might not have made it otherwise. We don't have a substitute for the subprime market… Draconian penalties that could cripple the subprime market should be avoided… The lien enforcement system should not be weakened… I would mandate a three-year extension of the initial rate period of all ARMs [under certain conditions.]"
- The Subprime Barn Door (Boston Globe, June 10th): "Avoiding future excesses will require regulatory action. [Such as] standardized loan forms [that] drive home the long-term costs of a loan, not just the monthly payments during a teaser period. William Apgar of Harvard's Joint Center for Housing Studies: Subprime mortgages are less likely than standard ones to include escrow mechanisms for property taxes and insurance – [making] monthly payments seem deceptively low. Federal banking regulators could… classify such an omission as a deceptive practice… Mortgage lenders have become more cautious… But these lessons may be forgotten when the housing market trends upward again -- unless lawmakers and regulators act now."
- AIG Settlement Costs $50 Million More (Business Week, June 8th): "American International Group (AIG), an insurance giant that also runs a home mortgage business, announced Friday a $50 million charge in Q2 [as a] settlement with the federal Office of Thrift Supervision, [following] a $128 million settlement charge in Q1 [for allegedly charging] homeowners excessive mortgage fees and [not] properly considering their credit ratings.... AIG said some of the money will be used to help borrowers with weak credit who face foreclosure after taking out mortgages from AIG Federal Savings Bank between July 2003-May 2006 … AIG also agreed to pay $15 million [to] promote financial literacy and credit counseling. The settlement will have a small financial impact on AIG, which reported Q1 profits of $4.13 billion."
- Downey Financial: REO Pipeline Watch (Colin Peterson in Seeking Alpha, June 7th): "This chart of Downey Financial (DSL) Real Estate Owned pipeline is based on a June sample of Alameda, Contra Costa, Kern, San Diego, San Joaquin, Solano, and Orange counties... DSL has at least one REO in over 40 different counties. However, the seven counties do account for 40% of the REOs listed on DSL's website… It takes at least 90 days to go from a default notice to a notice of sale… The April spike in sale notices and trustee's deeds probably came from borrowers that received notices of default prior to 2007… Virtually all of the defaults from Q4 2006 went to trustee's sales."
- On the Block in California (NY Times, June 10th): "A large-scale auction of foreclosed homes… in Riverside, two lenders [auctioned] 100 properties [and sold] 93. Most of those properties were in fast-growing exurban and desert communities in Riverside and San Bernardino Counties east of Los Angeles… The company sold more than 265 properties in San Diego, Los Angeles and Riverside during two weekends in May, and it is planning to hold auctions in Sacramento, Modesto, the Bay Area and Atlanta this summer."
Global Impact and Alternatives To The Housing Slump
- GE Real Estate Seeks Finnish Property Buys: Report (Reuters, June 11th): "Property investor GE Real Estate (GE) is seeking to buy a large property portfolio in Finland, including the possibility of buying a local firm… CEO Michael Pralle: We want to buy a large portfolio in Finland… GE's real estate portfolio is worth about $60b… the goal [is] to increase it to more than $100b in the next few years. We are aggressively buying property in other Nordic countries." GE RE made a bid for Finnish government-owned company Kapiteeli last year but lost out to Finnish property group Sponda, which paid about $1.3 billion for Kapiteeli in October."
- Indian Commercial Real Estate Market Expected to Reach US$60 Billion by 2010 (Business Wire, June 10th): "Research and Markets Industry Insight- Indian Commercial Real Estate 2007 report: Indian real estate market during 2006 is estimated about $16 billion and has been growing at a CAGR of 30% for the last few years and is expected to reach $60b by 2010 and commercial real estate market would reach $12b by 2010. Share of foreign investments in real estate will increase from current $3.12b to about $25-28b by 2010. The market is driven by buoyant economy, flourishing IT/ITES sector, banking and financial, retail sector etc."
Macro Impact, And Will The Housing Slump Cause A Recession?
- Housing Slowdown Impacts Job Relocations (Statesman.com, June 11th): "As "For Sale" signs [dot] the country, relocating for jobs is getting harder for workers, and more difficult for companies looking for highly skilled executives. In extreme cases, job offers are being rejected because people can't sell their homes or don't want to risk a big loss if they do… Considering it can cost up to $100,000 in today's market to move a top executive, some businesses are being even more selective about their relocation choices… Those companies that go after prized executives are responding to a slower housing market with bigger relocation packages… buying the homes of executives or paying closing costs and other housing-related expenses."
- Overbuilding, Affordability Haunt Housing Market (Inman News, June 11th): "Harvard University's Joint Center for Housing Studies: This housing downturn has been driven largely by the market’s own excesses. Chief among these is the oversupply of homes triggered by inflated demand from investors, second-home buyers and others intent on getting in on rapidly appreciating prices… Markets such as Phoenix, which has strong job growth, should emerge first from the correction in housing inventory… while many overbuilt markets in California, Florida and the Washington, D.C., area "may not recover as quickly because their employment gains are not as great and their excess supplies are still high."
- Fed's Pianalto Sees Little Consumer Hit From Housing (KPLC, June 11th): "A slowdown in the United States' housing market may have knocked as much as one percentage point off annual growth, but does not seem to have affected consumer demand much, a top Federal Reserve official said on Monday. Cleveland Federal Reserve President Sandra Pianalto, who votes on U.S. rates, said the fundamentals of the U.S. economy were strong and the biggest risk was inflation."
- Sunshine Doesn't Pay the Bills (Tampa Bay.com, June 11th): "Squeezed by rising property taxes and homeowners insurance rates… increasing numbers of residents are moving from Florida… Evidence is mounting that the migration boom it experienced in the first half of the decade is over: Public school enrollment, expected to climb by nearly 49, 000 students last school year, dropped by 3, 571, the first decline in 24 years… Three of the nation's largest van lines moved more customers out of the state than into it last year, reversing a decades-long trend. Many housing analysts say these are signs not of a long-term population shift but of the slumping real estate market."
- Housing Slumps But Homes Still Pricey (Marketplace, June 11th): "A closely-watched annual report on the housing market comes out today. We're not expecting much that's new — the housing market's in a rut, we know that. But for many people, that's not making homes any more affordable… Despite a sales slump, 2.3 million additional U.S. households joined a category of those with high housing costs in 2006. Nicholas Retsinas of the Joint Center for Housing Studies at Harvard led the research."
- The Truth About Personal Savings and Debt Levels (Jeff Miller in Seeking Alpha, June 8th): "David Malpass, Bear Stearns Economist, on the Fed's Flow of Funds report: Household net worth grew by $587 billion in Q1. Real consumption grew by 4.4% despite a reduction in mortgage equity withdrawals. The four-quarter savings rate, judged on a change in net worth basis, is 30% of disposable income! Those looking for a consumption decline should ponder this fact. US households have $29.1 trillion in net financial assets, more than the rest of the world combined. Household liquid assets (deposits and financial assets like mutual funds and credit market holdings) rose to a record level of $21t. Malpass: This shows consumer resilience."
- Housing Continues to Hurt 2007 Cement Consumption Growth (Builder Online, June 8th): "Portland Cement Association [PCA]: The ongoing correction to the residential market will continue to adversely impact construction activity and cement consumption in 2007… Despite a strong performance in the commercial and public sectors early in 2007, the decline in cement consumption this year could exceed 3%... PCA's spring forecast had predicted a 1.5% decline… PCA Chief Economist Ed Sullivan expects the slowdown to extend to the nonresidential sector, [in] the second half of the year [and] "Increased freight rates and pessimism regarding 2007 consumption could lead to a 5-6 million ton reduction in imports compared to 2006 levels."
- Unpaid Property Taxes Soar (Detroit News, June 7th): "Unpaid property taxes are at an all-time high in Metro Detroit, leaving county coffers short and putting more residents at risk of losing their homes. A weak economy and lack of jobs are being blamed for the rise in unpaid property bills in Wayne, Oakland and Macomb counties. Property owners who fail to pay taxes for three years in a row are at risk of losing their homes through foreclosure... Unpaid property taxes rose 29% in Wayne County, about 17% in Oakland County and about 33% in Macomb in 2006 compared to 2005. In total… some $415 million in unpaid property taxes."
Homebuilders And Housing Stocks
- Lifetime Brands Takes Stake in Mexican Firm (Crain's New York Business, June 11th): "Lifetime Brands Inc., (LCUT) a maker of kitchenware under brand names including KitchenAid and Farberware, said Monday it agreed to take a 29.99% stake in Ekco SAB for $21.9 million. Ekco makes and sells cookware, bakeware and related items in Mexico. Ekco plans to use proceeds from the investment to finance its acquisition of an aluminum smelter and rolling mills in Mexico. Lifetime Brands will be able to appoint four new members to Ekco's 11-person board, and said the deal also allows for Lifetime to acquire total ownership of Ekco or, require Ekco to repurchase its stake."
- A Look at Local CEOs Pocketing Top Salaries (Philly Burbs.com, June 10th): "Three months ago, a group of Toll Brothers (TOL) shareholders challenged how much the luxury homebuilder pays its chief executive… Toll made almost $25 million in 2006 in salary, bonus, stock option grants and other compensation... His pay included a $17.5m bonus in cash and stock options, awarded based on the company's performance… Jeffrey Orleans, CEO of Orleans Homebuilders (OHB)… made almost $4.3m in 2006. On top of his $850,000 salary, he was awarded a $3.4m bonus, which the company said in an SEC filing is 3% of part of Orleans' pre-tax profits."
- Horton Project is Back in Good Graces With Yolo: A Now-Fired Worker's Document Fiddling Had Halted Work (Builder Online, June 8th): "Sacramento: "Last month D.R. Horton (DHI) raised eyebrows when county building officials ordered the homebuilder to stop construction on 41 houses in the Plumas Lake community… Government inspectors said Horton's inspection reports were altered and worried that anchor bolts that secure wood frames to concrete foundations might not be properly installed. Yuba County spokesman Russ Brown said Thursday the firm satisfied inspectors that 32 homes now meet codes… [and that] a Horton executive told the county it had fired an on-site employee who handled inspection paperwork."
Commercial Real Estate and REITs
- Tighter Credit May Slow Office Buys (Real Deal, June 11th): "Despite recent blockbuster transactions like Kushner Companies' $1.8 billion buy of 666 Fifth Avenue and Macklowe Companies' $7 billion purchase of a number of Manhattan towers, tightening credit standards may cause a bit of a slowdown in the commercial market. Lenders are beginning to widen the spread between the most secure loans available to borrowers and the riskier mortgages that have proliferated in recent years. The shift comes as lenders wonder whether buyers who pay sky-high prices for properties will be able to hike office rents enough to turn a profit."
- Mack-Cali Realty: A High Yield Bargain (Steven Cook in Seeking Alpha, June 11th): "REIT Mack-Cali Realty's (CLI)… stock yields more than the 30-yr. Treasury, [and] has raised its dividend in seven of the last 10 years. CLI… performs services for the properties in its high quality portfolio… primarily office and office flex buildings… and [for its] Fortune 500 tenants. It has below average vacancy rates as a result of a unique lease renewal program. Finally, it has a debt to equity ratio (49%) that is below average for most REIT’s. Its stock yields in excess of 5.4%... Funds from operations [FFO]: 2006 $3.52, 2007 $3.45… investors look to the FFO as the source of... dividend payments."
- 625 Broadway Trades for $61M (Globe St., June 11th) NYC: "The Argo Corp. paid Beck Street Capital just under $61 million for 625 Broadway (or 192 Mercer St.) an 80,084-sf office property. Located in the City’s NoHo area... The all cash-transaction valued the property at $760.45/sf. It traded at a 5.9% cap rate. Broker Massey Knakal: “At this price… this sale specifically demonstrates buyers’ confidence in this Broadway corridor, which achieves retail rents upwards of $300/sf and office rents of $50/sf…" The building comes with significant upside for rents, with the average rent now on the upper floors set at $25 per sf, below the market average."
- Archstone Buyout May Signify Apartment REITs Peak (Seeking Alpha, June 10th): "Archstone's yield or cap-rate of 4.3%, is lower than apartment (5.1%) and general (5.7%) REITs. The 6% interest on the $17.1b loan to buy Archstone could cost $1b annually, more than Archstone's 2007 operating income ($800 million)... Properties will likely be flipped to pay off debt... But Archstone's buyout price is so high, flipping profits may yield low. Archstone's Adjusted Funds from Operations [AFFO]-- a REITs 'P/E'—is at a premium to the industry. Respected managers like EOP's Sam Zell and Archstone's are getting out, and… Morgan Stanley's MSCI REIT index is trending downwards. Investors accepting low yields in hopes of rising property values might find the nationwide residential slump and resultant credit crunch catching up to apartment REITs soon."
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