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Quote of the Day- "From the House's Mouth"
"We have not yet seen fully the impact of the credit shock to the U.S. and world economies, and the severity of that impact will depend on how long it takes for the markets to return to normal functioning." – Doug Duncan, chief economist of the Mortgage Bankers Association. (KPLC TV, Oct. 17th)
Real Estate Sales and House Prices
- R.I. Housing Price Decline Continues, But End Is In Sight (Providence Journal, Oct. 17th): "The median price of a single-family Rhode Island house peaked in Q2'06 at $282,644… A year later, the statewide median price had fallen 4.4%, to $270,067. By Q2'08, Global Insight forecasts, the median house price will fall to $262,450… The inventory of unsold houses last month rose to 6,883, a 10-month supply, up from 6,376 houses, or a 9.2-month supply, in September 2006… The market is generally considered to be balanced when the supply of unsold houses is about 5-6 months. The average number of days on the market during Q3'07 rose to 84, up from 74 during Q3'06."
- Slump In Houston Home Sales Spreads (Chron.com, Oct. 17th): "Houston Association of Realtors: Single-family home sales… fell 15% in September… While previous declines were contained mostly to homes priced between $80,000-$150,000… the slowdown is now affecting sales of more expensive properties dependent on move-up buyers selling their lower-priced homes… From a historical perspective, home sales and prices last month were ahead of 2005… Realtors sold 5,061 single-family homes during September — most of which were used, but some new. Inventory of homes on the market relative to the number of sales is still well below the 10-year average. Still, the number of homes listed for sale continues to rise.
- Valley Resale Market Enters Holiday Slowdown (AZ Central, Oct. 16th): "Arizona State University real estate experts: The 3,050 recorded sales in September 2007 heralds in the local resale housing market's traditional period of doldrums, due primarily to the holidays and the desire not to move children during a school year. The doldrums should begin to let-up in early 2008, with improvement in recorded sales becoming more evident in March... August 2007 had 4,240 sales and was below last year's 4,875 transactions. September brought the year-to-date total to 40,800 sales, which is well below the 52,390 for 2006 year to date and 88,750 sales for 2005 year-to-date."
Real Estate Investing and Sentiment
- REAL ESTATE MANAGERS: No Slowing Down (Pensions & Investments, Oct. 15th): "Pensions & Investments’ annual survey of the largest RE investment managers: RE managers’ total assets, excluding REITs, increased 30% in the 12 months ended June 30, besting the year-earlier growth rate by nearly 10 percentage points. The top 50 managers of U.S. institutional tax-exempt assets in RE grew 23% to $396 billion, topping the previous survey’s growth by four percentage points. Overall, tax-exempt assets grew to $415B, an increase of 21%, vs. [last] year’s 20%. Ninety-eight managers reported real estate assets for the current survey, vs. 101 last year. During the 12 months, the NCREIF Property Index returned 17.3%."
Mortgates and Real Estate Lending
- 2008 Mortgage Originations To Hit 8-Year Low: MBA (KPLC TV, Oct. 17th): "Doug Duncan, Mortgage Bankers Association chief economist: Mortgage originations will fall next year to the lowest levels since 2000, forcing job losses for at least 30,000 more home finance professionals. Inventories of homes for sale will remain high as tighter lending standards across the industry reduce available credit for prospective home-buyers. Foreclosures… will exacerbate the problem… Total mortgage originations will likely decline 18% to $1.89 trillion, the lowest volume of purchase and refinance loans since $1.14T in 2000... Loan volume will slide another 6% in 2009."
- Mortgage Executives say Housing Price Decline Expected to Stretch Into at Least 2009 (Memphis Daily News, Oct. 17th): "Officials with government-sponsored mortgage companies Fannie Mae and Freddie Mac and CEOs from two major mortgage banks [said] U.S. housing prices will continue to decline at least through the end of next year and may not begin creeping upward again until 2010.The continuing spike in foreclosures and a glut of unsold homes will prevent any quick price rebound. David Lowman, CEO of JPMorgan Chase & Co.'s Global Mortgage unit: "It's going to be a long time before we see it bottom out and recover. There's too much inventory already in the marketplace."
- Mortgages Down 36% In September (Pacific Business News, Oct. 16th): "Mortgage companies and banks saw both volume and value of Hawaii mortgages drop last month. Title Guaranty of Hawaii: September loan production fell to 4,310 loans, down 36% from the same period last year, while value dropped to $1.5 billion, down 45%. The local mortgage market had been on track to surpass last year's performance, but fell off as subprime lending woes fanned out across the industry, drying up the secondary market. Lenders wrote $26.1B in mortgages this year through September, a 3.1% drop from the same period last year, but volume fell to 54,529, down 12.4%."
Global Subprime Fallout
- China Casts Fearful Eye At Subprime (Asia Times, Oct. 17th): "In the wake of the US subprime crisis, China's central bank and its banking watchdogs have ordered commercial banks to tighten loans to home buyers and property developers [bringing] the deposit reserve ratio… for commercial banks to 13% - matching [rates] from September 1988-March 1998... The minimum down-payment required for mortgage loans to first home buyers must be no less than 20% of the total price of [properties] smaller than 90-sq.m and no less than 30% for those bigger than 90-sq.m… Second home buyers are required to make at least a 40% down payment… and pay higher interest rates."
- Credit Squeeze Hits European Real Estate Market (Int'l Herald Tribune, Oct. 17th): "The real estate industry in Europe - commercial and residential - is scratching its collective head, trying to figure out how to make money in a less hospitable environment. Even when the credit squeeze abates… the property market, with its heavy dependence on borrowing, will face a fundamental shift: Historically low interest rates, maintained by central banks in the US and Europe for much of the past decade, are gone and will not return anytime soon… Industry players agree, financing to buy existing commercial property or build new space is very hard to come by."
- Dutch Insurer Aegon Says Has No Q3 Subprime Impact (Reuters, Oct. 17th): "Dutch insurer Aegon NV (NYSE:AEG) said Wednesday that none of its holdings in the U.S. subprime market were downgraded in a recent review by Moody's Investors Services. Aegon's Q3 results, to be announced on Nov. 8, will not show any material impairments from its investments in subprime rated securities, built on mortgages made to risky borrowers. The increasing risk of default by subprime borrowers triggered, in part, the recent turmoil in global credit markets and has made investors wary of companies holding subprime investments."
- German Bank Hit By Subprime Crisis Slashes Results, Directors Leave (AFP, Oct. 16th): "German bank IKB said Tuesday it has drawn the "personal consequences" of its excessive exposure to the US [subprime] loans, with the departure of two directors and a retroactive slashing of its 2006/2007 results… IKB was saved from bankruptcy in August when KfW, the government's financial arm, gave it a line of credit worth €8.1 billion and other German banks agreed to add another €3.5B if needed. KfW is now seeking to sell its 38% stake in IKB… IKB [will] revise downwards its operating profit for its 2006/2007 fiscal year that ended on March 31, from €263M to €180M."
- 60% Jump In Househunters Turned Down For Mortgages (UK Herald, Oct. 16th): "Financial website MoneyExpert.com: [Potential homebuyers] who have had mortgage applications turned down has soared by 60% during the past six months. A combination of higher interest rates and tighter lending criteria affecting would-be borrowers in the higher-risk or sub-prime market are cited as reasons for the rise… Would-be homeowners turned down for a loan increased to 738,000 in the past six months compared to 463,000 for the previous six months… UK borrowers have been hit by three recent interest rate rises and banks suffer from the collapse of the sub-prime mortgage market in America hitting financial institutions… worldwide."
- Why Subprime May Be a Winner: Because Wilbur Ross Thinks So (Wall St. Journal, Oct. 17th): "Wilbur Ross built his fortune by betting on industries like steel and textiles that other investors were afraid to touch… Ross has wagered $435 million on American Home Mortgage Investment, a [subprime] lender that filed for bankruptcy in August. He is also part of the consortium [with] Sir Richard Branson to buy U.K. mortgage bank Northern Rock. Given his track record, other investors may want to give the sector a hard look… The worst of the subprime mess may still be yet to come. But for investors with a little patience, following in Mr. Ross's footsteps has generally been a winning strategy."
- Future Still Bright for Thornburg After Unmerited Price Drop (Tim Plaehn in Seeking Alpha, Oct. 17th): "Thornburg Mortgage (TMA) will revise its loss on the sale of securities from $900 million to $1.1 billion on the sale of $22B of mortgage securities… The assets were sold to pay off a similar amount of debt [but] should not affect the future profitability of the company. Thornburg has reduced its assets and debts by about a third. The remaining assets should be adequate to provide a generous ongoing dividend [which] I expect to be in the $0.40-$0.50 range and increasing from there as profitability improves. Any investor who buys at these prices and holds on… will be well rewarded."
- MGIC Posts First Loss on Writedown of Subprime Unit (Bloomberg, Oct. 17th): "MGIC Investment Corp. (NYSE:MTG), the largest U.S. mortgage insurer, posted its first quarterly loss and said it won't be profitable next year as the U.S. housing market worsens. The net loss of $372.5 million, or $4.60/share… MGIC earned $130M, or $1.55/share, a year earlier… MGIC reported third-quarter costs of $602.3M, more than three times as much as a year earlier, to cover losses by the mortgage lenders it insures… MGIC wrote off its $466M investment in Credit-Based Asset Servicing and Securitization LLC, jointly owned with Radian Group (NYSE:RDN), after demand for subprime loans collapsed. The writedown lowered third-quarter earnings by $303M after taxes."
- Countrywide Sees $125-$150 Mln Charge Over Job Cuts (Reuters, Oct. 16th): "Countrywide Financial Corp (CFC), the largest U.S. mortgage lender, said on Tuesday it expects to incur a $125M-$150 million pretax restructuring charge in connection with its plan to eliminate 10,000-12,000 jobs to cope with the U.S. housing slump. SEC filing: Countrywide expects to realize $57M of the charge in Q3 and the remainder primarily in Q4. It also expects $65M-$90M of the total charge to result in future cash outlays. Countrywide on Sept. 7 announced the job cuts, which remain the largest job reduction by a single company stemming from the housing slowdown."
- Thornburg Mortgage Slides To Loss In Q3; Board Not To Declare Dividend (Trading Markets, Oct. 17th): "Thornburg Mortgage (TMA) reported a Q3 net loss… of $1.08 billion or $8.83/share compared to net income of $75.34 million or $0.64/share in Q3'07. Analysts [expected] a Q3 loss of $7.88/share… Net interest income for the quarter dropped to $36.15M from $87.13M in Q3'06… Thornburg said [it reduced] its leverage position in Q3. The company sold $21.9B of adjustable-rate mortgage… during the quarter and recorded an estimated loss on the sale of $1.093B… Thornburg's board of directors elected not to declare a common stock dividend for Q3 in order to enhance liquidity until finance markets stabilize."
- Wells Fargo Profit Hurt By Credit Pressures (Reuters, Oct. 16th): "Wells Fargo & Co (NYSE:WFC) said on Tuesday third-quarter profit rose 4%, the smallest gain in more than six years, hurt by credit pressures from mortgage, home equity and auto loans. Net income for the fifth-largest U.S. bank rose to $2.28 billion, or $0.68/share, from $2.19B, or $0.64, a year earlier. Revenue rose 10% to $9.85B. Results included a $160 million gain from the sale of $27B of low-yielding mortgage securities. Analysts on average expected profit of $0.70/share [PPS] on revenue of $10.02B. Wells usually posts double-digit gains in quarterly PPS… Net credit losses increased 24% from Q2 to $892M."
- Minorities Bear Biggest Load Of Subprime Loans (Twin Cities, Oct. 16th): "Insurance company Genworth Financial and Compliance Technologies Annual Minority Lending Report: Minnesota ranked No. 12 in the nation last year for how frequently minority homebuyers got high-interest-rate subprime home loans. Of all the mortgages made to minority homebuyers in Minnesota in 2006, 42% were high-rate subprime loans compared with 17% for white homebuyers... Nationally, 39% of the mortgages minority homebuyers got were subprime compared with 18% for whites. Home buying in Minnesota last year dropped off dramatically for all borrowers… more dramatically than it did for different groups nationally. Nationally, home buying activity [rose] 1% last year for African-Americans."
- Questions Arise About Goldman's Blowout Quarter (CNN Money, Oct. 15th): "SEC filing: A large proportion of Goldman Sachs' (NYSE:GS) Q3 profits were 'unrealized' - i.e. paper gains, and not hard cash payments from fully closed out trades - and came from financial instruments that Goldman values largely according to its own estimates… [If Goldman's] derivatives gain does include the stupendously prescient bet against mortgages, it deepens the mystery over [who] is on the other side of that trade, effectively holding the losses… If hedge funds - which operate with thin capital and high leverage -- are on the other side… holding the losses, it may not be easy for Goldman collect."
Global Alternatives to the Housing Slump
- Jelmoli Real Estate Divestment To Be Decided In Next Few Days (Forbes, Oct. 16th): "Jelmoli Holding AG will decide on the divestment of its real estate portfolio in the next few days, said president of the board of directors Walter Fust… Negotiations with Delek Global Real Estate Ltd (NYSE:DK) are close to a conclusion… Delek had been unwilling to pay the 3.4 bln sfr asking price. Fust: If negotiations fail, Jelmoli will keep its real estate division and list it on the Swiss Stock Exchange as a separate entity to its retail operations… this might be in the best interests of shareholders."
Macro Impact, And Will The Housing Slump Cause A Recession?
- Housing Starts Fall 10%, Worst Level Since 1993 (Roy Mehta in Seeking Alpha, Oct. 17th): "Commerce Department: Housing starts for September dropped 10.2% to a seasonally adjusted rate of 1.19 million… the lowest level in 14 years. The drop was worse than the 1.28 million economists had expected. Authorized building permits dropped 7.3% last month to an annual rate of 1.23 million, also the lowest in 14 years. Housing starts have fallen 30.8% over the last year. Apartment building starts… dropped 34.3%... There seems to be little chance of a bottom soon: the latest forecast from the Mortgage Bankers Association predicts originations decreasing 18% in 2008 and another 6% in 2009."
- IMF Cuts World Growth Forecast, Warns of Market Risks (Bloomberg, Oct. 17th): "The International Monetary Fund lowered its projection for the global expansion next year to 4.8% in its semiannual World Economic Outlook, from an estimate of 5.2% in July. A weaker outlook for the U.S. was mostly to blame, as the fund reduced its forecast to 1.9%, from 2.8%. Simon Johnson, the IMF's chief economist. "The smoke has not yet cleared'' from the financial-market turmoil… Reduced access to credit and higher costs of some types of mortgages may "extend the decline in [U.S.] residential investment," with falling home prices posing a danger to household spending. "Risks of a recession have risen."
- Paulson Says Housing Woes to Worsen (NY Times, Oct. 17th): "Treasury Secretary Henry M. Paulson Jr. acknowledged on Tuesday what home builders and debt-loaded homeowners have felt for the last year: The meltdown in housing is worse than expected and has not yet hit bottom: “The housing decline is still unfolding, and I view it as the most significant current risk to the economy,” Mr. Paulson called for changes by mortgage lenders, credit rating agencies and Wall Street investment banks that had resold mortgages to investors around the world. “The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth,” he warned.
Homebuilders And Housing Stocks
- Beazer Forced to Replace Siding (Charlotte Observer, Oct. 17th): "Charlotte-Mecklenburg planning officials are forcing Beazer Homes USA (NYSE:BZH) to rip out some vinyl siding and replace it with brick on about 50 townhomes, or half those in [a; northern Charlotte subdivision. Beazer failed to install more expensive brick on street-facing facades when it built the townhomes, city planners said. The company filed building permits for the units needing the brick between 2004 and this year… It's unclear how much it will cost Beazer to replace the vinyl with brick at the townhomes, which start in the $120,000 range. [Generally,] installing brick is about twice as costly as vinyl."
- DR Horton Suffers Surge In Cancellations (MSN Money, Oct. 17th): "DR Horton (NYSE:DHI), the largest US homebuilder by sales… revealed that nearly half of its home orders were cancelled in Q3. The surge in the company's cancellation rate was complemented by a 39% drop in sales to 6,734 homes, in spite of an aggressive program of incentives and price cutting. The dollar value of sales fell by 48% [up] from 38% in Q2, compared with an historical average of about 25%, analysts said... At the end of the last quarter DR Horton's average sales price was $237,000."
- Remodels Retreat with Sinking Housing Market (RIS Media, Oct. 17th): "Bruce Forni, researcher at TNS-NFO… studied 2,900 homeowners for the Home Improvement Research Institute trade group: The nation’s homeowners, expressing doubt about the market, are doing fewer fix-up projects… Instead… more utilitarian home improvements, such as organizing the garage, are on the upswing, along with “emergency” jobs, such as fixing a leaky roof… Historically low interest rates no longer seem to be spurring as much remodeling. Freddie Mac (FRE) has reported that the amount of home equity cashed out through refinancing in Q2 was down about 25% y/y.."
- Icahn Followers May Err in Betting on BEA Bidding War (Bloomberg, Oct. 17th): "Activist investor Carl Icahn's 5% stake in homebuilder WCI Communities Inc. (WCI) is worth $6.37/share, 71% less than the $22 offer he made in March that was rejected. "A lot of investors just follow him in, sight unseen,'' said Chris Young, head of merger research at RiskMetrics Group in Rockville, Maryland, owner of proxy adviser ISS. "He agitates for change that will increase the share price in the short run. Over the long term, the return for investors is unclear.''
- Builder Halts Work On Homes In Florida (Florida Herald Tribune, Oct. 17th): "Levitt and Sons (LEV) has stopped construction of homes in all its Florida subdivisions… SEC filings: The company's two main home building divisions, which operate in Florida, Tennessee, South Carolina and Georgia, are weighed down by about $430 million in debt. In Manatee County alone, Levitt & Sons owes $16.5M to Bank of America and $21.5M to Wachovia… Levitt has also has been slapped with scores of liens by subcontractors and vendors including Horizon Construction Services, Southern Comfort Heating & Cooling and McLeod Land Services, which are demanding payment of more than $100,000 in unpaid bills."
- U.S. Homebuilder Confidence Index Fell to Record Low (Bloomberg, Oct. 16th): "Confidence among U.S. homebuilders fell to a record low in October as declining prices, higher mortgage rates and loan restrictions scared off buyers. The National Association of Home Builders/Wells Fargo index of builder sentiment fell to 18, more than economists had forecast, from 20 in September… Levels lower than 50 mean most respondents view conditions as poor. The index averaged 42 last year. Bigger discounts and sweetened incentives have yet to revive demand as buyers wait for even bigger bargains, builders said… The confidence index was forecast to drop to 19 this month, according to the median analyst estimates."
- Pinnacle West : Every Trend Has An Equal and Opposite Trend (Hilary Kramer in Seeking Alpha, Oct. 16th): "Pinnacle West (NYSE:PNW) has two divisions: real estate development and an electric utility. Pinnacle… has been excessively punished for [the] real estate division, and it's currently undervalued when one considers its electricity division. Arizona is a hot place with a growing population… There's only going to be increasing demand for electrical power to cool the homes and offices of all these people. Pinnacle may not return to its previous profit levels, but I think investors have overreacted, and we could see [shares] gain several dollars back. When you add some modest growth to a 5.3% dividend, you could [have] a nice little profit.
- Palm Harbor Homes 2Q Loss Widens (Chron.com, Oct. 16th): "Palm Harbor Homes Inc. (PHHM) on Tuesday reported a loss of $98.1 million, or $4.29/share, compared with a loss of $5.3M, or $0.23/share, in the year-ago period. The recent quarter's results included a one-time charge of $95.7M, or $4.19/share, for impairment of previously recorded goodwill, and for a new valuation allowance against all net deferred tax assets. Analysts… expected a loss of a $0.06/share, excluding special items. Net sales fell to $144.6M from $179.4M. Analysts forecast quarterly revenue of $152.4M. President and CEO Larry Keener: "Defaults and repossessions continue to grow."
- Champion Enterprises Reports 43 Percent Increase in Net Income to $0.17 per Diluted Share for the Third Quarter of 2007 (CNN Money, Oct. 16th): "Champion Enterprises, Inc. (CHB), a leader in factory-built construction: Q3 revenues increased 3% to $357.7 million compared to $346.5M for Q3'06. Income from continuing operations before income taxes increased 33% to $15.5M compared to $11.6M for Q3'06. Q2'06 net income increased 43% to $12.9M, or $0.17/share, vs. Q3'06 net income of $9.0M, or $0.12/share… Q3 manufacturing segment net sales decreased 11% to $260.4M compared to $293.4M in Q3'06. Quarterly revenues from the sale of modular homes totaled $80M, representing 31% of manufacturing segment sales, down from $89M in Q3'06… Segment backlogs totaled $64M at the end of Q3 compared to $78M in Q3'06."
- Housing Slump Hurts A.O. Smith Outlook (Journal Sentinel Online, Oct. 16th): "A.O. Smith Corp. (NYSE:AOS), manufacturer of residential and commercial water heaters… lowered its 2007 earnings projections to the $2.60-$2.70 range, $0.25 below midyear estimates... CEO Paul W. Jones: "Housing weakness will continue for the foreseeable future and may be accompanied by slowdown in other market segments. As subdivisions don't get built, some strip malls and the like will be delayed." A.O. Smith is hunkering down for tougher times - trimming inventory, moving faster to pass on its rising materials costs and closing three older manufacturing plants - sooner than anticipated."
- No New Bombs Found But Property Value Concerns Exist (WFTV, Oct. 16th): "Crews dug for bombs in the lawns of Orange County homes Tuesday [and] did not uncover any new bombs, but neighbors are still concerned. The old WWII-era bombing range was on an empty lot behind Odyssey Middle School... Bombs were found dangerously close to the school… Lennar Homes (NYSE:LEN) said workers dug up two yards Tuesday and only found construction materials… Even so, people are still worried about property values… There are 109 homes in the development and 43 are for sale… Since the bombs were discovered near Odyssey Middle School, nine homes have gone up for sale."
- Another Housing Bubble to Short (Larry MacDonald in Seeking Alpha, Oct. 17th): "Over the past [decade], house prices in Spain have soared 200% (according to the Ministerio de Vivienda), [vs.] 80% rise in U.S. house prices… Recently, signs of declining house prices have emerged in Spain. If the slide deepens, the impact on the domestic banking system could be serious since Spanish commercial banks have high loan exposures to real estate… Short selling the iShares MSCI Spain Index (NYSEARCA:EWP), on a currency-hedged basis, looks like an interesting speculation. More conservative investors might [consider]… a pairs trade -- short the iShares MSCI Spain Index and long the S&P 500 Depositary Receipts (NYSEARCA:SPY) exchange traded fund."
Commercial Real Estate and Real Estate Investment Trusts (REITs)
- AMB Property Corporation Announces Third Quarter 2007 Results (PR Newswire, Oct. 16th): "AMB Property Corporation (NYSE:AMB), a global developer and owner of industrial real estate, today reported… funds from operations… was $0.99/share for Q3'07, as compared to $0.72 for Q3'06. FFOPS for the year-to-date period was $2.31, as compared to $2.10 for the same period in 2006. The FFOPS results exceeded the high end of the company's previous guidance for Q3 by $0.21/share, primarily as a result of better-than-expected profitability on development projects… and strong core operating performance. Net income… was $0.69 for Q3'07, as compared to $0.33 for Q3'06. EPS for the year-to-date period was $2.04 as compared to $1.39 for the same period in 2006.
Tracking the Housing Market and Homebuilder Stocks
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