Housing Bubble and Real Estate Market Tracker

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Includes: CFC, COF, LFGRQ, LOW, PRAA
by: Judy Weil

Here's our summary of articles and data points on the housing market. It's part of Seeking Alpha's coverage of the real estate market and homebuilder stocks. Like all other topics and stock coverage from Seeking Alpha, you can get this sent to your blackberry or desktop email by signing up for our no-spam free email subscription service.

Real Estate Sales and House Prices

  • Upstate Housing Market Slows (Indpendent Mail, Jan. 9th) South Carolina: "The Market Edge., a Tennessee building permit tracker: Residential building permits issued in the Upstate decreased 1.8 percent in 2006 and will likely be off about 5 percent in 2007... A.B. Roberts Construction: Custom homebuilders’ business has remained steady, but production and tract homebuilders — both of which build on market expectations — will be most affected by the slowdown… Anderson County is saturated… So companies will likely build less in 2007… Pickens County also saw an 18.3 percent decline in permits issued, down from 633 in 2005 to 517 in 2006."
  • More Pain Ahead Predicted For Valley Real Estate (AZCentral.com, Jan. 9th) Arizona: "Building executives list challenges: Delivering new homes with interesting designs while facing cost challenges, higher impact fees from outlying cities and clearing inventory of existing homes..."What we saw (in the boom), we'll never see again in our lifetimes," said Steve Hilton, CEO of Meritage Homes. Homes will still appreciate, but at a pace of something like 3 to 5 percent a year. Another trend: The widespread incentives that builders are handing out for unsold homes now will disappear as they cycle back into normal production. Reason: they don't want to lose money."

Real Estate Investing and Sentiment

  • Trulia.com Debuts First Monthly Report On Real Estate Shopping Habits of U.S. Consumers (Yahoo Biz, Jan. 9th): Trulia.com, an intuitive residential real estate search engine, released its January 2007 Trends report. Trulia Trends uses a new indicator for measuring the direction of the real estate market (not the traditional historical sales and price information): consumer search behavior. Among the findings: The representative U.S. home shopper on Trulia is looking for a 1775 square foot single-family home with 2.4 bedrooms and 1.7 baths for $883,986… Real estate searchers in some cities -- like Boston, Seattle and San Francisco -- may be interested in moving out of state, while consumers in cities like Phoenix, Charlotte and Milwaukee prefer to keep it local."
  • New Wave Of Korean Investors Eye Real Estate In Los Angeles Enclave (International Herald Tribune, Jan. 8th): "Koreans are expected to invest nearly $2 billion in U.S. residential property in 2006, up from $1.27 billion in 2005 as a result of the foreign investment law changes. Much of the money will likely be directed to San Francisco, New York and Atlanta, cities with large Korean populations, to take advantage of the weakening U.S. housing market. Rand Corp. demographer: "It could very well release a tidal wave of investment into Southern California, particularly Koreatown…" 1,500 condo units are now on sale or planned in Koreatown as part of a mini-construction boom."

Mortgates and Real Estate Lending

  • AG Proposes Real Estate Legislation (Denver Business Journal, Jan. 8th): "Colorado Attorney General John Suthers announced proposed legislation to curb appraisal fraud and mortgage brokers who engage in deceptive practices "Just as homeownership is the American dream, foreclosure has become the American nightmare." Many appraisers say they are under immense pressure to provide real estate appraisals that match the expectations of the mortgage brokers, real estate agents and others involved in a sale… Colorado had the highest foreclosure rate in the nation for eight consecutive months before being bumped into second place by Nevada in November."
  • Lehman To Fund Mortgage Lenders Network Loans (Banknet360, Jan. 8th): "Lehman Brothers Holding Inc. will fund loans Mortgage Lenders Network USA approved, but had not closed when it shut down its wholesale operations earlier this month. Lehman has also reached a “tentative agreement” to assume the wholesale operations, according to an MLN executive. If Lehman eventually takes over MLN’s wholesale operations, it could absorb them into its mortgage lending unit, BNC Mortgage."

Macro Impact, And Will The Housing Slump Cause A Recession?

  • European Housing Market Starts to Cool Off (Wall Street Journal, Jan. 10th): "European home prices are generally still rising, but slower, often sharply, in nearly a dozen Western European countries in Q3'06 as interest-rate increases have started to bite and affordability has deteriorated … A construction slump would hit Spain, where a record 800,000 dwellings were started in 2006, particularly hard. The building sector accounts for more than 10% of gross domestic product. HSBC: Construction and real-estate companies make up almost 50% of banks' credit outstanding to Spain's corporate sector… Danish Real Estate agent: "The first half of 2006 was fantastic but the second half was a catastrophe, we can't get higher prices for properties now; the market is going down in Copenhagen."
  • Phantom Rebound In The Housing Market (Barry Ritholtz in Seeking Alpha, Jan. 10th): "Cancellations are actually accelerating… On its web site, the Census Bureau acknowledges: “As a result of our methodology, if conditions are worsening in the marketplace and cancellations are high, sales would be temporarily overestimated.” Economy.com: Between 150,000 and 200,000 home sales are being counted that actually did not occur..." There is some good news in the housing area: Mortgage Applications ticked up as rates slid last week. Oh, abusive, high-pressure sales tactics of Ameriquest Mortgage Securities hasn't saved their bacon: Fitch and S&P lowered their investment ratings on their mortgage-pass-through certificates."
  • Market Holding In Face Of Housing Dip (Kitchen & Bath Design News, Jan. 10th): "NAHB's latest Remodeling Market Index: Modest upticks in Q3 06 in both current market conditions and future expectations. NAHB Remodelers Council Chair: “Trillions of dollars in homeowner equity combined with the growing age of the housing stock means that the remodeling market will remain relatively strong in the face of a slower housing market… Forecasts $233 billion in home remodeling spending for 2006, up from $215 billion in 2005… Total major appliance shipments would hit a record 81.82 million units this year, just over the 81.74 million units estimated shipped in 2006."
  • Housing Turnaround? Not Quite (Tim Iacono in Seeking Alpha, Jan. 9th):"The prominent article "Bubble's pop was akin to a slow leak" in Sunday's LA Times, [used]… phrases like "small but unmistakable", "cyclical trough", "run its course", and "somewhere near slack-tide" are all clearly intended to influence opinion ... But the rise in existing home sales in November was accompanied by a y/o/y decline of 3.1 percent in the median sales price - the first real sign of pricing capitulation by individual home sellers in NAR data… 2003 sales volume levels… Add to this the mushrooming problems in subprime lending and it's hard to imagine how someone could be so optimistic that this is indeed the bottom."
  • Weaker Than The Data (Seeing The Forest, Jan. 8th): "Moody's: "The market is weaker than the data say." If a contract to buy a home, signed in November, is canceled in December, the Census Bureau does not subtract the failed transaction from the number of sales. In the last year, the volume of cancellations has risen to epidemic proportions... Just as the rising tide of cancellations leads the Census Bureau to overreport sales in the short term, it leads the government to underreport inventories. New homes on which contracts are not consummated are not added back into the inventory figure."
  • Homeland Insecurity? (Contrary Investor, Jan. 7th): "We’re maybe eleven months into the [housing] decline. The average cyclical peak to trough decline in housing starts historically spanned a 46-month time frame. The shortest contraction on record over the past 45 years was twenty-eight months… Moreover, the average percentage decline in starts from cycle top to bottom historically has been just shy of 62%. So far our current experience has been 30.0%. The recent cycle has seen a very steep drop over a compressed period of time, but this is nothing unusual given the prior unprecedented up cycle length."

Homebuilders And Hedging Your House Price By Shorting Stocks

  • Housing Bounce May Be Too Little Too Late for U.S. Homebuilders (Bloomberg, Jan. 10th): "U.S. homebuilders, stuck with more than 500,000 unsold houses, may report the lowest earnings in five years because a rebound in the real estate market is too little too late to save 2007 sales… Families with children tend to move before the start of the school year in September…so they have to sign a house contract by February or March... The busiest time for the new-home market traditionally comes the weekend after ``Super Bowl Sunday,'' the National Football League championship (Feb. 4 this year), when sports-loving spouses consent to forego Sunday afternoon television to begin touring model homes and potentially place an order for a new property."
  • Market Holding In Face Of Housing Dip (Kitchen & Bath Design News, Jan. 10th): The Kitchen & Bath Design News index of 52 key stocks of building products manufacturers, distributors, retailers, home builders and e-commerce enterprises gained 109.17 points, or 4.08%, from Nov. 3 through Dec. 5 at 2785.47… Advancing stocks outpaced declining issues 45-1, with eight stocks attaining a new 52-week high and two descending to a new yearly low. Top gainers for the period included Hovnanian Enterprises, USG Corp. and Ryland Group. Armstrong Holdings, Owens Corning and Georgia-Pacific were among the biggest losers."
  • Homebuilders D.R. Horton, Meritage Post Disappointing Sales (WSB in Seeking Alpha, Jan. 10th): "D.R. Horton reported net sales orders of $2.3 billion for fiscal Q1, nearly $1 billion below last year's figure and widely missing Street forecasts of $2.74 billion. Cancellations came in at 33% -- not good, but better than last quarter's 40%. Horton has resisted offering incentives but has recently been compelled to discount properties, a move that will hurt profit margins. Meritage reported net sales of $356 million in Q4, down from last year's $723 million. Q4 revenue was also down at $821 million versus $1.04 billion a year earlier, but this figure beat forecasts of $742.3 million."
  • Profit From The Housing Bust (MSNBC, Jan. 9th): "Short ideas: Mortgage lenders like Countrywide Financial (CFC) and consumer finance operations like Capital One Financial (NYSE:COF), since most lenders are likely to be hurt… On the long side, collection agencies like Portfolio Recovery Associates (NASDAQ:PRAA) could potentially gain business. [Or] wait for the depths of the bust, then buy the companies with the strongest balance sheets and biggest competitive advantages. Like Lowe's (NYSE:LOW) in home improvement and LandAmerica Financial (LFG) in title insurance. At that point, these businesses will likely have unusually low profits and be trading at low multiples."
  • The Decline Of Mobile Homes: Skyline Corp Shows Weak Quarterly Numbers (Steve Ferris in Seeking Alpha, Jan. 9th): "Manufactured Housing is one of the worst performing industries right now, and one of its biggest companies, Skyline Corp. (NYSEMKT:SKY), has just issued its report for its Q2, ending November 30, 2006. Showing continued weakness for the second quarter, Skyline's EPS were $.07, compared to $0.54 for the same quarter last year. Sales for the second quarter were $94,786,000, compared to $136,487,000 for the same quarter last year. Skyline suffered an operating earnings loss of $470,000 in the second quarter, compared to a gain of $6,202,000 for the same quarter last year."

Commercial Real Estate and REITs

  • Chicago Real Estate Firm Buys Major Memphis Sites (Memphis Daily News, Jan. 10th): "Chicago-based HSA Commercial Real Estate has bought several prominent Memphis properties in a $40 million dollar deal with AMB Property Corp. The sale includes properties in Willow Lake Business Park and Corporate Park. … AMB Property Corp. is a publicly traded real estate investment firm [REIT] founded as an investment management business in 1983. The company focuses on major hub and gateway distribution markets throughout North America, Europe and Asia."
  • Mall REIT Warns That It Might Be Forced Into Bankruptcy (NYTimes, Jan. 10th): "The Mills Corporation, the real estate investment trust known for off-price malls in outlying suburbs combining shopping and entertainment, said in an SEC filing it was running out of cash, it might be forced to seek bankruptcy protection and there may have been misconduct. Mills replaced its entire management team in '06… Mills must repay a $1 billion loan to Goldman Sachs… The company tried to expand rapidly by starting projects in Europe and buying traditional malls, like the huge Del Amo Fashion Center in the L.A. suburb of Torrance and the Southdale Center in Minneapolis."
  • Slow Housing Won't Stop Malls (Arizona Republic, Jan. 10th): "The housing market has slowed but Westcor remains confident in the prospects of a regional shopping center, SanTan Village in Gilbert. Within two miles of SanTan Village, another large retail center, Main Street Commons, will open this year featuring retail, 150,000 square feet of office space, housing and two hotels... Woodbine Southwest Corp., developer of Main Street Commons: "We know there's a lot of interest. We've been getting unsolicited calls from the brokerage community looking for office space, so we know the market's strong."
  • CBOT To Launch Futures Contract Based On Dow Jones U.S. Real Estate Index - Contract To Provide Exposure To U.S. Commercial Real Estate Market (Mondo Visione, Jan. 9th): "The Chicago Board of Trade announced a new stock index futures contract based on the Dow Jones U.S. Real Estate Index. The DJUSRE Index futures contract, to be launched in Q107, will allow market participants to capitalize on changes in the real estate sector of the stock market, and the commercial real estate market. The new contract tracks the DJUSRE Index, comprised mainly of REITs, which serve as an accurate proxy for the underlying U.S. commercial real estate market because lease rates, vacancies, development costs and property transaction values are all reflected in REIT share prices."
  • Kensington Investment Group Launches the Kensington Global Real Estate Fund (PRNewswire, Jan. 9th): "Kensington Investment Group announces the launch of the Kensington Global Real Estate Fund (KGFAX). Designed for investors seeking to diversify their domestic real estate and broad international stock positions, with a primary focus on blue chip equities of real estate companies based in North America, Asia Pacific and Europe. The fund is benchmarked against the FTSE EPRA/NAREIT Global Real Estate Index, which is designed to track the performance of real estate companies and REITs worldwide. At least 40% of the fund's portfolio will be invested in real estate companies outside of the U.S."

Web Site of the Day

Nashville Investment Richard Courtney has been a real estate agent for 28 years. On the side he does a couple of other things like write a column for the Nashville City Paper, serve as the Nashville Realtor's Board President-- he's even written a book, catchily titled: "Buyers Are Liars & Sellers Are Too".

Some of his favorite real estate lies? #10: The truth-in-lending statement is true. #6: The basement never leaks except in cases of a hard rain. #5: The appraisal establishes the actual, definitive value of the house. 4: The buyer’s loan is in good shape, but they need to take possession a couple of days early. Everything will be fine. #2: All houses are priced 10 percent over the price the seller wants to receive. We especially like his Articles, Advice & Admonishments section, where you can see the "full list of lies" he's gathered over years of experience.

Courtney's website offers constantly updated neighborhood descriptions, replete with historical anecdotes as well as honest explanations of seller's ads for that particular area. And then there's the fact that he's a Beatles fan...

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