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- "Shouted From the Rooftops"
"This devastation took one week. I have been in the business 30 years, I have never seen anything like this,” Brookstreet founder Stanley Brooks described to employees the devastation subprime mortgages wrought upon the firm, which closed its doors. Brookstreets' book value had gone from $11 million at the end of May to minus-$2.1 million." (Matt Stichnoch in Seeking Alpha, June 24th)
Real Estate Sales and House Prices
- C.A.R. Reports Sales Decrease 25 Percent in May, Median Price of a Home in California at $591,180, up 4.8 Percent from Year Ago (Business Wire, June 25th): "California Association of Realtors: Home sales decreased 25% in May in California vs. May 2006. The median price of an existing home increased 4.8%... The May 2007 median price decreased 1.1% compared with April’s revised median price… C.A.R.’s Unsold Inventory Index for existing, single-family detached homes in May 2007 was 10.7 months, compared with 6 months (revised) for May 2006… The median number of days it took to sell a single-family home was 51.7 days in May 2007, compared with 44.5 days (revised) for May 2006."
- Birmingham Area Home Sales Rise In May; Local Home Prices Fall (Birmingham Business Journal, June 25th): "Birmingham Association of Realtors, MLS: In May, a total of 1,836 homes were sold in the Birmingham area… That's up from 1,581 in April and 1,748 in May of 2006. The average home price was $202,800 for May, compared to $195,379 in April and $204,895 in May 2006. The median home price was $164,275 for May, compared to $169,900 in May 2006. For the year, the average number of days on the market was 109, compared to 97 in 2006. The year-to-date total sales are 3% ahead of sales for the same period in 2006 - $1.46 billion in 2007, compared to $1.42b in 2006."
- Orange County Home Prices And Sales (OC Register, June 22nd): "For the 22 business days ending June 12, sales for all types of Orange County home sales decreased 30.5%. The median sales price decreased .8%. The median is where half the homes sold for more and half for less. Types of homes selling, as well as home value changes, cause the median to change."
Real Estate Investing and Sentiment
- Home Lemon Law Now Offered to Provide Cost-Free Legal Help to Home Owners with Construction and Remodeling Problems (PR Leap, June 25th): "Kimmel & Silverman… has opened the nation’s first ever home lemon law practice… to provide legal assistance to home owners who suffer defects related to new construction, renovation, and installation of major components... Using Federal law (Magnuson Moss Warranty Act), Kimmel & Silverman plans to offer contractor fraud, legal representation at no cost. Should the consumer prevail, the recovery of all attorney fees and court costs are recoverable in addition to the amount recovered for the homeowner."
- Out Of Touch With Realty Reality (Yahoo! Finance, June 21st): "Management strategy firm Boston Consulting Group survey: 55% [Americans] are confident that their homes continued to increase in value compared with a year ago… Most home-price indices point to 2% lower median single-family house prices… nationwide… 74% of the survey respondents… were confident that they could sell their home within six months at the price they think it's worth… Center for Economic and Policy Research: [Americans] added mortgage debt in Q1'07 at an annual rate of $510 billion. The ratio of equity-to-home-value stood at 52.7%, a record low… [Also,] 16% have cut back spending [because] of lower real estate values."
- In Tacoma, Recreating Public Housing (NY Times, June 24th) Tacoma, Washington: "Hope VI development, a program of the Department of Housing and Urban Development, converts distressed public housing into mixed-income communities. The developments continue to serve poor residents but also provide market-rate homes for sale… Financing for the [Tacoma] project includes a $35 million federal Hope VI grant, $9m from the Washington State Housing Trust Fund, and about $60m in private funds generated from the sale of low-income tax credits… The multifaceted community has raised local property values, has catalyzed new development and is “building large scale equity” in the city of Tacoma."
Mortgates and Real Estate Lending
- Housing Problems Start to Hit the Financial Sector (Huffington Post, June 24th): "The FDIC's Quarterly Banking Profile report: "Reflecting an erosion in asset quality, provisions for loan losses totaled $9.2 billion in Q1'07, an increase of $3.2b (54.6%) from a year earlier." The reason for the loan-loss provision increases was an across the board increase in delinquencies and charge offs which increased 48.4% from year ago levels. [Also,] "net charge-offs of 1-4 family residential mortgage loans were up by $268 million (93.2%) [from year ago levels]."
Subprime Fallout and Foreclosure Impact
- Subprime Crisis Is Likely To Continue Its Sting (Wall St. Journal, June 25th): "Late Friday the riskiest, triple-B-minus, tranche of the benchmark derivative index based on subprime mortgages hit a new low of 58 cents on the dollar. The index, designed to allow investors to take a broad position on the housing market's most vulnerable segment, has been closely watched by market participants. The latest version of the ABX, which is renewed every six months, references loans originated in the second half of 2006, a year noteworthy for its loose lending standards. UBS said trading volume picked up Friday afternoon as market participants braced for the subprime loan performance reports published Monday."
- Bear Stearns Rivals Reject Fund Bailout in LTCM Redux (Bloomberg, June 25th): "Nine years ago, Bear Stearns (BSC), the biggest broker to hedge funds… declined to join 14 other investment banks in the bailout of Long-Term Capital Management LP. Last week, as Bear Stearns pleaded for help to rescue two of its hedge funds teetering on the brink of collapse, many of the same firms refused to come to its aid. Merrill Lynch & Co., which pumped $300 million into LTCM, said no and seized $850 million of bonds held as collateral for loans it had made to the funds. Lehman Brothers Holdings Inc., JPMorgan Chase & Co. and Cantor Fitzgerald LP also pulled out."
- US Subprime Woes Start To Spread (Money Week, June 25th): "A lot of [Bear Stearns' fund assets] are of dubious quality and… they don’t change hands very often… No one is sure how much those assets are actually worth… In the wake of the subprime mortgage collapse, they are probably worth much less than they were when everyone in America still believed that house prices could only go up. Joseph Mason, Drexel University: “The problem is… what we don’t see… We don’t know the price of these assets. We don’t know which banks are exposed to this sector. These conditions are classic conditions for financial crises across history.”
- Foreclosure Surge Signals Uncertainty (Florida Herald Tribune, June 24th): "The number of foreclosures in the region spiked during May, and Manatee County was fifth among all Florida counties in terms of per-capita foreclosures. However, the number being repossessed by lenders remains relatively small in the region, at about 5% of all homes in foreclosure… Several lenders, including some of the area's largest like SunTrust and Washington Mutual (WM) declined to be interviewed about foreclosures, saying it has negative connotations… The number of foreclosure actions filed in Manatee County during May rose 164% from April. In Sarasota County, foreclosures rose 104%. Charlotte County foreclosures rose 74%."
- Why The Market Was Spooked By Bear Stearns Friday (Jim Kingsland in Seeking Alpha, June 24th): "We see the coming credit bust originating from [subprime]… Bear Stearns hedge fund [troubles] over the last two weeks speaks directly to this risk, [particularly] given the amount of leverage utilized in this sector… The broader issue remains the cat getting out of the bag about CDOs, and how they are grossly mispriced. Attempts by Bear creditors to sell some of the "assets" was met with offers of $0.10 on the dollar… Securities Industry and Financial Markets Association: Aggregate global CDO issuance totaled $157 billion in 2004, $249b in 2005, and $489b in 2006."
- Bear Stearns, Lloyd Blankfein and The Wonders of Leverage (Matt Stichnotch in Seeking Alpha, June 24th): "Brookstreet Securities, a broker/dealer… is liquidating… The firm apparently sold CMOs to its individual clients on way-too-generous-terms: One Brookstreet broker… attributed Brookstreet's troubles to [the] bond division's… special website for wealthy investors [which] allowed investors to purchase collateralized mortgage obligations — bonds backed by various flows of payments on pools of mortgages — with as little as 10% down and the other 90% borrowed, rather than the 50% down that is typically required on such margin accounts...
- $3.2 Billion Move by Bear Stearns to Rescue Fund (NY Times, June 23rd): "Bear Stearns… pledged up to $3.2 billion in loans yesterday to bail out one of its hedge funds... It is the biggest hedge fund rescue… since 1998 when more than a dozen lenders provided $3.6b to save Long-Term Capital Management … Bear agreed to buy out several Wall Street banks that had lent the fund money, which managers hoped would avoid a broader sell-off without causing a meltdown in the once-booming market for mortgage securities."
- Fitch Places 1 Class of ACA ABS 2003-1 on Rating Watch Negative (Business Wire, June 22nd): "Fitch has placed 1 class of notes issued by ACA ABS 2003-1, L on Rating Watch Negative:. ACA ABS 2003-1 is a collateralized debt obligation [CDO] managed by ACA Management, [with] a portfolio composed primarily of residential mortgage-backed securities [RMBS], along with asset-backed securities, CDOs, commercial mortgage-backed securities and REIT debt. The [downgrade due to a] credit deterioration within the portfolio and the high exposure [it] has to under-performing 2006 vintage subprime closed-end second lien RMBS assets. Since February 2007, approximately 7.9% of the portfolio has been downgraded [mostly subprime RMBS assets] and another 5.9% of the portfolio is currently on Rating Watch Negative."
- Freddie Mac: Capitalize on Subprime Chaos (FIG Trader in Seeking Alpha, June 22nd): "Freddie [now] has to provide values for derivatives for which there is no secondary market (and hence no real way to assess value). Margins have shrunk… and Freddie's business model is now a mid to high teens ROE business (operating), and not a mid twenties ROE business… Partly due to the forced retention of capital and reduced leverage… The annuity stream of revenues [from rate rises and less refinancing] is improving in security and stability, hence enhancing the long-term value of the underlying credit and equity. Freddie's at a discount to the price/book of the peer financial group, and [has] a more dependable revenue stream than banks, broker-dealers."
- Eleven Good Points On Residential Real Estate (David Merkel in Seeking Alpha, June 22nd): "Much of the excess yield that allowed the CDOs to be sold came from subprime CDOs. Now… a bunch of hedge funds, hedge fund-of-funds, and pension plans hold the risk. The easy yield [tempts] institutional investors [with] returns targets [and] low-paid managers of public funds [under] political pressure to keep taxes low… The average indebted homeowner has only 30% equity in his home… Excess supply rule: We have a little less than one year’s supply of housing vacant and ready to sell at present… A record by almost double the long term average. This will take years to clear up."
- Fitch, S&P May Cut Ratings On Subprime Debt (Reuters, June 22nd): "Fitch Ratings… may cut its ratings on some securities in debt products known as collateralized debt obligations because of exposure to deteriorating subprime loans... The affected CDOs, are: Trainer Wortham First Republic CBO III, ACA ABS 2003-1, ACA ABS 2003-2, and Ipswich Street CDO… Standard & Poor's cut or may cut the ratings of 133 subprime-related securities, potentially affecting about $1 billion in securities… S&P downgraded 56 classes of residential mortgage-backed securities in total -- 45 groups backed by closed-end, second lien collateral and another 11 subprime classes. Most of the residential mortgage-backed securities originated in 2005 and 2006, and delinquency is [at] 18%."
- The Short Case on Freddie Mac (Daniel Jones in Seeking Alpha, June 21st): "With subprime credit default insurance spreads holding at record levels of 1,500 basis points, (a full 15% of value) a buyer at full price would have to pay $1.5 million annually for five years to insure $10m of loans against default. Freddie holds about $180 billion of subprime mortgages and about half of those loans do not conform to the Company’s new underwriting criteria announced in late February 2007… If “only” 10% to 20% of those loans are bad or in danger of foreclosing, there would be between $18b-$36b in [problem] loans."
- H&R Block Needs You To Forget About Subprime Mortgage Problems (George Gutowski in Seeking Alpha, June 21st): "HRB reported subprime market losses of approximately $85.5 million… [It's sale of Option One is pending to Cerberus Capital Management… When the deal is to close… [and] as the market continues to fall apart, the purchase price [determined at the end] will worsen. There will probably be post-closing conditions… General Motors (GM) was stung with approximately $1 billion of post-closing charges because of its involvement in sub-prime. Hey, was Cerberus the purchaser of GM's finance unit? Management… set up the dividend to pay Oct 1 to record holders of Sep 10… Approximately [around the time of] the anticipated Cerberus closing."
- Representative Frank On Financial Accounting Statement 140 – Loans (Jack Ciesielski in Seeking Alpha, June 21st): "Federal law 140: Mortgage loans are transferred from a lender’s balance sheet to a qualified special purpose entity - a kind of trust - for the purpose of securitizing the loans… Once a transfer has taken place and accounted for as a sale, the originator of the assets has no further involvement with the assets put into the trust... Tinkering with the assets in the trust after its creation could negate the sale and result in its reversal… Congressmen want the FASB to issue some kind of exemption so that lenders might be willing to postpone the inevitable from their deadbeat subprime borrowers without risking accounting consequences."
Global Impact and Alternatives To The Housing Slump
- Understanding the Global Real Estate Game (Nicholas Vardy in Seeking Alpha, June 25th): "Knight Frank: Latvia… home prices jumped by a whopping 61.2% over the past year. Estonia and Lithuania rose by a relatively moderate 24.5% and 21.7%. South Africa is the fastest-growing commercial property market in the world… Property prices [there] rose 30.1%... Ukraine is still largely untapped as an institutional-investment market… Even Africa… is attracting investments, including a new $100 million fund focused on less developed African countries in western and southern Africa… More than a dozen global [US-launched] real-estate mutual funds… now manage $16.8 billion. International real-estate ETFs such as WisdomTree International Real Estate and Northern Trust Corporation's Northern Global Real Estate Index are solid bets in the sector."
- Global Home Prices Remain Fairly Strong Relative To U.S. (Hickey and Walters in Seeking Alpha, June 25th): "The Economist checked Q1 y/y percent change in home prices of 20 countries: The U.S. and Japan were the only countries that had a decline, while South Africa, Singapore, Denmark, New Zealand and Britain all posted double digit increases. The chart and table highlight that home prices across the globe, while slightly weaker than the prior year, remain fairly strong compared to the slumping U.S. market."
- U.S. Investors Looking Abroad For Real Estate Holdings (St. Louis Today, June 24th): "ASE-listed… WisdomTree International Real Estate fund (DRW) [and] private bank Northern Trust Corp.'s Northern Global Real Estate Index (NGREX), now [have] more than $1 billion in assets… Wealth manager Linda Lubitz-Boone's… foreign funds of choice: Cohen & Steers International Realty (IRFAX) and Alpine International Real Estate (EGLRX). Both have $1,000 minimums… The Dryden Global Real Estate fund, [which] has more than a third of its assets in U.S. real estate investments… Fidelity International Real Estate fund owns no U.S. stocks and doesn't hedge their currency exposure, providing the purest play for foreign property. Typically, "global" funds will own U.S. investments, while "international" funds won't."
- Global Real Estate At A Turning Point (International Business Times, June 24th): "Peter Hobbs, global head of real estate research at Deutsche Bank's RREEF, and one of the world's biggest property fund managers: The recent spike in bond yields increases the risk that the [expected] slowdown in property performance [will] start… before the end of the year." Soaring prices in some Asian hotspots, such as major Indian and Chinese cities, have provoked fears risky bubbles are forming and price corrections are on their way. In China, the government is trying to cool the market with a raft of measures to deter speculation, including taxes and interest rate rises."
Macro Impact, And Will The Housing Slump Cause A Recession?
- U.S. Economy: Existing Home Sales Approach 4-Year Low (Bloomberg, June 25th): "National Association of Realtors: Sales of previously owned homes in the U.S. fell in May 0.3% to an annual rate of 5.99 million, from a revised 6.01 million the prior month [the lowest in four years]… The supply of homes for sale increased 5%% to 4.43 million, the most ever. At the current sales pace, that represented 8.9 months' worth, the highest since June 1992 and up from 8.4 months' worth at the end of April. The median price of an existing home fell 2.1% last month from a year ago to $223,700, the 10th consecutive month of y/y declines."
- Sussex Sheriff's Office Expands To Handle Foreclosures (Delmarva.com, June 23rd): "Last July, the Sussex County Sheriff's Office handled 26 mortgage foreclosures. This July, the number… climbed to 47… Funding for two new part-time deputies… was one of few new [budget] expenditures in a fiscal [belt-tightening] year... due, in part, to a cooling real estate market. The realty transfer tax -- a 3% tax levied on property sales... is shrinking... In 2005, the realty transfer tax peaked at about $36 million. For 2008, it is projected to be about $22.4m. County officials… have scaled back or slowed capital projects to make up for the lack of funds."
Homebuilders And Housing Stocks
- At Home Depot, How Green Is That Chainsaw? (NY Times, June 25th): "Home Depot (HD) [offered] the companies that supply the 176,000 products it sells… to have their products included in its new Eco Options marketing campaign… More than 60,000 products — far more than obvious candidates like organic gardening products and high-efficiency lightbulbs — suddenly developed environmental star power. “Everybody is in a mad scramble to say how green they are,” said Jim O’Donnell, manager of the Sierra Club Stock Fund, which handles $50 million in a portfolio of companies it considers environmentally friendly… He was hopeful the product greening would become more meaningful over time."
- In Region, Only Denver Permits Increase (Denver Post, June 25th): "U.S. Census Bureau: Denver is the only county in the metropolitan area that has seen an increase in the number of building permits issued in Jan.-April 2007 vs. Jan.- April 2006. Permits were issued for 1,649 residential units in Denver through April, up more than 20% compared with April 2006… Homebuilders are continuing to build in close-in communities like Stapleton and Parkfield, a master- planned community… and [in] downtown projects… Rusty Crandall, president of KB Home Colorado (KBH), which is building in Stapleton and Parkfield. "With gas prices going up, people don't want to commute more than 30 minutes in general."
- Home Depot: New Stock Buyback Amounts to 30% of Its Shares (Chad Brand in Seeking Alpha, June 21st): "Home Depot's market cap before Thursday was only $75 billion, so this new $22.5b buyback is truly enormous… What type of impact could [this] have on the company's earnings? Home Depot intends to update its guidance (ex HD Supply) in July. We could dig through the company's past SEC filings to determine the impact from jettisoning HD Supply from its results, but until we hear whether expectations for the core retail business will have to be slashed yet again, we won't really have a good idea of how much the buyback will boost the stock's declining earnings."
- Was Relational Investors Instrumental in Home Depot's Buyback Decision? (Lon Juricic in Seeking Alpha, June 21st): "Activist firm Relational Investors was awarded a Home Depot board seat in February as part of a settlement on corporate governance matters. Relational was instrumental in getting former-CEO Bob Nardelli ousted and getting the company to look at a sale of the supply business, which was also announced yesterday. It can also be safely assumed that they had something to do with [HD's $22.5 billion] buyback decision."
Commercial Real Estate and REITs
- Landmark's Leasing Rally Closes Off 184,522 SF (Globe St., June 25th) Dallas: "TIAA-CREF, poised to spend roughly $3.5 million on exterior upgrades, has locked down 184,522 sf in renewals, expansions and new deals for the 1.6-million-sf Lincoln Centre. The freeway-fronting landmark's overall occupancy has spiked to 94% in a three-week run of back-to-back lease closings. As a result of the leasing flurry, the largest block of class A office space in the three-building complex is 44,000 sf, according to Jay Bailey, VP of leasing, Cousins Properties… In the past year, occupancy has gone up eight percentage points."
- On FFO's of REIT's (Motley Fool, June 24th): "REITs typically own many properties, such as offices, hotels, shopping centers or apartments. REITs… net income [figures] aren't so meaningful… The value of REIT properties is decreased over time, with depreciation charged against net income, reducing it. In reality, however, real estate properties probably are not falling in value and may even be appreciating. So a REIT's net income tends to understate its health. This is why, with REITs, you should look at the "funds from operation," or FFO, instead. It ignores the effect of depreciation and other non-cash charges and gives you a clearer picture of the REIT's true performance."
- Has the REIT Train Run Its Course? (James Picerno in Seeking Alpha, June 21st): "The yield on the 10-year Treasury has for some time exceeded what's available in REITs generally. Vanguard REIT Index Fund (VNQ), for instance, had a 3.65% yield on May 31, or 124 basis points below the 10-year Treasury at the time. For those who look to REITs for yield - and many do - why give up yield in return for higher risk? Presumably one could answer that the growth prospects of REITs are still high enough to overcome the yield deficit. But… for so many years, REITs [were] attractive because the yield offered a premium over Treasuries."
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