Quote of the Day- "From the House's Mouth"
"There will be a ripple effect of forcing funds to rebalance their portfolios by selling things in a market where there just aren't many buyers. Eventually there will be demand again for securities backed by subprime loans, because the higher-rated bonds in the subprime class are still decent investments. But that won't happen until everybody takes a bath first." - Guy Cecala, publisher of industry newsletter Inside Mortgage Finance (Forbes, July 18th)
Real Estate Sales and House Prices
- As Sales Skid, Home Prices Remain Strong (SF Gate, July 19th): "DataQuick Information Systems: Bay Area region sales of houses and condos tumbled 26.5% from 10,830 in June 2006 to 7,964 last month. The median price paid was $665,000, up 2.6%. Little construction in pricey areas, along with a robust stock market and good job growth are helping boost multimillion-dollar property sales… In Marin County… the median price for a single-family home last month was $1.125 million. The median for both houses and condos jumped 15.8% to $961,250… Solano County, [had] the lowest Bay Area median price at $475,000 -- down 11.7% from June 2006. [There were] 41.4% fewer sales… than in June 2006."
- Silicon Valley Home Market Squeezing Buyers And Sellers (San Jose Mercury News, July 18th): "Bay Area Real Estate Market Newsletter: The current median home price is [up] nearly $50,000 [y/y], but… Silicon Valley's housing market is[n't] booming… As of July 5, the days of unsold inventory--the number of days it would take to sell all the homes available at the current pace of sales--was 284 in the East, South and Central San Jose areas and 254 in South County... In more expensive markets, the DOI ranged from only 28 days in Mountain View, Palo Alto and Los Altos to 79 days in Saratoga and Los Gatos."
- Trumbull Makes Money's Best Places List (Connecticut Post, July 18th): "Connecticut municipalities placed on Money magazine's list of towns with the highest median home price. While Montecito, Calif., ranked No.1 with a median home price of $3,157,233, Greenwich ($1,931,189), New Canaan ($1,634,922) and Darien ($1,464,129) placed in the top 25."
- Big Island Median Home Falls To $363,000 (Pacific Business News, July 18th): "Hawaii Information Service: Half the homes sold in Hawaii County last month sold for less than $363,000, down 20% from the median price a year ago, as sales shifted from expensive Kona neighborhoods to more affordable ones on the Hilo side. Realtors on the Big Island closed on 161 single family home sales in June, down 47% from 208 a year earlier, and 46 condos, down 35% from 81 a year ago. The condo median price was $415,000, more than $50,000 more than the single family home median and 12% more than the condo median a year earlier."
- Indy House Prices Unlikely To Slide Further, Report Says (Indianapolis Business Journal, July 18th): "PMI Mortgage Insurance Co.: The metro Indianapolis area has an 8.4% chance of seeing its average sale price decline by the middle of 2009… Los Angeles [has] a 58.6% chance of falling. Most areas with the greatest odds of decline had red-hot housing markets—Orlando, Sacramento and Boston. By contrast, Rust Belt cities like Indianapolis didn’t experience the boom, thus had less to lose. Risks of declining prices in Cincinnati and Columbus, Ohio, for example, are less than 10%. Metropolitan Indianapolis Board of Realtors: The median sale price in May in the Indianapolis area was $125,000, down 2% from a year earlier."
Real Estate Investing and Sentiment
- Real Estate Industry Targets Youth (Globe St., July 18th): "Real estate experts who gathered for the 17th annual Southern California Real Estate Conference yesterday expressed concern over a lack of young leaders within the industry. As the population ages and the Baby Boomers retire, many companies, according to panelists, are realizing that they have not found a significant amount of young talent to turn the business over to… Chris Hite, president of Coreland Cos: “No longer does a real estate manager need to just be proficient in the operation of real estate, they now need accounting skills, they need to be Wall Street-oriented, they need to be able to manage people."
Mortgates and Real Estate Lending
- Mortgage Applications Rise (Forbes, July 18th): "The Mortgage Bankers Association's weekly mortgage index, which measures the volume of applications for loans to buy or refinance homes, rose 0.9%... with an increase in new home loan [applications] and for refinancings of existing mortgages. The mortgage index rose to 631.6 for the week ending July 13, up 15.7% compared with same week a year earlier. The MBA's mortgage application index, which stood at 100 in March 1990, measures the number of home loan applications in a given week. It is derived from a survey of major mortgage lenders representing about half of the U.S. market and does not include loans originated by nonbank lenders."
- J.D. Power and Associates Reports: Wachovia Ranks Highest in Customer Satisfaction with Home Equity Line/Loan Origination for a Second Consecutive Year (PR Newswire, July 18th): "J.D. Power and Associates 2007 Home Equity Line/Loan Origination Study [SM]: For a second consecutive year, Wachovia ranks highest in satisfying customers who recently obtained a home equity loan or line of credit... Now in its second year, the study measures customer satisfaction with home equity line/loan lenders. Three factors are examined to determine overall satisfaction. They are, in order of importance: closing process (36%), loan officer/representative or banker (34%) and application/approval process (31%) (1)."
Subprime Fallout and Foreclosure Impact
- Lehman Denies Subprime Exposure (Judith Levy in Seeking Alpha, July 19th): "Lehman Brothers (LEH) denied rumors on Wednesday that it was about to announce losses connected to the subprime mortgage market, but its shares fell along with its sector. The market was already skittish following the revelation Wednesday that two Bear Stearns hedge funds with wide exposure to subprime loans have essentially been wiped out. Punk Ziegel & Co. [also] downgraded Bear Stearns, Merrill Lynch, Morgan Stanley and other firms on concerns that they might not be able to make payments due on debt. Investors honed in on Lehman because of a perception that it has a greater exposure to the mortgage market than its competitors. Despite Lehman's protestations otherwise, investors clamored to buy puts on the stock: 50,113 Lehman puts versus 21,118 calls were traded by early afternoon Wednesday, well beyond Lehman's normal options volume of 28,682 contracts. The shares fell over 3% before rebounding slightly to close down 1.93% at $71.65."
- Washington Mutual Q2 2007 Earnings Call Transcript (Seeking Alpha, July 18th): "CEO Kerry Killinger: We saw improvement in the performance of our Home Loans Group, despite continued pressure from the challenging rate environment and ongoing weakness in the subprime mortgage market as well as continued erosion in the housing market Turning now to the Home Loans business. I continue to be optimistic that the segment is on track to return to profitability by the end of the year. The Q2 net loss of $37 million was an improvement over the $113m loss in Q1, and was due in large part to improve subprime results."
- MGIC Investment Corporation Second Quarter Net Income of $76.7 Million (CN Money, July 18th): "MGIC Investment Corporation (NYSE:MTG) today reported Q2 net income of $76.7 million, compared with the $149.8m for Q2'06. Q2 EPS were $0.93 vs. $1.74 for Q2'06. Net income for Jan.-June 2007 was $169.1m, compared with $313.3m for the same period last year. For Jan.-June 2007, diluted EPS were $2.05 compared with $3.61 for the same period last year. CEO Curt S. Culver: Financial results in the short term are being negatively impacted by recent credit developments in California and Florida and continued weakness in the Midwest. However, key long-term business fundamentals continue to improve."
- The Financial Cancer Spreading Through the Credit Markets: Subprime Not Contained (Michael Panzner in Seeking Alpha, July 18th): "Investors are struggling to place values on mortgage-backed securities tied to subprime home loans. Because some of these instruments aren't actively traded, investors worry that they are holding securities on their books at values that are no longer accurate… Several traders said Calyon, the investment-bank division of French bank Credit Agricole SA, was active in the [recently volatile ABX] market. In May, bank officials said some of its dealings in collateralized debt obligations [had] "suffered from the crisis" in subprime. It could have been forced to hedge against exposure by taking positions that pushed the index lower."
- Foreclosures Hit Record Numbers (Journal Advocate, July 18th): "There have been 53 foreclosure proceedings started in 2007 in Logan County, which is significantly ahead of last year, according to Logan County Treasurer Patty Bartlett, [Bartlett said] it wasn’t until Dec. 1 of last year when she started foreclosure number 53… Colorado has the highest number of foreclosures in the nation. Bartlett: That’s because Colorado has public trustees, not private ones, and the public trustees report any foreclosures that are started, not necessarily the ones that go to sale… That distorts the numbers a little bit and the reporting process may change in the future."
- Moody's Shut Out of Rating Commercial Mortgage Bonds (Bloomberg, July 18th): "Tad Philipp, a managing director at Moody's: Moody's Investors Service has been excluded from rating 70% of new commercial mortgage-backed securities after toughening its guidelines [and] been shut out of nine of the past 13 deals as underwriters sought better ratings from rival companies. The securities had a face value of more than $25 billion. Phillipp: "There's no doubt in my mind that it's because of the change. Normally, we'd rate 75% of the issues, not 30%." To get a high rating for some pieces of bonds, Moody's now requires lower-rated pieces to be larger, reducing losses further up the chain [raising underwriting costs]… Wall Street underwriters snub [of] Moody's highlights the relationship between credit ratings companies, the firms that pay for the ratings, and investors who rely on them to make decisions."
- The Fallout From the Subprime Debacle Continues (Jim Kingsland in Seeking Alpha, July 18th): "Theflyonthewall.com reported that Moody's has downgraded 8 ABS [Asset-Backed Securities] deals sold by Bear... Mike Metz at Oppenheimer: "The issue is the credit ramifications for those who have leveraged themselves to take positions in subprime loans. This is going to result in significant losses for those investors/speculators and the market can live with that. What the market can't live with is a phase of forced liquidations at hedge funds which are leveraged to the hundreds of billions, but [no one knows who it is]." Metz says the toxicity of what's occurring in subprime debt is making "stocks look like the least overpriced and dangerous" of the asset classes for now."
- East Bay Home Foreclosures Pose West Nile Risk (KCBS, July 18th): "County Mosquito and Vector Control District: Contra Costa County residents who live near homes going through foreclosure are at higher risk for West Nile Virus exposure. [Spokeswoman] Deborah Bass said people under financial distress because of foreclosures are more likely to abandon or neglect properties. Mosquitoes can easily take over prime breeding grounds, like swimming pools. "In Contra Costa County… there are 10,000 homes that are in some sort of foreclosure process. We can put a lien on the property. We are a public health agency and breeding mosquitoes that can transmit West Nile Virus is a health risk."
- Foreclosures Bloom at Corner Of Prosperity and Gullibility (Washington Post, July 18th) Maryland: "Prince George's is the wealthiest predominately black county in the United States… In Prince George's, mortgage foreclosures are the highest in the region, a Homeownership Preservation Coalition has been formed to guide residents through the complexity of refinancing. In neighboring Montgomery County, there have been more foreclosures in the first quarter of this year than in all of 2006."
- A Tale of Two Borrowers (Yahoo! Finance, July 16th): "Mortgage Bankers Association reports: [While] more borrowers are moving away from risky adjustable-rate mortgages [ARMs] toward fixed mortgages, subprime borrowers… seem to be doubling down, in hopes that a combination of recovering home prices and more favorable rates will bail them out. Three-quarters of all subprime loans originated in the last half of 2006 were ARMs, up from two-thirds in the first part of the year. Even as rates have risen, many subprime borrowers continue to use their homes as a source of cash for other uses; 87% of all refinancing loans were for the purpose of taking out additional cash."
Global Impact and Alternatives To The Housing Slump
- Australian Investors Hit By US Subprime Crisis (ABC.Net, July 19th): "An Australian investment fund is teetering on the brink of a billion-dollar collapse… Basis Capital, which runs two hedge funds linked to US [subprime] mortgages, has told its investors that… returns may be just at 50 cents on the dollar. Basis [has] as much as $2 billion at stake… Australian financial newsletter The Sheet: Basis… announced they've appointed an accounting firm ... to advise them on the sale… to try and recover as much as they can for investors." International ratings agency Standard and Poor's (S&P) has already [put] the two Basis funds on hold."
- Europe's Junk Fear Grows (Wall St. Journal, July 19th): "Europe[an] investors show[ing] signs of an increasing aversion to risky corporate bonds: An index of 50 mainly "junk"-rated borrowers, known as the iTraxx Crossover [considered] a barometer of credit sentiment, widened by 0.265 percentage point to 3.24 percentage points early Wednesday… meaning the cost of insuring a portfolio of €10 million of debt against a default in a pool of 50 mainly junk-rated European borrowers had risen to around €324,000, compared with €288,500 late Tuesday. Concern over the subprime-mortgage market has prompted some European and U.S. borrowers to restructure deals with less-aggressive terms or to pull back from the market."
- World's Hot Property Market: Singapore (Bangkok Post, July 19th): "The property market in Singapore is the "world's hottest" for major real estate investments, Jones Lang LaSalle (NYSE:JLL) said Thursday in a new study. The firm cited astounding rental growth and rising values for the strong showing in the first half of this year. Capital values of prime property in the city-state have soared 50% in the past six months alone, said JLL's report in The Straits Times. The study tracked properties that sell for more than 5 million US dollars around the world, which are mostly commercial buildings."
- CB Richard Ellis Predicts Global Real Estate Set To Soar (eMediawire, July 18th): "Funds from North America and Australia are penetrating into the global market at a rapid rate - in 2006, North American investors made about US$45-billion notable investments outside of the Americas, with allocation increased by 131% for Europe and 95% for Asia y-o-y. In the same year, Australian Listed Property Trusts [LPTs] invested A$13 billion (US$10 billion) abroad, up from A$8.5 billion in 2005. The strong growth stories in the Asian markets have attracted the attention of international investment funds. Emerging giant China is now among the top destinations for global real estate capital in Asia. European investors continued to predominantly engage in cross-border transactions in Euro zone, with intra-regional investment led by UK and German funds."
- ING Real Estate Purchases Barcelona Office Property for 57 Mln Eur (Forbes, July 18th): "ING Real Estate, a subsidiary of ING Groep NV, said it has purchased the Imagina TV office building in Barcelona, Spain, for €57 million. The company said the building will be incorporated into its ING (NYSE:IND) Real Estate European Office Fund. ING said the property has floor space of around 20,000-sq.m… Tenants include Spanish broadcast media groups Television de Cataluna, CCRTV and Mediapro."
- Realty Slowdown Hits AIM (NDTV Profit.com, July 19th): "The realty slow down is beginning to show its impact not just in India but also at the London-based AIM exchange. The alternate listing market is now feeling the pinch of reduced cash flows from the real estate sector... This year much less money is being raised than last year [for] the real estate sector in India from the AIM," said Ian Gomes, Chairman-New and Emerging Markets, KPMG. Last year… over $2 billion [was] raised [on the AIM]. But this year, many like K Raheja Corp and Ishan Construction have delayed listing."
Macro Impact, And Will The Housing Slump Cause A Recession?
- Housing, Economy Bite Bank Earnings (Michigan Live, July 19th): "Columbus, Ohio-based Huntington Bancshares Inc. (NASDAQ:HBAN), with a large market share in western Michigan, and Ionia-based Independent Bank Corp. (NASDAQ:IBCP) each warned of lower earnings last week, in part because of higher loan losses and slower loan growth. Holland-based Macatawa Bank Corp. (NASDAQ:MCBC) this week cited the weak economy -- and particularly the deterioration of residential land development -- for its earnings decline. Weakness in the real estate sector has been worse and had a greater impact on performance than bankers expected."
- Housing Starts Beat Forecasts; Permits Miss the Mark (Eli Hoffmann in Seeking Alpha, July 18th): "Housing starts were up 2.3% to 1.467 million annual starts, an about face from May's revised 3.4% drop to 1.434 million. Originally, the Commerce Department reported a milder 2.1% drop in May. Economists… thought starts would fall 1.6% to 1.45 million. Overall, housing starts are now down 25.2% from June 2006. On Tuesday, the National Association of Home Builders said its sentiment index fell to its lowest level since January 1991… Building permits, a clearer indication of future activity, fell 7.5% to 1.406 million annually in June, reversing a May gain of 4.3%. Economists expected a milder 2.6% fall."
- Weak US Home Prices Should Spur Savings - Bernanke (Reuters, July 18th): "Federal Reserve Chairman Ben Bernanke told Congress on Wednesday that many homeowners should save more now home prices have halted their rapid rise and have stabilized. Homeowners "will have to save more out of their current income and that may lead to some increase in the household savings rate. Over the medium-time horizon, we do want to see more saving. People saved less in the past decade or so precisely because home values (were rising). They did not feel that they had to put aside part of their income."
Homebuilders And Housing Stocks
- First Half ETF Performance: Steel's The Strongest, Housing Funds Weakest (Matt Hougan in Seeking Alpha, July 18th): "The iShares Dow Jones US Home Construction ETF (NYSEARCA:ITB) delivered the worst return, falling 25.8%, followed by the SPDR Homebuilders (NYSEARCA:XHB) at negative 18.3%. Indeed, the "ten worst" list is dominated by the real estate and homebuilding industry, which truly took it on the chin during the beginning of this year."
- Midday Leaders & Laggards: S&P 500 (Forbes, July 18th): "D.R. Horton Inc. (NYSE:DHI) was among the stocks dragging the Standard & Poor's 500 Index lower Wednesday. The homebuilder was responding to a Census Bureau report that building permit activity slowed to 1.4 million permits last month. Also, fellow homebuilder Pulte Homes Inc. said it expects to report a steep loss for Q2. DHI's stock… was down as low as $18.90, its lowest point in three years… Sherwin-Williams Co. (NYSE:SHW), the paint company, was also hurt by the continued bad news in housing. Sherwin-Williams' shares sank $1.28, or 2%, to $66.41."
- Champion Enterprises Profit Down, Still Tops Expectations (Chicago Free Press, July 18th): "Champion Enterprises Inc. said its Q2 profits fell sharply to $7.5 million, or $0.10/share, compared with $112.1m, or $1.44/share in Q2'06. The manufactured homes maker said Q2 revenue fell 11% to $330.4 million, versus $340.7m in Q2'06… [And] manufacturing segement sales were down nearly 20%, as a weak housing market continued to hurt Champion's financial performance. Still, Champion exceeded Street Q2 estimates... CEO William Griffiths: "While our manufacturing segment sales declined 19%, our segment margin improved to 6.7% for Q2, up from 6.6% last year. In addition, the manufacturing segment ended Q2… with backlogs improving over 30% y/y and over 60% since Q1."
- American Standard Companies Reports Second-Quarter Results (PR Newswire, July 18th): "American Standard (ASD) CEO Fred Poses: "With 14% earnings growth on an adjusted basis, we delivered a good Q2, particularly in light of some challenges in the residential part of our air conditioning business. Continued strong sales of commercial equipment and services drove our results in Air Conditioning Systems and Services, more than compensating for the softer housing market, cooler weather and a warranty charge that affected our residential results. We see continued strength in the global commercial air conditioning systems and services markets. Combined with our strong position in residential markets, we expect a good overall year for this business."
- Stanley Posts Quarterly Declines (Roanoke Times, July 18th): "Stanley Furniture (NASDAQ:STLY) posted a Q2 loss of $2.4 million, or $0.23/share, on lower sales, vs. Q2'06's net income of $3.9m or $0.32/share… Sales fell 12.6% y/y, dropping to $67.7m. Like… its neighbor and competitor, Bassett Furniture, Stanley CEO Jeffrey Scheffer attributed the decline of sales and earnings during Q2'07 to "current industrywide conditions" [of] increased gas prices and a housing recession… Scheffer… does not anticipate [improvement in] 2007. For the first half of 2007, sales of $142.8 million were off 11.3% vs. the same period last year… STLY's shares closed Tuesday at $19.16/share, down $2.57 [and were unchanged Wednesday]."
Commercial Real Estate and REITs
- Commercial Real Estate Still Active In County (Stamford Times, July 19th) Connecticut: "Cushman & Wakefield mid-year market review: Buoyed by frenetic growth in the financial services market, Fairfield County commercial real estate remains a hot commodity… Greenwich Vacancy rates dropped to 13.6% and have dropped by more than 30% over the last two years. Jim Fagan, senior managing director and head of Cushman & Wakefield's Fairfield and Westchester County [NY] region: "There's a big demographic wave of financial jobs. When we look at Stamford and… White Plains, we have to change our thinking of these places as a suburban market of Manhattan to a submarket of Manhattan."
- Mortgage Market Pushes Residential Players To Commercial Field (Michigan Live, July 19th): "Commercial real estate broker Patrick Mohney: "A lot of those investors that used to be investing in marginal products, in single-family homes, now are investing in commercial properties. For the same amount of money an individual might use to buy a rental property or fixer-upper house, they can become a partner in a commercial investment. Out-of-state interest in commercial real estate in western Michigan continues with California and Nevada investors finding considerable value in Grand Rapids properties."
- Mission West Properties Announces Second Quarter 2007 Operating Results (CNN Money, July 18th): "Mission West Properties, Inc. (NYSE:MW) reported today that Funds From Operations ("FFO") for Q2 was approximately $15,954,000 or $0.15/share (considering the potential effect of all O.P. units being exchanged for shares of the Company's common stock) as compared to approximately $16,954,000 or $0.16/share for Q2'06. On a sequential quarter basis, Q1'07 FFO was approximately $0.23/share. Q2'07, FFO decreased to $39,859,000 or $0.38/share from FFO of $51,480,000 or $0.49/share for the same period in 2006."
- Washington Property Buys Rockville Building (Washington Business Journal, July 18th) Maryland: "Washington Property Co. has purchased a 108,000-sf office building in Rockville from a consortium of owners including Piccard Development LLC. Financial terms of the deal were not disclosed. The Bethesda development company plans to spend $2.6 million to renovate the three-story property at 1390 Piccard Dr., located along Interstate 270… Within the last year, Washington Property has bought three other office buildings in the area."
- Analyst Raises Boston Properties Rating (Chron.com, July 18th): "KeyBanc Capital Markets analyst Jordan Sadler raised his rating on REIT Boston Properties Inc. (NYSE:BXP) on valuation as the stock fell below his former downside price target of $104. Sadler upgraded his rating to "Hold" from "Underweight," saying the REIT's shares are trading below the underlying value of its properties. "We believe BXP remains one of the highest quality names in the group, with top tier assets and management, a bullet proof balance sheet and a robust development pipeline in some of the country's strongest office markets." Sadler characterizes Boston Properties as a "long-term high quality play."
Web Site of the Day
In light of the whole subprime crisis, mortgage brokers seem to have achieved the level of lawyers: Not exactly beloved. They must be good for something, right? In lieu of "dead mortgage broker" jokes, I thought it might be interesting to look at what's happening in today's market from a mortgage broker's perspective.
Lenderama is generally an informative industry website, with do-gooder tips to brokers like "informing your clients as to how YSP's [controversial and generally hidden broker fees] and RESPA laws work is more important than ever." Lenderama's advice, tools and marketplace links are useful to brokers and borrowers. But as an industry insider, it might well be useful to investors looking for the next hot mortgage products now that subprime is, well, not exactly beloved.
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