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Quote of the Day- "From the House's Mouth"
“There is no immediate crisis for the long-term individual investor. This is mostly a case of relatively rich, sophisticated investors who made big bets on the credit spreads that will have big problems. It is not Joe 401(k).” - Michael Poulos, a managing director at Oliver Wyman, a consulting firm that specializes in financial services, on how the current financial crisis is different from previous ones like the Savings & Loan crisis in the 1980's. (NY Times, Aug. 13th)
Real Estate Sales and House Prices
- Rentals Reach a New Level of Luxury (NY Times, Aug. 12th) Manhattan: "With NYC rental vacancies hovering at less than 1%, developers are confident that the rental market is strong enough to absorb thousands of new apartments, even if they come with rents that are two to three times current averages. That means studios that rent for as much as $3,500/month, one-bedrooms for $6,000, and two-bedrooms for $11,000… Brokers and developers agree that the target audience for many of the new high-rises is young professionals in their 20s and early 30s who may earn as much as $300,000 a year but who just aren’t ready to own yet."
- As National Housing Bubble Bursts, Billings' Market Remains Strong (Billings Gazette, Aug. 12th) Montana: "Local real estate agent Sue Lovely described the Billings market as a "workhorse." Many in the business point out that Billings may lack the glitz of a Las Vegas or Phoenix, but the Magic City is now reaping the benefits of a steadier market based on a strong and diversified economy… Montana's rate of foreclosure filings - one in every 5,502 households - represents a fraction of the national average of one in every 704 households and a mere sliver of Nevada's one in 175."
- Price Drop May Signal Correction (In Business Las Vegas, Aug. 10th): "Greater Las Vegas Association of Realtors: The median price of [MLS-listed] resale homes… fell to $295,000 in July. That's a 3.3% drop from June and 6.3% below the all-time high of $315,000 in June 2006… With a combined 30,000 single-family homes, condos and town homes on the market… New listings [were] up 2.5% for single-family homes… sales of homes listed on the service fell nearly 11% from June to 1,318. That's 34% below sales totals a year ago… Las Vegas' resale housing inventory [is] sufficient for 14-16 months… July buyers went after lower-priced homes. The average price of units sold in July was $377,861, nearly 12% below the price in June."
- Housing Inventory Glut Gets Fatter (CNN Money, Aug. 10th): "ZipRealty: The number of homes for sale [in] 18 metro-area markets from all four regions of the country… jumped. Over… the past 12 months ended July 31, only Boston's inventory fell 5.8% and San Diego's dropped 2.1%. The average for the 18 cities was a 19% increase in homes on the market, a total of 810,566. Seattle inventory [increased] 56% to 32,647… Miami (34% to 77,055), Orlando (34% to 34,900), Las Vegas (33% to 28,905), Baltimore (31% to 9,601) and Chicago (26% to 82,622)… In Sacramento, 48% of sellers have discounted from their original listing price. Some 47% of Orange County, California, sellers have dropped their price and more than 45% of sellers in both Boston and Phoenix have done the same."
- Bronfman Townhouse Sets Record (Real Deal, Aug. 10th): "Seagram heir Matthew Bronfman has closed on the sale of his 25-room mansion at 7 East 67th Street for $33 million. The price is a record for a townhouse less than 26 feet wide, according to appraiser Jonathan Miller. No Manhattan house of that size had previously closed for more than $30m. The buyer is investment banker Charles Murphy."
Mortgates and Real Estate Lending
- Hated New York Co-Op Boards Teach Lenders A Lesson (Reuters, Apr. 12th): "In Manhattan, the much maligned apartment co-op board, famous for rejecting notables such as Richard Nixon and Mariah Carey, may turn out to have been the last line of defense against risky lending practices. Several real estate agents said the stringent boards that govern the comings and goings of buyers in their buildings could mitigate whatever effects higher interest rates and more restrictive lending policies may inflict on the Manhattan apartment market… Many candidates have found the boards too intrusive, requiring references, payment guarantees, extensive income histories and long tallies of assets. . Even media tycoon Rupert Murdoch had to seek co-op board approval before spending $44 million on a three-story penthouse three years ago."
- Mortgage Lender Homebanc Files For Chapter 11 (MSNBC, Aug. 11th): "Regional mortgage lender HomeBanc Corp. (HMBN) filed [Thursday] for bankruptcy protection, the latest casualty of a housing market that continues to weaken… The company… list[ed] estimated assets and liabilities of more than $100 million each… A list of creditors holding the largest unsecured claims against HomeBanc included JP Morgan Chase Bank, KeyBank, Commerzbank, US Bank and French bank BNP Paribas, which earlier this week froze three investment funds heavily invested in securities backed by subprime mortgages… Earlier in the week, HomeBanc sold five retail lending branches to Countrywide for no cash premium… "in an attempt to maintain the value of its mortgage portfolio and servicing operations."
- Fannie Mae, Freddie Mac Regulator Rejects Cap Request (Bloomberg, Aug. 10th): "Office of Federal Housing Enterprise Oversight [Ofheo] resisted pressure from Fannie Mae (FNM) and Freddie Mac (FRE), the largest sources of money for U.S. home loans… to [be allowed to] buy more home loans and help ease a credit crunch… Fannie requested an increase in its asset ceiling… amount[ing] to 10% of the company's home loan portfolio, about $72 billion… After Fannie and Freddie disclosed accounting misstatements of $11.3b last year… Fannie must [now] restrict its portfolio to $727.2b, while Freddie must constrain annual growth of its $712.1b portfolio to 2%. The two also can't buy mortgages of more than $417,000 for a single- family home in most states."
- Reversal Of Fortune: An Encore For Fannie, Freddie (MarketWatch, Aug. 10th): "Stephen Blumenthal, a former deputy director and acting director of Ofheo, highlighted the dilemma facing the agency's current director, James Lockhart, over the request to raise the portfolio caps: "If this is going to happen it will have to be demonstrated to him that the portfolios can be expanded in some way that doesn't conflict with his belief that [Fannie and Freddie] are already too large, undercapitalized and represent systemic risk to the economy."
- Lone Star, Accredited Lenders Deal is Off (Ant & Sons in Seeking Alpha, Aug. 12th): "In a Friday night filing, Lone Star informed Accredited Home Lenders (LEND) that in light of the drastic deterioration in the financial and operational condition of the company, among other things, that as of Friday, the company would fail to satisfy the necessary conditions for the closing of the tender offer. Accordingly, Lone Star does not expect to be accepting the Accredited shares that were to be tendered at of the end of the current offer period ending on August 14." [Accredited announced Monday it would sue Lone Star to complete the sale.- Ed.]
- Mortgage Originated Credit Crunch May Just Be Beginning (Paul Litchfield in Seeking Alpha, Aug. 12th): "Under the new market structure today, fixed interest fund managers are not in the mortgage lending business like the banks were… They don’t have to buy mortgages. They could just as soon hold treasuries… What if most of the world’s big fixed interest fund managers suddenly decide to go risk adverse, and sharply slow, or even stop purchasing mortgage securities[?] The entire global mortgage market would seize up… The whole structure of the [mortgage] security presumes there will be… buyers of the low quality tiers. When [that] end of the market dries up, you can’t sell the higher quality tiers either. So the entire market just shuts down."
- In a Credit Crisis, Large Mortgages Grow Costly (NY Times, Aug. 12th): "Robert Barbera, chief economist of ITG, a brokerage firm: “The crisis that brought down the Long-Term Capital Management hedge fund in 1998 started with Russia’s default on some of its debt. Long-Term Capital had not invested in Russia’s bonds, but some of those who owned such bonds, and needed to raise cash, sold instruments that Long-Term Capital also owned, and on which it had borrowed a lot of money…" In this case, securities backed by subprime mortgages were owned by people who also owned securities backed by leveraged corporate loans. With the market for mortgage paper drying up, and a need to raise cash, they sold the corporate securities and that market began to suffer."
- Citigroup Seen Taking $700 Million In Credit Losses (MarketWatch, Aug. 11th): "Citigroup Inc. (C) has reportedly lost more than $700 million in credit business in recent weeks, placing the world's biggest financial services firm high on the list of casualties from the market-roiling credit crunch. The losses are not a serious issue for a bank that pocketed more than $20 billion last year. Financial Times: The red ink will be embarrassing for Citigroup's CEO Chuck Prince, undermining his efforts to restore investor confidence... The losses, which are in addition to those Citi faces from lending commitments to leveraged buyouts, were incurred mostly in the structured credit business."
- Donald Trump - Bah Humbug! Buy, Buy, Buy! (Jack Miller in Seeking Alpha, Aug. 10th): "Jerry Bowyer… notes that of the 44 million mortgages in America, 14% are sub-prime. Of those, 13% are currently at least one payment behind. The large majority of the late payers are still paying and many are working with lenders to restructure payments… There are about 250,000 mortgages moving to foreclosure. The total value of these loans is about $7B. If these houses are worth 30% less than what is owed, the total money lost will be in the neighborhood of $2B. Americans have net worth of $53T Dollars. The "total hit" will be in the neighborhood of .003% of value."
- Washington Mutual Warns On Subprime Pressures (The Raw Story, Aug. 10th): "SEC filing: US bank Washington Mutual (WM) warned that… "Due to the conditions roiling the subprime sector, the company's liquidity may be affected by an inability to access the capital markets or by unforeseen demands on cash. This situation may arise due to circumstances beyond the company's control, such as a general market disruption." WaMu said that during H1'07 and continuing into Q3'07, there has been "significant volatility in the subprime secondary mortgage market which has spread into markets for all other nonconforming residential mortgages. While these market conditions persist, the company's ability to raise liquidity through the sale of mortgage loans in the secondary market will be adversely affected."
- A New Kind of Bank Run Tests Old Safeguards (NY Times, August 10th): "The basis of the [mortgage-backed securities] system was a belief that securities backed by bad credit could be very safe — so long as there were other securities that would suffer the first losses that came from defaults in pools of subprime mortgages or of loans to highly leveraged companies. So far, none of those highly rated securities have failed to make their interest payments on time, but that fact is not enough to make anyone want to buy them. The rating agencies have downgraded some securities, and they are tightening their standards for new ratings."
- Foreclosures May Spur Price Drops (LA Times, Aug. 12th): "Major lenders are repossessing homes in Southern California much faster than they can sell them… [Eventually,] lenders' inventories will grow so large that they will have… to start aggressively cutting prices, many agents and analysts predict. That… will put more pressure on individual sellers, who will have to reduce their own prices if they want to find a buyer. As values fall, more people could lose their homes, which would swell the lenders' inventories anew… First American, a real estate tracking firm: Lenders' inventories in the counties of Los Angeles, Riverside and San Bernardino grew by 5,829 during Q2."
- Foreclosure Notices In Gilbert Take 240% Leap (Arizona Republic, Aug. 9th): "Foreclosure notices in Gilbert and Ahwatukee Foothills jumped 240% in H1'07 compared with H1'06, as more homeowners struggle to afford the higher-priced homes in these communities. Other areas of the Southeast Valley also were hit hard, especially in the south. Notices jumped 183% in Chandler and Sun Lakes, 116% in Mesa, and 97% in Tempe, according to the Information Market… Arizona Regional Multiple Listing Service said about 19,000 homes were on the market in June in the Southeast Valley, with 1,973 selling, taking an average of 90 days."
Global Subprime Issues
- US Subprime Crisis Likely To Have Limited Impact On S. Korea (The Hankyoreh, Aug. 13th): "Domestic financial institutions are not likely to be seriously affected by the U.S. subprime mortgage crisis. The Financial Supervisory Service estimates that local lenders’ investments in bonds related to subprime mortgages amount to 800 billion won (US$861 million). Considering the size of local lenders’ assets, they will not be hit seriously, according to the Financial Supervisory Service. The problem is that if the international financial market is affected by U.S. subprime mortgage loan defaults, it is likely to influence the local market. With a worldwide tendency to prefer safe assets, the local stock market is turning bearish."
- Deutsche Postbank Drawn Into U.S. Subprime Morass (Reuters, Aug. 12th): Deutsche Postbank has taken onto its own books €600 million ($821.8m) in exposure to two investment vehicles run by hard-hit German peer IKB, Postbank said at the weekend: "Of the €600m, as much as €200m may be linked in some way to the subprime sector -- lending to riskier borrowers… In all, Postbank has €800m in direct or indirect exposure to the U.S. property business… Unlisted German state bank WestLB has €1.25 billion in overall exposure to the U.S. subprime mortgage sector, it said on Saturday, giving a figure for the first time."
- U.S. Homeowner Woes Felt Around World (Yahoo! Finance, Aug. 12th): "From New York to Frankfurt to Tokyo, markets were jolted in the past week by fears that Americans are failing to keep up with their mortgage payments… [Last week's global sell-off] was triggered by France's biggest bank, BNP Paribas, which had to freeze billions of dollars in assets in three mutual funds because of the falling value of securities linked to high-risk mortgages taken out by U.S. borrowers. Kenneth Rogoff, Harvard professor and former IMF director of research: "I'm sitting here in Brazil and Brazilian markets have gotten crushed by this… If this were to snowball next week, it would affect markets in Turkey, Indonesia."
- Fewer Mexicans Are Sending Money Home (Forbes, Aug. 8th): "The Inter-American Development bank [IAD] survey: Overall, 64% of Mexicans returned money they earned in the U.S. to their native country, vs. 71% in H1'06. Remittances totaled $11.5 billion from January to June, compared to $11.42b last year. The Central Bank of Mexico has reported remittances from the U.S. totaled $23.1b in 2006. The IAD projected only a .6% increase this year… Donald Terry, manager of IAD's Multilateral Investment Fund: A slowdown in construction and increased border security were considered as possible causes. But job losses after the Sept. 11, 2001, terrorist attacks far exceed the job loss in construction this year."
Macro Impact, And Will The Housing Slump Cause A Recession?
- Home Price Indexes Showing No Signs of Recovery (Matt Hougan in Seeking Alpha, Aug. 12th): "The S&P Case-Shiller Home Price Indexes marked their 18th consecutive decline in annual growth rate in May... The 10-City Composite's annual decline of 3.4% is at levels of steepness not seen since 1991… The 20-City Composite was down 2.8%. Fifteen of the 20 metro areas experienced y/y declines in existing home prices… Portland [was] (up 5.7%) and Seattle (rose 9.1%)… [Some of] the most hard-hit areas include Detroit (down 11.1%), San Diego (down 7.0%), Tampa (down 6.7%), Washington (down 6.3%) and Phoenix (down 5.5%)… [From] May-April 2007, the number of metro areas experiencing positive annual growth in home prices increased to eight from one or two in previous months."
- Mills Challenged As Furniture-Makers Move Plants To China (Post Gazette.com, Aug. 12th): "[Lumber] production nationally is down 25% since 2000 to just over 10 billion board feet, according to the Hardwood Review, the industry… standard-bearer for economic forecasts. The publication predicts production will fall to 9.5 billion by the end of the year… There are factors sawmills cannot control, like the housing industry slump. Business from remodeling jobs helps, but not as much as a thriving real estate market, many sawmill owners said."
- Shaky Markets Prompt Rumors of Who’s in Trouble (NY Times, Aug. 10th): "If there is an upside to the mortgage meltdown, some analysts said, it may be that because these securities are held by so many investors the pain will be spread among many market participants instead of taking down a large single financial institution. Indeed, two rating agencies, Moody’s and Standard & Poor’s, said this week that the large American investment banks face modest risks and manageable losses because of subprime-mortgage losses."
- How To Tell Whether Subprime Will Cause a Crisis (Larry MacDonald in Seeking Alpha, Aug. 9th): "How can we tell whether or not the U.S. subprime mortgage crisis will precipitate a financial crisis and/or bear market in stocks? One way to tell is by watching… the spread between intermediate government bonds and corporate junk bonds of similar duration. When such spreads are calm and remain historically low, things do not usually tank; when they are experiencing sharp moves and historically high, watch out below. Right now… news of deterioration in the subprime market has caused only subdued jumps in the spread compared to real financial crises of the past, and it remains relatively low compared to levels that presaged previous shocks."
Homebuilders And Housing Stocks
- If Not the Funds, Maybe Try the Firms (Wall St. Journal, Aug. 13th): "Some money managers have been directly affected by the recent turmoil. AXA SA's (AXA) stock, for instance, is down about 15% in the past three months and its AXA Investment Managers unit offered to cash out investors in a money-market fund in Europe this month because of subprime-related losses. Real-estate investment firm Cohen & Steers Inc. is down 41% in the past three months as real-estate investing has slowed this year."
- Centerline Looks Sturdy, Standard Pacific Will Be Further Pressured (Thomas Kelly in Seeking Alpha, Aug. 13th): "Friday, I covered my small short position at 13.45 in Centerline Holding (CHC). Thursday’s conference call [indicated] that although [Centerline has] less than $200 million of liquidity… much of its portfolio is [in] commercial real estate [so] this liquidity crunch will have to endure for a lengthy period in order to seriously threaten the company. Defaults in commercial real estate are still quite low, and with so much pressure on the Fed to cut rates, I doubt that credit will remain tight long enough to change that... I have also extended my short in Standard Pacific (SPF) by increasing the position by 50% at 12.10… The housing correction is still in full tilt, and I expect the situation to get worse before it gets better."
- Is Home Depot's Share Buyback At Risk? My Question Answered (Todd Sullivan in Seeking Alpha, Aug. 10th): "Citing the current market for financing, Home Depot (HD) said that it would cut the price it will pay for its $250 million share tender offer to between $37-$42/share. [vs. the original] $39-$44/share offer... Why? A lower price will lead to fewer shares being tendered. The fewer shares tendered, the lower total cost of the offer… [And] this was to be the "cash" portion of the share buyback program… A large portion of this buyback was to be funded by debt and if they can't get the cash part due to current conditions, anyone want to bet the debt part will not happen anytime soon?"
- Levitt's Q2 Loss Widens (South Florida Business Journal, Aug. 10th): "Homebuilder Levitt's Q2 loss increased [was] $58.1 million, or $2.93/share, on revenue of $127.8m. For Q2'06, Levitt (LEV) said it lost $737,000, or $0.04/share, on revenue of $133.2m. The Q2'07 loss included pre-tax charges of about $63m related to homebuilding inventory impairment charges, compared with $4.7m of impairment charges in Q2'06… Levitt said Q2'07 real estate sales increased 6% to $123.7m from $116.6m in Q2'06. Units delivered, however, declined 3% to 379 from 392. The average selling price rose to $326,000 in Q2 from $297,000. Levitt reported a 39.1% cancellation rate in Q2, compared to a Q2'06 rate of 21.5%."
Commercial Real Estate and REITs
- Commercial Real Estate Could Be Next Victim of Credit Market Woes (Eli Hoffmann in Seeking Alpha, Aug. 13th): "Recent credit market woes could reduce the hefty prices that industrial real estate has commanded over the past few years, analysts say. "The sale prices of assets are going to decrease," said Robert Horowitz, of Cooper-Horowitz Inc. "Prices are a reflection of what people can borrow. The buyers can't get the level of financing that they were able to obtain six months ago." Compounding the issue is the fact that commercial mortgage interest rates are up at least 0.5%, he said. Cheap credit and and high demand has kept commercial real estate prices elevated even as a housing slowdown has hurt pricing and sales of new homes. However, experts say borrowers with good credit histories can still get loans."
- ETF INVESTING: Mortgage REIT Fund Hammered By Credit Crunch (CNN Money, Aug. 12th): "[Since] Barclays Global Investors listed iShares FTSE NAREIT Mortgage REITs Index Fund (ARCA) on May 4 on [the] NYSE, shares of the… ETF designed to track REITs that specialize in residential and commercial loans… reached a high of $51.06 on June 4, but tumbled to $29.86 on Aug. 6, a more than 40% loss. On Friday, shares closed at $31.15. Morningstar ETF analyst Sonya Morris: "It looks like this fund may have been launched into a market top…" Morningstar: The fund had only about $6.5 million in assets late last week… it [was] the biggest decliner among all U.S.-listed ETFs [in August]."
- Commercial Foreclosures Highest Since 1994 (Dallas Business Journal, Aug. 10th): "Commercial foreclosure postings in North Texas through August have reached their highest level in 13 years as the downturn in the housing market clouds the broader real estate picture. So far this year, 806 commercial buildings have been listed for the auction block in the Metroplex, according to Foreclosure Listing Service... This year's total is 30% higher than the 621 postings in the same eight-month period last year."
- $700M Funds II River Place Construction (Globe St., Aug. 8th): "Six years after I River Place reached completion, developer Larry Silverstein [obtained] $700 million… to fund the construction of II River Place... [This] may be the largest single residential construction loan ever to close… The luxury residential project will contain 2.3 million sf… New York State Housing Bonds will finance a major portion of II River Place, with the 107 corporate units included in the plan set to be financed conventionally, CWSG says… Arthur Sonnenblick, senior managing director of CWSG… declined to reveal the total project cost or the terms of the $700-million loan."
- Japan's Fast Retailing Exits Barneys Bidding War (Forbes, Aug. 9th): "Japan's Fast Retailing on Thursday dropped out of the bidding war for Barneys New York, clearing the way for Dubai firm Istithmar to buy the upscale US department store for $942.3 million… Fast Retailing entered the bidding for Barneys last month, topping an initial 825-million-dollar offer from the Dubai firm… If Fast Retailing offered a new bid, then another offer would have inevitably followed from Istithmar,' said Machiko Amano, a retail analyst at the credit ratings agency Standard & Poor's. 'With an escalating bidding war, there was also the risk that the terms of the deal would not turn out to be profitable,' she added.
Web Site of the Day
Nowhere is the subject of subprime and foreclosures more pressing than in California. (Florida?) It is so pervasive, that the LA Times has come up with a foreclosure data base where readers can check the stats for their area. The fact that this is featured in a mainstream daily publication and not on a foreclosure or real estate tracking site is a sign of the times. See Foreclosures: How does your zip code fare?
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