Quote of the Day- "From the House's Mouth"
"This issue will continue to shadow markets. The prolonged downturn so far doesn't seem to be the stuff of a significant recession in the making." – Lehman Brothers Chief Global Fixed Income Strategist Jack Malvey, on how the subprime crisis and the housing slump will affect financial markets and the general economy. (Reuters, June 12th)
Real Estate Sales and House Prices
- Would-Be Home Buyers Hesitate (San Francisco Chronicle, June 11th): "The Bay Area real estate market has become a giant game of chicken… California Association of Realtors: The "unsold inventory index" hit 3.5 months for the seven innermost Bay Area counties in April, compared with 2.9 months in April 2006 and 1.6 months in April 2005. The number of days on the market also rose, with single-family homes on a median of 48.8 days in April, up from 35.9 days two years ago. ZipRealty: Reduced asking prices have become commonplace, with anywhere from 20-50% of listings in Bay Area counties reporting price cuts."
- Springfield in Top 100 Among Affordable Cities (Springfield News Sun, June 11th): "Even though the median home price is almost $100,000 below the national average, the compilation shows Springfield [Ohio] as having nearly the slowest increase in median home prices at 16.2%. Economically speaking, only 13 of the 373 cities ranked are considered to have greater decline or slower growth than Springfield. That contributed to the area's slow household income growth of only 9.7% over the past five years. Projected economic growth from 2005 to 2010 is a dismal -0.1%."
- Gloomy Outlook For Las Vegas Housing Slump (Las Vegas Now, June 9th): "Keith Schwer, UNLV Center for Economic Research: Construction is falling and housing permits plummeting in Southern Nevada… Greater Las Vegas Association of Realtors: People who are selling… need to look at what their homes were worth in 2004 and then start to go down from there… The median price of a single-family home in Southern Nevada decreased in May… In Las Vegas, the median single family home price was… $301,000 in May. That's down 1% from April and down nearly 3% y/y. In May, the number of homes listed for sale increased by more than 3% from April."
Real Estate Investing and Sentiment
- The Golden Bear Roars: Nicklaus Inks New Deal (Wall St. Journal, June 11th): "Golf icon Jack Nicklaus is selling a substantial minority stake in his company to New York real-estate mogul Howard Milstein to expand the Nicklaus empire around the world, extending its reach in golf course-designs, clothing, equipment and real-estate… The Nicklaus name on any course significantly increases its worth to developers, because it allows them to sell the accompanying real estate or resort properties at a higher price. Under the traditional business model, Mr. Nicklaus got only the design fee and in some cases also a small cut of the developments' profits."
- For Many Retirees, Home's Too Sweet to Leave (USA Today, June 11th): "Defying a myth that [many] U.S. retirees… migrate to golf course and beachfront communities in Arizona and Florida… Millions are retiring near home… Long the norm rather than the exception [census figures show]… Pulte Homes (PHM) VP: In the 1990's we started to focus on the three-quarters [of the population] that don't really want to relocate… Now Pulte and other developers are [creating] developments in the Northeast, Midwest and Rocky Mountain regions. Pulte has opened 53 Del Webb active-adult retirement communities since 2001, not only in the Sun Belt but also in such states as Pennsylvania, Michigan and Illinois. Two more such communities are scheduled to open later this year."
Mortgates and Real Estate Lending
- Credit-Rating Standard Tightens (Yahoo! Finance, June 11th): "Fair Isaac Corp. (FIC), the company behind FICO credit scores, is shutting down a fast track to a better credit rating. Starting in September, consumers who are added as an authorized user on someone else's credit card will no longer be able to benefit from that card's credit history. The change reverses the current practice, known as piggybacking, which treats all authorized users the same as the cardholder… Fair Isaac… discovered a number of companies that sell the right to become an authorized user on complete strangers' credit accounts, [and so] decided it was time to close the loophole."
- Home Equity Loans- Reverse Mortgage Exposed (Best Syndication, June 11th): "Reverse Mortgages are the fastest growing product in the marketplace. There are five more RM products to hit the marketplace in the next year and the market segment eligible for these products is the fastest growing demographic in the country-BABY BOOMERS. A few reasons for its popularity: 1) There is no income verification. Even if you have no money coming in as long as you meet the eligibility requirements you are good to go. 2) Non payment of the loan is the biggest reason for foreclosures. There are no payments, eliminating that headache. 3) The borrower can use the proceeds any way they want."
Subprime Fallout and Foreclosure Impact
- A Bad Week for Bear Stearns (FT Alphaville, June 12th): "Ahead of its Q2 results later this week… Bear Stearns (BSC) has found itself caught up front and centre in the attack by a group of US hedge funds, led by Paulson, on banks which sell derivative contracts backed by subprime mortgages… WSJ now reports that… a hedge fund managed by the bank is down almost 25% from the start of the year to late April. The High-Grade Structured Credit Strategies Enhanced Leverage Fund is widely exposed to subprime mortgages, WSJ says. It has $600m under management, but borrows heavily to make bigger bets. [But] the fund’s losses, however large they might be, should have a limited impact on Bear."
- Foreclosures Multiply (Oakland Press, June 11th): "More than 7,000 Oakland County homeowners could lose their homes to foreclosure by the end of the year, the highest level ever, and housing values on average are flat to falling because of it, Oakland County says. The county recorded 585 mortgage foreclosures in May for a total so far this year of 2,946 and a five-month pace that could mean 7,070 foreclosures by the end of the year. The county recorded 4,881 foreclosures last year… Building permits have fallen 50 percent in the past two years."
- Foreclosures Up 6 Percent in May 2007 According to Bargain Network (Business Wire, June 11th): "Bargain Network (bargain.com), an online provider of real estate foreclosure information: The number of properties entering some stage of the foreclosure process in May 2007 climbed approximately 6% to 149,000 listings compared to April 2007. A 38% increase in foreclosure listing activity compared to November 2006 when properties in some stage of foreclosure totaled 108,000… For the second consecutive month, five states – Florida, California, Texas, Illinois and Colorado – accounted for 59% of the total number of foreclosure home filings… The total number of households entering some phase of the foreclosure process in May 2007 decreased in 35 of the 50 states compared to April 2007."
- Beware of Exploding Mortgages (NY Times, June 10th): "During the next five years, some $1 trillion in adjustable-rate mortgages will reset. But… from just June to October this year — more than $100 billion of [it] is scheduled to reset, and all [subprime]. Many of those loans [will] reset to at least 11%... RealtyTrac: Last year there were 1.2 million foreclosures… Morgan Stanley: 8% of mortgage loans in pools put together in the latter part of 2005 were more than 60 days delinquent in May… Almost 4% of the loans made in the second half of 2006 were more than two months delinquent. That’s almost double the delinquency rate for loans made one year earlier [under the same] terms… Fully 35% of the most recently issued loan pools in the index have delinquency rates that exceed the target levels specified when they were sold to investors. And for loans made in the first half of 2006, three-quarters are exceeding their delinquency targets."
Global Impact and Alternatives To The Housing Slump
- Bank of England Boss Says House Prices at Risk (Reuters UK, June 12th): "The British property market could be at risk if a decline in savings from Asian countries pushes up long-term interest rates, Bank of England Governor Mervyn King said: "Savings from Asia are coming into financial markets, bidding down interest rates, and that's bidding up asset prices.If that process were to go into reverse, and people in Asia started to save less, then I think you would see a rise in long-term real interest rates and that would have an effect on asset prices as a whole." King said Britain's housing market was not immune to influences from the world economy."
- Homeowners Abroad Take Currency Gamble in Loans (Wall Street Journal, June 9th): "The carry trade has surged as relatively low interest rates in many parts of the world [give] investors… new ways to boost yield. Volatility among currencies is also near historic lows, reducing the apparent risk… In Britain, a few wealthy individuals are taking out mortgages in Japanese yen -- taking advantage of super-low interest rates in Japan -- to buy homes or investment properties in Florida. Last year London businessman Chris Papa bought a seven-bedroom house in Kissimmee, Fla., [near] Disney World, borrowing the equivalent of $240,000 in yen... He's paying 2.85%, far below the rates for a similar mortgage in dollars or pounds."
Macro Impact, And Will The Housing Slump Cause A Recession?
- Lehman Strategist Says Economy Won't be Derailed by Subprime Crisis (Seeking Alpha, June 12th): "Lehman Brothers Global Fixed Income Strategist Jack Malvey said Monday that falling house prices will prolong the current housing slump, but that it was not enough for now to harm the domestic or global economy. Malvey expects the subprime loan crisis to deepen and foreclosures to accelerate as adjustable rate mortgages reset and lending standards tighten, but that the current "benevolent cycle" in the overall economy should last until 2009-2012. Until then, Malvey sees housing prices falling to 'early boom' 2005 levels. Fears of a subprime fallout affecting the general economy led to mistaken expectations of a rate cut. It may come in 2008, Malvey says, but the current 5.25% rate will hold steady until then."
- Why Last Week's Interest Rate Based Selloff Was Overblown (Roger Nusbaum in Seeking Alpha, June 11th): "[Higher rates] potentially hurts stocks and slows the economy as… accessing capital becomes more expensive. [But] a $300,000 mortgage at 6% for 30 years will have a monthly payment of $1798.65. At 7.5% the payment goes up to $2097.64. For a couple, each making $3000-$4000/month [this isn't] a deathblow to the dream of owning a [primary] home. It probably… squeezes out the marginal buyer, or… force the marginal buyer to find a cheaper house… For investment [or] speculative real estate, might not prices coming down a little bit result in a balancing out, or at least a partial balancing out?"
- Real Estate & Housing Issues from the Beige Book (Right Side Advisors, June 10th): "Directly from the Beige Book for the May 9 FOMC Meeting - Residential real estate activity… sales declining in many Districts and flat in a number of others. Boston, however, noted improving residential markets, with some increases in sales volume. Several Districts also reported declining homebuilding activity. Commercial real estate markets continued to be active, with several reports of robust commercial construction activity. Several Districts noted little or no growth in overall lending activity, but San Francisco noted generally solid loan demand. Reports of weakening residential mortgage activity continued to offset reports of increases in commercial and industrial lending."
Homebuilders And Housing Stocks
- HUD Audit Hurts Stock in Hovnanian (APP.com, June 12th): "Homebuilder Hovnanian Enterprises Inc (HOV)… said it refunded 17 loans to home buyers on the recommendation of the U.S. Department of Housing and Urban Development. The company was audited by HUD for referring home buyers to its own mortgage lending affiliate… Hovnanian refunded 17 loans worth a total of $5,190 on HUD's "recommendation." Still in dispute are 65 more loans worth $24,833 in all.... Hovnanian said it also has agreed to certain changes recommended by HUD in what the company called its "quality control plans…" Hovnanian also has been accused in a legal complaint of requiring buyers to use its mortgage and title insurance affiliates, a violation of federal law."
- Nucor Predicts Weak Profit News (Charlotte Observer, June 12th): "Nucor Corp. (NUE), the second-largest U.S.-based steel company, said Q2 profit will fall… as demand from automakers and homebuilders slowed. Shares fell 5.9% to $62.66… Profit will be $1.05-$1.15/share, down from $1.44 a year earlier... [Analysts expected] Nucor to earn $1.42/share in Q2.... U.S. shipments fell after customers stocked up on steel during Q1, and some "price increases were not realized" as imports surged from China… Nucor has gained 33% in the past year… The S&P Supercomposite Steel Index has risen 63%. Takeover speculation has fueled rallies in steel shares even as U.S. automotive manufacturing and housing demand slowed and steel imports rose."
- Standard Pacific Home Orders Below Expectations (Orange County Business Journal, June 11th): "Irvine homebuilder Standard Pacific Corp. (SPF) reported Monday new home orders… were down 16% from the year-ago period… They were off nearly 20% from the company’s business plan for the period. The decrease in orders was driven by continued weakness in two of its key markets, Florida and Arizona. Orders were up over 13% in California… The company’s cancellation rate for the April and May was 28%, down from 35% in the year earlier period. In California, the cancellation rate, where buyers back out of a purchase, was 29%, compared to 42% during the same period last year."
- Homebuilder C.V. Perry Says it's in Business to Stay (Columbus Dispatch, June 9th): "C.V. Perry & Co., one of central Ohio's oldest homebuilders, is under new leadership and is promising to continue crafting custom homes and condominiums. The company squelched recent rumors that the homebuilder had closed its doors…C.V. Perry had been in a period of transition since… Carlyle V. Perry Jr., died in 2004… Perry's widow, Lynda Perry, recently took over as trustee and hired Terry Andrews, a former C.V. Perry employee who had spent much of the past decade at Centex Homes (CTX)… Andrews said the company would make some changes because of the "current unpredictable and challenging housing market."
- Homebuilder Adds Local Projects Despite Slow Sales Statistics (Tampa Bay Business Journal, June 8th) Florida: "With 4,000 residences on the drawing board, Centex Homes (CTX) is quickly becoming Hillsborough County's largest homebuilder. Building many homes at once is not entirely uncommon in an area thousands of people migrate to each year, but the Dallas-based builder is defying warnings of a slowing housing market to keep communities in the region's largest county growing."
Commercial Real Estate and REITs
- Desjardins: Brookfield Bid for Australian Property Group Compliments Existing Assets (FP Trading Desk in Seeking Alpha, June 12th): "Brookfield Asset Management Inc.’s (BAM) friendly all-cash takeover offer for Australia-based diversified property company Multiplex Group is expected to be financed primarily via debt, but Michael Goldberg at Desjardins Securities thinks the financing will also include some common equity. The offer, which includes a A$20-million break fee, values Multiplex at approximately A$7.3-billion on an enterprise value basis... Goldberg: "The deal expands Brookfield’s property and asset management operations, while the makeup of Multplex’s property portfolio and its related fund management business appear to compliment Brookfield." Mr. Goldberg’s “buy” rating and C$43 price target for Brookfield shares are currently under review."
- Highwoods Rating Lowered (The News & Observer, June 12th): "Rising interest rates and a general shift away from real estate investment caused analysts to downgrade the Raleigh REIT Highwoods Properties (HIW), the biggest suburban office landlord in the Southeast, and 20 other REITs Monday... Stifel, Nicolaus & Co… now thinks REITs will perform 10% above or below the general stock market -- a sign that REITs might have lost their sure-thing status… The REIT index has dropped 3.5% this year, while the S&P has gained 6.4%... More mutual funds [are] pulling money out of real estate. "About $2 billion flowed out of real estate mutual funds in the past few weeks."
- ProLogis Buys Land Near Chicago (Denver Business Journal, June 11th): "ProLogis, one of the world's largest owners of warehouse space, has purchased 184 acres near Chicago for a new distribution park. ProLogis (PLD) optioned another 591 acres nearby for expansion. The company's new park will be located in Wilmington, Ill., off Interstate 55 and 60 miles southwest of Chicago… The new development will serve Logistics Park-Chicago, which is the BNSF Railway Co.'s largest intermodal distribution hub in the Chicago area. [Named] the ProLogis Park Arsenal, its $120 million first phase will include 3.2 million sf of warehouse space… Future phases on the optioned land will accommodate another 6.8 million-sf."
- Washington REIT Downgraded to "Hold" (New Ratings, June 11th): "Analysts at Stifel Nicolaus & Company downgrade Washington REIT (WRE) from "buy" to "hold." In a research note published Monday, the analysts mention that the downgrade in rating is part of a sector-wide downgrade in view of rising interest rates, investor interest in real estate outside the US and funds flow data indicating apathy towards US REITs. Washington REIT has good quality assets as well as the ability to achieve further operational improvements and to beat its FFO guidance, the analysts say."
- Cerberus Capital Management Renames Real Estate Investment Affiliate (PR Newswire, June 11th): "Cerberus Capital Management, L.P., today announced that the name of its real estate investment affiliate has changed to Cerberus Real Estate Capital Management, LLC. Formerly known as Blackacre Institutional Capital Management, Cerberus Real Estate Capital Management, LLC, is an industry leader in providing customized debt, equity and hybrid capital solutions for complex real estate and real estate-related assets and business opportunities. The name change symbolizes the goal to directly identify the real estate investment affiliate with Cerberus Capital Management."
Real Estate and Homebuilder ETFs
- SPDR Homebuilders ETF Rallying: How Could This Be? (Part II) (Michael K. Dawson in Seeking Alpha, June 11th): "My trading strategy is [to] identify a dominate theme and then buy leading stocks in that theme… This strategy also keeps me away from themes where I can’t identify a driving catalyst. A few weeks ago I wrote an article, SPDR Homebuilders ETF Rallying: How Could This Be? The Homebuilders ETF (XHB) was rallying, but why? Are interest rates going down? Nope. Have the homebuilders sold off their bloated inventories yet? Nope. Has the guy down the street sold his house yet? Nope. Using a fundamental theme as the first screen convinced me to ignore XHB’s buy signal."
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