Quote of the Day- "From the House's Mouth"
"Kids come out of school playing with Gameboys and iPods. Here's a hammer. 'What do I do with it?' That's my simplistic view of what's happening." - Korte Co. division manager Greg Korte, on rising construction costs and the reasons for a shrinking construction labor market in a high tech world. (Builder Online, July 10th)
Real Estate Sales and House Prices
- Home Buyers Find What They Like In Area (Indy Star, July 12th): "Real estate sales in Greenwood are increasing, and on a percentage basis, are outpacing home sales in other area suburban markets, even the fast-growing communities just north of Indianapolis. Since 2003, the number of homes sold in Greenwood between January-May has risen each year. Metropolitan Indianapolis Board of Realtors: This year, 648 homes were sold during that time period, three more than 2006 and 151 more than 2003."
- Home Prices Edge Up In June, But Sales Down (Capitol Online, July 12th): "Metropolitan Regional Information Systems: Anne Arundel County home prices edged up slightly last month, after falling along with the number of homes sold during the first half of the year. The median sale price for a county home in June inched up to $359,900, a 2% increase from June 2006. The June figure was $15,150 higher than the median sale price in May. But only 676 homes were sold last month, down nearly 10% from June 2006."
- Honolulu Home Prices Still Rising (Pacific Business News, July 11th): "Honolulu median home prices ran 2.5% above year-ago levels in Q2 and condo prices were up 9.8%. The number of sales going to closing in April-May-June was up 19.1% for houses and up 20% for condo, Prudential Locations: [In] the Oahu housing market, for the three months as a whole, half the houses that went to closing, sold for more than $665,000, and half the condos sold for more than $335,000. Realtors regard median prices as more telling than average prices because a few very cheap or very expensive deals can skew averages."
- Rockland Home Prices Drop Slightly (Lower Hudson Online, July 11th): "Greater Hudson Valley Multiple Listing Service: Median single-family house [prices] in Rockland County slipped 1.9% to $505,000 during Q2. In Q2'06, the median price … [was] $515,000… The average… days on market, grew to 98 days from 85 days a year ago, requiring more than three months on average to sell a single-family home in Rockland. The median price for condos [fell] 11.9%to $281,892, down from $320,000 a year ago. It also took an average of 15 more days to sell a Rockland condo than last year, raising the days on the market to 89."
Real Estate Investing and Sentiment
- Wall Street Boyz, Inc. To Offer Nationwide REO Packages (PR Web, July 12th): "Wall Street Boyz, Inc. a... financial marketing company, gains access to a half billion dollar REO portfolio, making them one of the few companies which will assist the handful of bank portfolio liquidation brokers in the nation to wholesale off properties. With ever increasing foreclosures occurring, analyst predict companies like Wall Street Boyz, Inc. are positioned to make investors a lot of money and realize profits of 6 million or more."
Mortgates and Real Estate Lending
- American Borrowers - Like Lab Rats Hitting the Credit Lever (Tim Iacono in Seeking Alpha, July 11th): "Last week, the American Bankers Association reported that late payments on home equity loans rose during Q1'07 while delinquencies for credit cards fell. While this is not that unusual, some have postulated that, sensing an accommodating environment in mortgage lending due to the overall distress in the industry, borrowers are seeking to preserve their access to credit cards while risking their homes."
- Novastar, Two Other Lenders Face $46M Verdict (Kansas City Business Journal, July 11th): "NovaStar Home Mortgage (NFI), Amerimax Realty Financial Inc. and Business Mortgage Inc. were saddled with a $46 million verdict in a California state court… The lenders had been sued in 2002 by American Interbanc Mortgage, for allegedly making false statements about their mortgage rates and terms on ads that appeared on Bankrate.com, [a] financial rate aggregator. The judgment also found that the three companies had pressured Bankrate.com, along with Monstermoving.com, to remove American Interbanc from its Web sites… NovaStar Home Mortgage was an indirect subsidiary of NovaStar Financial Inc. at the time the lawsuit was filed in March 2002."
Subprime Fallout and Foreclosure Impact
- GE Plans To Shop Its WMC Subprime Mortgage Unit (Jonathan Liss in Seeking Alpha, July 13th): "Reuters reports General Electric plans to sell its subprime mortgage unit, WMC Mortgage. WMC President and CEO, Laurent Bossard: The current subprime market environment has made a significant negative impact on the business." During Q1, GE took a $500 million pretax charge on subprime loans, with additional subprime losses likely for during Q2. A.G. Edwards analyst Christopher Kotowicz: Each $100m write down affects EPS by $0.01. GE laid off 450 WMC employees during Q1, in addition to selling off $3 billion in subprime loans. It still holds another $1.5b in subprime mortgages. GE Credit-default swaps… jumped this week, signaling a deteriorating perception of GE's credit quality."
- NAACP Files Lawsuit Over Home Loans (LA Times, July 12th): "The NAACP sued a dozen mortgage lenders Wednesday, claiming that the companies discriminated against blacks by steering them into higher-interest, sub-prime loans while giving more favorable loan terms to white borrowers… Among the defendants are Ameriquest Mortgage Co… one of the nation's largest sub-prime lenders… The NAACP contends that the lenders have engaged in "institutionalized, systematic racism" and that black homeowners who received sub-prime loans from the lenders in 2004 were 30% more likely to get higher interest rates than white borrowers with the same financial qualifications. "
- Subprime-Exposed Hedge Fund Investors Behind The Gates of Hell (Michael Shedlock in Seeking Alpha, July 12th): "An Australian hedge fund manager with $1bn in structured credits and junk-rated loans warned investors yesterday it could restrict withdrawals to ensure its survival as it reported losses of 14% in one fund in June. Basis Capital in Sydney, [told] investors it had been hit by "indiscriminate" repricing of "otherwise fundamentally sound collateral" amid the crisis in US home loans to less creditworthy investors... Braddock Financial, based in Denver, said last week it would close its $300m Galena Street fund because of redemption requests, while United Capital Holdings, in Florida, suspended redemptions."
- Insurers Called Safe From Subprime Woes (Chicago Tribune, July 12th): "Big insurers that invest in bonds backed by home mortgages are for the most part unlikely to take big hits if homeowners continue to default on their loans, analysts say, because most of the companies limit their investments in below-investment-grade or high-risk securities… Insurers operate large investment portfolios, consisting of funds they take in to pay eventual claims and invest across a wide spectrum of investments, analysts say. However, the strategy of diversification, along with a tendency of insurers to stick mostly with highly rated investments, means few insurers have much to fear from a big subprime downgrade."
- 2,200 To Get Reprieves On Foreclosures (Boston.com, July 12th): "Fremont Investment & Loan yesterday agreed to postpone foreclosure proceedings against 2,200 Massachusetts homeowners after state officials determined the lender gave subprime mortgages to borrowers who could not afford the loan payments. Attorney General Martha Coakley secured the 90-day foreclosure moratorium from Fremont, once the state's second-largest issuer of subprime loans, after she threatened in May to sue the California company over lending practices she alleged violated the state's consumer-protection laws, such as making mortgages without fully disclosing the terms."
- How Will the Bear Stearns Sage End? (Money Week, July 12th): "John Robson & Andrew Selsby at RH Asset Management Limited: One clue to solving the investment puzzle is that the VIX which is we think poised to explode upwards rather than subside downwards. Following the VIX’s coming surge, the world will be different as people’s attitude to risk will dramatically change as the credit crunch bites hard.. As we have repeatedly said in the past, the unprecedented credit expansion will inevitably be followed by an unprecedented credit contraction and there is a very good chance, we think, that this is now underway."
- Area Foreclosures Rise (Appeal Democrat, July 12th): "ForeclosureRadar, [an] auction tracking company: Yuba County had one foreclosure sale for every 2,252 residents [the second highest in the state]… Sutter County [had] one foreclosure sale for every 2,534 residents, and Colusa County [had] one foreclosure for every 7,171 residents. Nadia Artero, [of] Countrywide (CFC) Home Loans in Yuba City… noticed a large number of foreclosures in the area recently… ForeclosureRadar: Foreclosures now represent 16% of all new and resale home sales in the state. California had 6,960 homes sold at auction in June, a 95% increase from January. However, there was almost no increase from May to June."
- Michigan No. 3 In U.S. Foreclosures (Detroit Free Press, July 12th): "Mortgage Bankers Association: Michigan ranks third nationwide in mortgage delinquency rates, new foreclosures and existing foreclosures… MBA chief economist, Douglas Duncan: The state's foreclosure cycle likely will not end soon… Home loan delinquencies could peak within the next six months to a year with foreclosures peaking six months after that. Many parts of the country have avoided massive foreclosures. Duncan said right now it is a tale of seven states: Michigan, Ohio, Indiana, California, Florida, Nevada and Arizona. Delinquent home loans during Q1 hit Midwest and Southern states particularly hard."
- Fitch Affirms Anthracite 2005-HY2 Ltd. (D Business News, July 12th): "Anthracite 2005-HY2 is a collateralized debt obligation [CDO]… supported by a static pool of commercial mortgage-backed securities and senior unsecured REIT securities... BlackRock Financial Management… serves as the collateral administrator. The affirmations reflect the expected performance of the underlying collateral. Since Fitch's last review, the CDO has experienced $0.8 million (0.17%) in paydowns, totaling $1.3 million since issuance based on the June 2007 trustee report. No losses have been incurred by the notes of the CDO to date. Although future losses are anticipated due to the concentration of first loss pieces (22.3% of the par value)."
- American Borrowers - Like Lab Rats Hitting the Credit Lever (Tim Iacono in Seeking Alpha, July 11th): ""Consumer credit agency Experian: One in three auto-loan borrowers have payments greater than $500 a month… and 12% have been late at least once... Repossession agents in areas hit by foreclosures say they've been picking up vehicles both from people struggling to keep their homes and from those now left without work: construction workers, pavers, landscapers and real-estate agents. Falcon International recovery agency: "It is actually stunning the number of cars we're taking from people who are supporting the local real-estate market... It's like they turned off the spigot."
- Is This the Bottom for Submerging Prime? (Toro in Seeking Alpha, July 11th): "No worries, says Credit Suisse. Keep the losses in perspective. Credit Suisse says the maximum potential losses for investors in CDOs is equivalent to about a tenth of the $513 billion of equity capital for the world's biggest 10 investment banks. It's less than a quarter of the $227b that flowed in to hedge funds and mutual funds in the first three months of this year, Switzerland's second-largest bank said."
- Will Stocks Feel Subprime Sting As Debt Ratings Are Cut? (CNN Money, July 11th): "Until now, the pricing of risks linked to housing and subprime mortgages remained something of a mystery, as risks remained hidden in the complex world of credit derivatives. But changes in ratings will force a re-pricing of the roughly $800 billion in subprime-mortgage bonds sitting in investment portfolios across the globe. "Whenever you have such a massive growth in derivatives, as we had with housing, it's [used] to hide the losses," said Matt Smith, president and portfolio manager at Smith Affiliated Capital. "Nobody knows the true counterparty risks."
Global Impact and Alternatives To The Housing Slump
- Australian Investors Flock To Small-Town U.S.A. (International Herald Tribune, July 11th): "Australian investors widened their lead as the biggest international buyers of U.S. real estate, spurning skyscrapers in New York and San Francisco for warehouses in Mineral Wells, West Virginia, and malls in Sylvania, Ohio. Real Capital Analytics: This year, Australians purchased $7.7 billion of U.S. real estate, or $2.2b more than they acquired during all of 2006... Germans spent $2b in the same period and Middle East buyers $3.9b. Record prices and falling yields from offices and trophy properties in New York, Chicago, Washington and San Francisco have sent Sydney-based Record Realty and Macquarie Bank to markets like Pittsburgh and Mineral Wells where initial returns are about 45% higher."
- Hypo Real Estate Raises Full-Year Profit Forecast (Bloomberg, July 11th): "Hypo Real Estate Holding AG, Germany's second-biggest commercial-property lender, raised its 2007 profit forecast after Q2 earnings rose 28% on higher commission income. Pretax profit will amount to more than €710 million ($977m) this year [vs.] the previous forecast of at least €680 million. Q2 pretax profit rose to about €183m from €143m in Q2'06. CEO Georg Funke has cut costs and boosted lending outside Germany to improve earnings. New business of about €10 billion in Q2, 61% more than a year ago, helped increase Q2 commission income "considerably.''
- Housing Demand to Increase in China and India, Study Says (Bloomberg, July 11th): "University of California, Berkeley study: Demand for housing in China and India will increase as more people move to urban areas and incomes grow. The number of people living under one roof is expected to decline in emerging markets and that will boost the need for housing… Morgan Stanley (MS) and Jones Lang LaSalle are among the U.S.-based companies piling into Asian real estate as booming economies drive up property prices. LaSalle Investment Management… said it plans to triple its investments in Asia to $20 billion within four years. Private Equity Intelligence: More than 100 real estate funds may raise a record $69b this."
- The Lure of Living South of the Border (Yahoo! Finance, July 11th): "Seeking a year-round tropical climate and a relatively low cost of living, U.S. retirees are flocking south of the border. Panama, Mexico and Costa Rica top the list of the most popular retirement destinations in Latin America. Dwight Ford and Marciana Wilkerson… put 10% down on two side-by-side condos selling for about $440,000 each [in 2005]. Today, the condos in the fashionable commercial district of Punta Pacifica are worth close to $700,000 each... American retirees living in Panama pay no tax on foreign-generated income and are exempt from property taxes for up to 15 years."
- Morgan Stanley To Buy Daewoo's Tower In Seoul (San Jose Mercury News, July 10th): "Morgan Stanley (MS), investing a record $8 billion in real estate outside the US, plans to buy Daewoo Engineering & Construction's Seoul headquarters for about $1.04b... In May, MS agreed to buy Investa Property Group, Australia's biggest office owner, for about $4b, and Crescent Real Estate Equities in the US for about $2.9b [minus] debt. In April, MS agreed to buy 13 hotels in Japan from All Nippon Airways for about $2.3b in Japan's largest real estate purchase by an overseas investor. MS also acquired 10 hotels in Europe from Hilton Hotels for about $770 million, adding to its more than 80 hotels worldwide."
Macro Impact, And Will The Housing Slump Cause A Recession?
- No Vacancy At Mines (AZ Central, July 12th): "The eastern Arizona… copper boom has transformed bucolic towns such as Clifton and Globe into industrial juggernauts teeming with heavy equipment. Phelps Dodge (PD), has been forced to buy up hundreds of so-called Katrina trailers from the Federal Emergency Management Agency to house workers for its mines in Morenci and Safford. New apartment complexes, RV parks and housing tracts are sprouting like weeds in two of the state's least-populated counties, Greenlee and Graham. Rents have soared, in some cases doubling... New homes are bought up before the footings have been dug… four years ago, copper was marginally profitable at $0.70/pound… But this year, with burgeoning markets in China and India and elsewhere, copper prices skyrocketed to more than $3.65/pound."
- NAR Lowers Housing Outlook for a Fifth Straight Time, But Remains Optimistic (Seeking Alpha, July 12th): "The National Association of Realtors: In 2007, 6.11 million existing homes will sell, down from June's 6.18 million forecast, and the lowest since 2002's 5.63 million. The median existing home price will shrink 1.4% to $218,800, down from June's -1.3% prediction, but should rise 1.8% in 2008 with sales rising 4% to 6.37 million. Some 865,000 new single-family home sales are expected this year, down from 1.05 million in 2006. Median 2008 new-home prices will rise 2.2% to $245,400 after a 2.6% drop in 2007 to $240,100. The NAR expects 1.43 million housing starts, including multifamily units, in 2007, and about the same in 2008. There were 1.80 million in 2006… NAR chief economist Lawrence Yun: The decline in building could trim another 1% from the home supplies/construction market to $495 billion, a 5-year low."
- Consumers Are Willing to Spend - So Why Aren't Retailers Performing Better? (Gary Gordon in Seeking Alpha, July 11th): "If consumers are still willing to spend, why haven't companies like Sears, Home Depot and Kohl's Corp (KSS) performed better in 2007? (Each can be found in the SPDR Consumer Discretionary Fund (XLY)… The strength of Costco and Target has offset some of the weakness in [housing and/or home improvement] retailers like Home Depot to help propel the Merrill Lynch Retail HOLDRs (RTH) to slightly more impressive profits… The dog days of summer may be harsh on the Merrill Lynch Retail HOLDRs (RTH) and the SPDR Consumer Discretionary Fund (XLY)."
- Is Mexico Paying For U.S. Housing Downturn? (Reuters, July 11th): "Residential construction has fallen some 25% since early 2006, but a government survey of employers shows a drop of less than 2% in jobs in the sector… The Labor Department may have miscalculated how many construction firms may have been created and [died]… Suggesting… wage inflation should not be a major concern for the… Fed. Others speculate that the jobs simply shifted to commercial or government projects when residential construction slumped… Pew Hispanic Center: An estimated 2.2 million foreign-born Hispanics worked in the construction sector in 2006, representing 19.1% of industry employment. Deutsche Bank: "It appears that job losses among undocumented workers, principally from Mexico and other Latin American countries, have been serving as a buffer against job losses by resident or documented U.S. workers."
- Construction Costs Still on Rise (Builder Online, July 10th): "Turner Construction executive in New York: A boom in construction activity and a shortage of skilled labor continue to drive up construction costs, though not as rapidly as the past two years. Turner's Building Cost Index registered 847 in Q2, a 1.9% increase from Q1 and 7.6% increase from a year ago... It… jumped 9.5% in 2005 and 10.6% in 2006… As the baby boomer generation [retires], the Census Bureau reports that for every four workers retiring from the industry, only one is entering the construction field… Global[ly,] construction cranes clutter the skylines of Shanghai and Dubai for large-scale construction projects. Much of the construction material and equipment needed in the US is being shipped abroad."
Homebuilders And Housing Stocks
- Homebuilder To Pull Out Of Central Indiana (Indy Channel, July 12th): "KB Home (KBH), which builds in 20 developments in the area, cited sluggish sales for its decision to leave central Indiana.... KB spokesman Jason Lindaman: The company will honor existing 10-year limited warranties on the homes it has constructed. All of our current homeowners in the Indianapolis area will still maintain that warranty. Our homebuyers in backlog, meaning their homes are currently under construction, they will also have the KB Home limited warranty on those homes… The company said the slumping market is the main reason for the departure."
- Jim Cramer's Stop Trading! Stock Picks and Comments, 7/11/07 (Miriam Metzinger in Seeking Alpha, July 12th): "Best Buy (BBY), Circuit City (CC) and Costco (COST): BBY is not the best buy because warnings from Home Depot and Sears. While Cramer searched desperately for a reason to be bullish on CC, he couldn't find one. COST is Cramer's favorite warehouse retailer because it is where "the rich people shop." Whirlpool (WHR) and Black & Decker (BDK): Cramer would avoid these stocks because he doesn't envision a housing turnaround in the near future."
- Cancellation Numbers Still Horrific At Ryland (Blogging Stocks, July 11th): "What continues to be most striking about homebuilder results is the magnitude of cancellations, suggesting either how widespread speculation was or how difficult it is for new homebuyers to get financing. Cancellations were approximately 34% of gross orders for the quarter, compared to 35.9% in Q2'06. Preliminary closings totaled 2,461 units in the period, compared to 3,803 units in Q2'06, a decline of 35.3%. These are simply huge numbers."
Commercial Real Estate and REITs
- Pyramid Real Estate Brokerage Partners With Cushman & Wakefield (Business Review, July 11th): "The Pyramid Brokerage Co. said it will become the "exclusive alliance partner" for upstate New York with Cushman & Wakefield, the biggest privately held real estate brokerage firm in the world. Pyramid… said the partnership with Cushman & Wakefield could result in more economic growth upstate through real estate deals with Fortune 500 companies and other large firms… Twenty-two other firms across the country are allied with Cushman & Wakefield, whose U.S. offices are in New York City."
- Illinois Company Buys Middleburg Shopping Center For $10.7M (Jacksonville Business Journal, July 11th): "Inland Real Estate Acquisitions Inc. paid $10.7 million for the 64,232-sf Middleburg Crossings Shopping Center… The shopping center was 94% leased at the time of the sale June 29. Anchor tenants there include Publix and Hollywood Video… Inland Real Estate Acquisitions is the purchasing arm for various companies that are part of The Inland Real Estate Group of Companies Inc. Middleburg Crossings is the company's first shopping center acquisition in Northeast Florida. Inland also owns the 60,000-square foot Citizens Insurance building in Southpoint."
- Sprint, CB Richard Ellis, Jones Lang LaSalle and the GSA Among CoreNet Global Award Finalists (PR Newswire, July 11th): "CoreNet Global, the world's leading professional association for corporate real estate [CRE] and workplace executives, today announced the selection of 10 finalists for the prestigious H. Bruce Russell Global Innovator's Award. Now in its 8th year, the award recognizes the industry's top practitioners among the some of the world's most respected companies… The award spotlights innovation."
- The Rundown on REITs (Yahoo! Finance, July 11th): "S&P expects diversified REITs with significant exposure to retail, industrial, health-care, or office properties to see growth… The stock in this index with the highest [rating] is PS Business Parks (PSB)… Highest rated industrial REITs: AMB Property (AMB), and Prologis (PLD)… S&P's [is positive] on office REITs… S&P believes office leases will be renewed in 2007 at [higher] average rents. Highest rated: Mack-Cali Realty (CLI)… Residential REITs: Many previously converted units have begun to return to the rental market, thereby increasing supply… Highest rated: Essex Property Trust (ESS)…We see attractive appreciation potential for retail REITs over the next 12 months. Highest rated: Simon Property Group (SPG). Highest rated specialized REITs: Medical Property Trust (MPW), Public Storage (PSA), and Sovran Self Storage (SSS). Our favorite non-index REIT is Health Care REIT (HCN)."
- Fashion Statement: Guess Gobbles Lipstick (Slatin Report, July 10th): "A few weeks ago. Rumors (what else) were flying that the buyer, Haim Revah's Metropolitan Real Estate Investments, had lost their financing on a deal they had gone into contract on in April. With a hard deposit of $30 million, sources said, Revah was scrambling to find a lender to back up his $648.5 million buy… The debt was "rate-locked" a month ago, says a source familiar with the deal. But the lender is not Wachovia, which had provided a term sheet to Revah, then had to back out as interest rates rose and CMBS spreads widened past the point of profitability against those terms. Into the breach stepped Royal Bank of Canada… The equity level on the Lipstick deal is well above 10%."
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