Quote of the Day- "From the House's Mouth"
“Sentiment changed; it changed on a dime. It’s a 180 from where the market was even six months ago.”- Shelly Lombard, a senior high-yield bond analyst at Gimme Credit, on investors losing their collective appetites for leveraged bonds backing big buyouts. (NY Times, July 26th)
Real Estate Sales and House Prices
- Agassi, Graf Stake Tennis Winnings on $600 Million Idaho Resort (Bloomberg, July 26th): "Retired tennis champions Andre Agassi and Steffi Graf… bought a house at a new ski resort called Tamarack in Long Valley, Idaho. For decades, it was a secluded playground for the gentry in [nearby] Boise… Now, Agassi and Graf plan to build a Fairmont hotel there... [The condominium hotel will] be the first Fairmont in the world with a rock-climbing wall and a machine that simulates kayaking… Selling the 224 rooms and 69 penthouses -- plus 50 private homes on the mountain -- will bring in $600 million for Agassi Graf Development LLC and its partner, Bayview Financial LP in Coral Gables, Florida."
- Home Sales in Polk County Maintain Downward Trend (The Ledger, July 26th) Florida: "Polk County's existing home sales dropped for the 13th consecutive month. June's total fell nearly 40% from 554 in June 2006 to 333… The Ledger's home-sales figures include existing duplexes, condos, co-ops, manufactured and mobile homes, modular, single-family and town homes, as well as new-home sales by Realtors. Lakeland Realtors had 210 home sales in June, down 43% from 366 a year ago… Linda Jackson, Keller Williams Realty: The average time to sell a home now is between six and eight months… It is estimated that local builders have an inventory of about 5,000 new homes."
Real Estate Investing and Sentiment
- Second Life Makes Sense For Real Estate (Inman News, July 25th): "[In Second Life] an online virtual world [with] million of registered users, who complete millions of dollars of in-world transactions each month… Coldwell Banker has launched an in-world realty business … to sell virtual homes to people who earn and spend "Linden dollars" in the virtual economy... Coldwell Banker wants to build brand name-recognition among Second Life participants and leverage that awareness into real-world real estate sales. Coldwell's [has] about 3,800 affiliated real estate offices and 124,000 sales associates in 31 real-world countries. The opening of Coldwell's outpost in Second Life even merited a formal announcement to the media.
Mortgates and Real Estate Lending
- Fidelity National Financial Earnings Fall 36% (Inman News, July 25th): "Higher interest rates and the slowdown in the mortgage lending and housing markets helped push Fidelity National Financial's Q2 profits down 36% from last year, to $84.8 million. Q2 revenue totaled $1.49 billion, down 44% from $2.64b for Q2'06. FNF… highlighted a 9.6% pre-tax profit margin in the title business as a bright spot in [Q2]. Profit margins in the title business were 12.3% in Q2'06, however… Fidelity, which says it issues about 28% of all U.S. title insurance policies, reported closing 66% of orders opened, down from 68% a year ago. At 408,700, Q2 orders closed were down 14% from the 473,800 tallied in Q2'06."
- New Twist On Popular Reverse Mortgage (Upstate House, July 25th): "Reverse mortgages definitely are on the rise. The [federally insured] Home Equity Conversion Mortgage… the nation's most popular reverse mortgage, jumped from 43,081 closings in fiscal-year 2005 to 76,276 in fiscal 2006…Jim Smith, vice president of marketing and sales for Circle Lending: One client, a widow with no children… owns her home and contacted an acquaintance [and] worked out an arrangement where the acquaintance will slowly accumulate equity in the property by making monthly payments to the homeowner. They worked out an acceptable interest rate for both sides."
- MBIA Accounting Practices Cleared (Crain's NY Business, July 25th): "Shares of MBIA Inc. (MBI) jumped nearly 10% Wednesday after the insurance holding company said an independent consultant hired to assess certain company accounting and disclosures found they were consistent with generally accepted accounting principles and federal securities laws. MBIA in January agreed to pay $75 million to settle civil securities-fraud charges with the SEC, the New York Attorney General and the NY State Insurance Department over what the agencies said was a sham $170 million transaction in 1998. MBIA [also] agreed to… restate its earnings from 1998-2004, and hire an independent consultant to review its accounting and financial reporting."
- Countrywide Collapses as Chief Cashes In (NY Post, July 25th): "Countrywide (CFC) CEO Angelo Mozilo began cashing out his… options in December... Countrywide hasn't been accused of any wrongdoing, and Mozilo's insider stock sales were disclosed in regulatory filings. Filings showed that he typically netted about $4 million a week on his options sales since December… including a $1.7m gain on 70,000 options he redeemed on the eve of the earnings release. His windfall exceeds the $72.2 million gain he made on options in the entire year of 2006. The latest proxy in June said Mozilo held about 8.2 million options that he could redeem for as little as $9.60/share."
- Wells Fargo Closes Subprime Wholesale Lending Business (CNN Money, July 26th): "Wells Fargo & Co.'s (WFC), the nation's second-largest home lender, said Thursday it will stop making subprime mortgages through brokers, in a move aimed at reducing late payments and defaults... Industry data show that mortgage brokers and state-licensed lenders generate about 68% of all residential mortgages in the U.S… Wells Fargo said its subprime "wholesale lending" business accounted for 1.6% of its total residential mortgages of $397.6 billion last year… As part of the move, Wells will close its subprime wholesale operations in Baton Rouge, La., and Des Moines, Iowa… affecting 170 employees in Baton Rouge and 67 in Des Moines."
- Weak Home Sales, Tightening Credit Standards = Multiple Mortgage Apps (Barry Ritholtz in Seeking Alpha, July 26th): "Wednesday on Real Money's columnist conversation, Tony Crescenzi noted that "It would be extraordinarily unusual for the combined figures on new and existing home sales to continue falling in the face of increases in mortgage applications." I have to disagree. Based on our interviews with our Real Estate clients (commercial builders, RE brokers) and especially residential Mortgage Brokers, there appears to be a dramatic rise in multiple applications for both new purchases, refis, and home equity lines. As many of the ARM resets come up over the next 18 months, I would surmise these multiple mortgage apps will increase -- especially amongst the more desperate marginal homeowners."
- Triad Guaranty Inc. Reports Earnings of $15.3 Million for the Second Quarter (CNN Money, July 25th): "Triad Guaranty Inc. (OTC:TGIC) today reported Q2 net income of $15.3 million vs. $19.6m for Q2'06, a decline of 22%. Diluted EPS were $1.02 for Q2'07 vs. $1.31 for Q2'06, a decrease of 22%... CEO Mark K. Tonnesen: "Increases in defaults and foreclosures coupled with generally flat to declining home prices have led us to substantially increase our reserves since Q4'06… California and Florida were significant contributors to the reserve increase this quarter due to an increasing default rate and the higher average loan size of our insured loans in those states… The 2006 book has experienced defaults at a faster pace when compared to earlier vintage years."
- Radian Profit Plummets 86% (Philadelphia Inquirer, July 25th): "Radian Group Inc. (RDN) said yesterday that its second-quarter net income fell 86%, as the Philadelphia mortgage insurer paid a steep price for a rise in defaults. Radian CEO S.A. Ibrahim: "Our Q2 results clearly illustrate the credit challenges in today's mortgage market," particularly in California and Florida." Radian's net income plummeted to $21.1 million, or $0.26/share, in the quarter ended June 30, compared with $148.1m, or $1.79/share in Q2'06. Revenue fell 20.2%, to $243.2m from $304.6m."
- Chrysler Deal in a Struggle for Financing (NY Times, July 25th): "Bankers have been unable to raise the money needed for the purchase of the Chrysler Group by the private equity firm Cerberus Capital Management… [due to] investor unwillingness to accept the terms for $12 billion in loans… At least 20 debt offerings have been postponed or sweetened as the markets have tightened in recent weeks. Investors have begun to demand better terms for the high-yield loans and bonds at the heart of the leveraged deals… early this week, G.M. had to postpone a loan sale to pay for the $5.6b buyout of its Allison Transmission unit to the Carlyle Group and the Onex Corporation… Tighter [credit] restrictions comes at a difficult time, when many in the [automotive] industry are revamping or seeking financing to exit bankruptcy."
- Skid In Accredited Shares Makes Investors Skittish Over Sale Plans (Sign On San Diego, July 25th): "Shares of troubled subprime mortgage firm Accredited Home Lenders (LEND) skidded 15% yesterday, highlighting investor fears that the company's proposed $400 million sale to a private equity firm could fall apart. Accredited's stock… close[d] at $10.97 [despite] Lone Star Partners'… offer to acquire all of Accredited's shares at $15.10 in cash. The offer expires Tuesday, although it could be extended. Typically, shares of a company that's a takeover target trade much closer to the proposed sale price. Analysts say investors appear to be concerned that the deal won't be completed or will be reworked at a lower price."
- Subprime Hits Auto Sector As Financing Tightens (Washington Post, July 24th): "Glenn Reynolds, analyst for fixed-income research service CreditSights: Automakers' bonds are bearing the brunt of a general sell-off in junk bonds as investors dump the most liquid, or easily traded debt. "GM and GMAC are about as liquid and on-the-run as they get in that end of the credit food chain. So it ends up as the panic proxy." MarketAxess: GM's bonds with a 8.375% coupon due 2033 fell to $0.84 on the dollar on Tuesday, down from $0.86.875/dollar on Monday, for a yield of 10.13%. Ford's 7.45% bonds due in 2031 fell to $0.75.75/dollar, down from $0.76.25 on Monday. Those bonds now yield 10.17%."
- 3 Mortgage Brokers and 2 Argent Employees Arrested in Multi-Million Dollar Fraud Case (Originator Times, July 23rd): "Florida Department of Law Enforcment [FDLE]: Five defendants [have been] charged with racketeering, conspiracy to commit racketeering, obtaining of a mortgage by false representation, and second-degree grand theft by fraudulently obtaining mortgages in the names of victims solicited for home improvement projects and for obtaining fraudulent loans on their own personal properties. [Three of the defendants were] former owners, principals or employees of the Hillsborough County mortgage broker companies Advanced Mortgage Solutions and Consumer Lending Resources. In addition to the mortgage brokerage businesses, the defendants operated two home improvement companies: Premier Quality Renovations and Florida Beautiful Construction."
- Countrywide Financial Q2 2007 Earnings Call Transcript (Seeking Alpha, July 24th): "John McMurray Senior Managing Director & Chief Risk Officer: [In Q2, there's] a $91 million charge in HFS, (held-for-sale), compared to $266m last quarter. Q1's charges were heavily influenced by subprime. Approximately $81m of the $91m this quarter pertains to approximately $484m of loans that were moved from HFS to HFI (held-for-investment) during Q2. The loans were marked to the lower of cost or market as they moved from HFS to HFI. These loans consist of delinquent government, prime, subprime, HELOCs, and fixed-rate seconds… the decision to move assets into HFI is done on a best execution basis. We often realize better economics by retaining delinquent loans than by selling them."
- Downey Posts Terrible 2Q - As Predicted (Colin Peterson in Seeking Alpha, July 25th): "Cramer's been making the ludicrous suggestion that WaMu (WM) should buy DSL for $100/share. Cramer's thesis is that Downey is cheap, in a growth area, and has no loan loss problems… Downey is cheap if you believe that they have a prayer of collecting on their loans. Negative amortization balances were up to 377M this quarter, which is 25.8% of stockholders equity (up from 320M and 23% in January). Negative amortization is a debtor's death spiral. Its net income was 75.6M in 2007 YTD, and negative amortization balances increased by 57M. Fully, 75% of its net income in 2007 has been non-cash negative amortization."
- Default Notices Hit Highest Level For Quarter In 10 Years (The Ledger, July 24th): "Real estate research firm DataQuick Information Systems: Mortgage defaults in California soared on an annual basis in Q2 to the highest level in 10 years, the result of weak home sales and sagging home prices. A total of 53,943 default notices were sent to homeowners between April and June, up 158% from 20,909 in Q2'06… The notices serve as an early indicator of possible foreclosures. The latest default figures represent a 15.4% increase since Q1, when 46,760 defaults notices were sent out statewide… Many of the mortgage loans that went into default in Q2 were taken out between July 2005-August 2006."
Global Impact and Alternatives To The Housing Slump
- Housing Market Will 'Grind To A Halt' (This Money.co.uk, July 23rd): "Unrelenting rises in house prices are finally expected to halt, dropping from well over 10% today to less than 1% by the end of next year, the Ernst & Young ITEM Club forecasts. Houses are currently overvalued by as much as 16%, it warns… An interest rate hike to 6% will end the property market boom, ushering in a decade of stagnation… As householders are squeezed, the Treasury appears to be enjoying a boom. Tax payments rose almost 10% in Q1 this year, compared to Q1'06, dramatically outstripping growth in wages and salaries of only 5.1%."
Macro Impact, And Will The Housing Slump Cause A Recession?
- The Fed Stops Spoonfeeding Us: A Great Depression for Housing? (Tate Dwinnell in Seeking Alpha, July 25th): "PIMCO's Bill Gross and Countrywide Financial CEO Angelo Mozilo's… remarks [Wednesday were] significant enough to create a change of character in this market, possibly creating a market of opportunity sellers rather than a market of dip buyers as we've seen over the past several months… It's important to realize that while technically this market has some problems, all indices retain key. The S&P took out the 50 day moving average and dropped a hair below its upward trend line and the Russell 2000 is already fast approaching its 200 day moving average. Both the Dow and Nasdaq have a bit further to go before testing key support levels. The area around Nasdaq 2620 and Dow 13600 will certainly be watched closely."
- Prices Rise, Existing-Home Sales Decline in June (NAR Press Release, July 25th): "National Association of Realtors: Total existing-home sales… declined 3.8% to a seasonally adjusted annual rate of 5.75 million units in June from a downwardly revised level of 5.98 million in May, and are 11.4% below the 6.49 million-unit pace in June 2006… Freddie Mac (FRE), the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 6.66% in June, up from 6.26% in May; the rate was 6.68% in June 2006. The national median existing-home price for all housing types was $230,100 in June, up 0.3% from June 2006's $229,300… Total housing inventory fell 4.2% at the end of June to 4.20 million existing homes available for sale, which represents an 8.8-month supply at the current sales pace, the same as a downwardly revised 8.8-month supply in May."
- Survey: Average Home Purchase Price Up 4.3% From May To June (Inman News, July 25th): "The Federal Housing Finance Board reported today that the average home purchase price increased 4.3% from May-June, to $309,700. The FHFB's data, based on a monthly survey of conventional purchase loans made by major lenders, excludes FHA- and VA-guaranteed mortgages and balloon loans. The National Association of Realtors today reported that average sales prices of existing homes rose by a more modest 2.2% from May-June, to $276,700. The FHFB survey of 17,319 reported loans from 74 lenders found the average loan amount increased by $7,600, to $234,200, and that average loan-to-price ratio was 79.7%, down from 80.4% in May."
- U.S. Economy Continues Moderate Expansion: Fed (CNBC, July 25th): "Fed Beige Book: Most districts said residential construction and real estate activity continued to decline through mid-July, with some describing conditions as "soft" and "weak." Separately, the NAR said the median price of a new home edged up slightly (0.1%) to $230,300 in June [from June 2006]… Mark Zandi, chief economist at Moody's Economy.com: "The net increase in prices is very misleading. [It's] related to the mix of homes that are transacting. The low end of the market is getting pummelled by the implosion in subprime, but it's being biased upward because the share of homes in the high end is greater now."
Homebuilders And Housing Stocks
- Beazer Homes Swings to 3Q Loss (Yahoo! Finance, July 26th): "Beazer Homes USA Inc. said Thursday it swung to a loss in FQ3 after the homebuilder cut prices to spur sales and took major charges to write down the value of unsold inventory. Beazer posted an FQ3 loss of $123 million, or $3.20/share, vs. FQ3'06 when it earned $102.6m, or $2.37/share. The latest quarter included pretax charges of $188.5m to write down the value of inventory and goodwill as well as forfeit options on land… Analysts [had] projected a loss of $0.32/share. Revenue fell 37% to $761m from $1.2 billion last year, as home closings plunged to 2,666 from 4,156."
- Pulte Homes Swings to Loss; Revenue Falls 40% (Susan Lerner in Seeking Alpha, July 26th): "Pulte Homes (PHM) posted a Q2 loss of $507.6M ($2.01/share) as revenues skid 40% to $2B from $3.4B a year earlier. Last year, Pulte earned $243.9M ($0.94/share) in Q2. Earnings were at the low-end of the $2.00-2.10/share loss range the company forecast last week. Analysts were expecting a loss of $2.04/share. Previously, Pulte had expected results to be break-even to a $0.10/share loss, excluding charges. Pulte expects Q3 EPS of $0.10-0.20/share excluding charges, but declined to give guidance beyond that. On Wednesday, National Homebuilders Association chief economist David Seiders said "The outlook for [new construction in] the second half and next year are a lot weaker than six months ago." He blamed the downturn on the unsustainable boom of new housing sales that was driven by an "overly aggressive monetary policy."
- D.R. Horton Swings to 3Q Loss (Yahoo! Finance, July 26th): "D.R. Horton Inc. (DHI), posted a Q3 loss Thursday… [from] pretax charges of $852 million that reflect the lower value of land and other holdings... With the write-down charge, Horton lost $823.8m, or $2.62/share, in Q3, vs. a gain of $292.8m, or $0.93/share, a year earlier. Analysts [had] expected losses of $0.35/share. Revenue fell to $2.5 billion from $3.6b, as the number of homes closed plummeted to 9,643 from 13,377 a year ago. Analysts said they were stunned by the size of the write-offs, which equaled about 8% of Horton's equity… CEO Tomnitz said sales and prices were stabilizing in Florida and the Northeast… Weakness in California contributed to Horton's companywide cancellation rate for houses of 38%, about double the normal rate."
- Ryland Slips To Loss In Q2 On Charges – Update (Trading Markets, July 25th): " Ryland Group Inc. (RYL), a homebuilder and a mortgage-finance company… posted a Q2 net loss of $52.4 million or -$1.25/share, compared to net income of $94.8m or $2.03/share in Q2'06. On average, six analysts polled… expected a loss of $1.31/share for Q2. Excluding pre-tax charges of $147.1m for inventory valuation adjustments and write-offs, earnings would have been $0.80/share for the latest quarter… During Q2'07, the company repurchased 370 thousand shares of its common stock for $15.9m. Previously, in December 2006, Ryland's Board authorized $175.0m for the purchase of additional shares. At June 30, 2007, Ryland had $142.3m remaining under this authorization."
Commercial Real Estate and REITs
- Opportunity REIT I Buys Back-Office Complex (Globe St. July 25th): "Citing location, tenant quality and lease terms as chief dealmakers, Behringer Harvard Real Estate Investments [bought] the 134,246-sf CentrePort Office Center [in Dallas] for its Opportunity REIT I fund. The two-building asset is triple-net leased long term to Dean Foods Co. and Radiant Systems Inc. "The pricing was right," Jason Mattox, executive VP for Behringer Harvard. And though he can't discuss the sale price, he did say the acquisition cost fell below the federal reporting level. The asset is assessed at roughly $77/sf… local sources believe the deal closed in the neighborhood of $90/sf due to underlying dynamics."
- Behringer Harvard and Brookfield Real Estate Opportunity Fund Invest in D.C.-Area Apartment Development (PR Newswire, July 25th): "Behringer Harvard, Brookfield Real Estate Opportunity Fund and Fairfield Residential today announced the closure of funding for the development of Fairfield at Bailey's Crossroads in Fairfax County, Virginia. Funding is comprised of a mezzanine loan provided by Behringer Harvard and equity provided primarily by Brookfield. Behringer Harvard also has the option to acquire a majority equity interest at completion. Fairfield Residential intends to develop the property into 414 luxury apartment units designed to appeal to a wide variety of renters."
- ETF Teardown: The Best REITs (Motley Fool, July 25th): "Health Care REIT (HCN) [is] a popular holding for investors. The aggregator of senior housing and health-care facilities has been taking on more debt and snapping up properties... The company is aggressively building out a portfolio of properties ahead of competitors Ventas (VTR) and Healthcare Realty in hopes of cashing in on the increased medical and assisted-living needs of the future... A dividend yield of 6.7% and a diversification into medical office properties with a recent acquisition of Windrose Medical Properties are the icing on the baby boomer cake. It's all reason… to give a bullish rating to HCN."
- United Synagogue Sells 32,500-SF HQ for $27M (Globe St., July 25th): "In a transaction that enabled the United Synagogue of Conservative Judaism to upgrade its headquarters office and to increase its endowment, the organization, which comprises more than 700 affiliated synagogues throughout North America, sold its 32,500-sf, seven-story office building at 155 Fifth Ave. for $26.5 million and acquired a new headquarters on two floors at 820 Second Ave… The buyer [is] an affiliate of Philips International Holding Corp. The owner of the new headquarters, [is] also a Philips affiliate, Second 820 Owner LLC."
- Prebuild Offices Jump Off Shelves (The Real Deal, July 25th): "Small "prebuilds" -- 2,500-7,000-sf finished office spaces -- are becoming an increasingly popular product in New York's commercial market. Wealthy investment companies, like hedge funds and private equity firms, will pay a premium for a space if it means they can move in immediately and not go through the hassle of dealing with architects and contractors. Robert C. Fink of Capital Properties said that a raw space on the market for two years at $75/sf a year leased for $85/ft as a prebuild… Architect Milo Kleinberg Design Associates is putting small prebuilds in 7 World Trade Center."
- CT Hotel Group Buys Westchester Marriott Hotel (Globe St., July 25th): "In a deal [purportedly] worth approximately $65 million, Northview Hotel Group LLC of Westport, CT has acquired one of Westchester’s top hotels--the Westchester Marriott--from Morgan Stanley (MS)… The hotel…features 444 guestrooms, approximately 26,000-sf of meeting space… Jones Lang LaSalle Hotels (JLL): MS had implemented approximately $11m in upgrades to the hotel in the past two years to transform it into a best-in-class asset... JLL: “The market responded very favorably to the opportunity to leverage the recent renovations and Westchester County’s booming economy, as well as to acquire a highly-desirable Marriott-managed asset.”
- Shareholders Greenlight FECI, Fortress Merger (Globe St., July 25th): "Fortress Investment Group’s $3.5-billion bid to take Florida East Coast Industries private is in the home stretch now that FECI’s shareholders have approved the merger. The deal is expected to close July 26... Locally based FECI is the owner of Flagler Development Group and Florida East Coast Railway LLC. An overwhelming majority of FECI’s shareholders, 98.8%, cast votes in favor of the merger. Under the agreement, the shareholders are entitled to $84/share--$62.50/share, plus a one-time, special cash dividend of $21.50/share on all issued and outstanding common stock to shareholders of record as of close of business July 24."
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