Housing Bubble and Real Estate Market Tracker

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 have this sent to your Blackberry or desktop email by signing up for our no-spam free email subscription service.

Quote of the Day- "From the House's Mouth"

"I had a buyer, but they had financial difficulties. I'm not sure if it's just harder to get a loan, or if everyone is expecting to buy a house without putting money down." - Jim Fry, a house flipper, has been trying to sell a home in Windsor borough for four months. It's the longest the Lancaster County, Pennsylvania man has held onto a property in the three years he has been flipping houses in the region." - (York Dispatch, Apr. 18th)

Real Estate Sales and House Prices

  • Dive in Long Island Luxury Real Estate Prices (Barry Ritholtz in Seeking Alpha, Apr. 19th): "Last August, we discussed why big housing sales drops do not produce big price drops - at least not right away in the official data… We looked at all of the high end RE speculation on Long Island… These concepts eventually led to a nice piece on pricing in the NYT: The Hidden Truth About Home Prices (which we discuss in detail here). So… it was no big surprise for us to learn yesterday that "luxury" home prices on Long Island -- defined as those costing $750,000 to $12.5 million -- have slid over 5% last quarter, as Inventory levels doubled from what they were two years ago."
  • House Flippers Face Slow Stretch in York County Market (York Dispatch, Apr. 18th) Pennsylvania: " Realtors Association of York and Adams counties: There were 2,863 homes on the market in February 2007, compared to 1,386 in the same month in 2005… Jeremy Rauhauser, [who has a house flipping business]: A slowdown in the market is at least partially because of the 200-home developments popping up all over York County. He said he's perplexed by the recent phenomenon of buying a large house with little property.[His partner] Karen Hake said she thinks part of the problem with the market now might be that potential buyers are having trouble getting financing."
  • New Home Prices Fell in March (AZ Central, Apr. 18th): "Monthly Southern Arizona Housing Market Letter: The median price of a new Tucson, Arizona home in March dipped to $241,213 from $253,235 in March 2006… The median price of a home on the resale market was $215,000 in March, up only $5,000 from the median in the same month last year…. New-home closings for the month dropped to 660 from 902 in March 2006. Resale closings fell to 1,559 from 2,001. New-home permit activity also dropped. A total of 555 permits were issued last month, down from 995 in March 2006."

Real Estate Investing and Sentiment

  • Executives Upbeat About Valley Real Estate (NJ.com, Apr. 19th) Pennsylvania: Frank Smith, of Summit Realty in South Whitehall Township: The Lehigh Valley has enough dynamics working in its favor despite signs of a slowing real estate market at the national level. The planned arrival of the casino industry, redevelopment of Bethlehem Steel property, the addition of AAA-level minor league professional baseball and a growing heath care industry should keep the region's market expanding for the foreseeable future... Executives also remarked on the area's continued ability to attract investment from professionals as far as Manhattan and Philadelphia."
  • Housing Bubble Bursts into American Elections (American Enterprise Institute, Apr. 18th): "At an emotive level, the travails of the US housing market will receive increasing political attention as the 2008 election approaches. Scenes will become commonplace of single mothers or minority homeowners being evicted… Politically more important will be the fallout on the overall economy's performance. A 30% decline in housing construction could shave up to 1.5 percentage points off GDP growth… Recent remarks from Congressman and regulators… [suggest] proposals to stick investors in mortgage-backed securities with the losses when subprime borrowers default… An early sign of the impact of political pressure: At yesterday's House hearings… Freddie Mac and Fannie Mae unveiled plans to help subprime borrowers refinance their mortgages."
  • Army's Land a Builder's Bonanza (Contra Costa Times, Apr. 18th) California: "Plenty of builders are expected to chase the rights to own and develop a choice swath of land that officials here hope will be a gateway to the fast-growing East Bay city… The Camp Parks land would be one of the few large properties left in the vicinity. Colliers International [Brokers]: "There is a lot of money chasing development-type real estate… It will be a hot commodity when they bring it to market… A mix of some residential, retail and offices is the most likely scenario for the land."

Mortgates and Real Estate Lending

  • Wells Fargo Earnings Quiets Critics (Blogging Stocks, Apr. 17th): "Wells Fargo's (NYSE:WFC) EPS were $0.66 on revenue of $9.44 billion… Analysts had expected profit of $0.65… This is the 17th out of the past 20 quarters [of] double-digit earnings growth… Subprime loans cost it about $90 million in revenue--not profits. That's about 1% of quarterly revenue… In other words, it's not a big deal. Management is carefully monitoring the loans charge -off which rose from 0.56% of loans up to 0.9% of loans…Wells Fargo said core deposits rose a stunning 13% to over $290b in Q1. It also noted strong growth in the commercial loan division."

Subprime Fallout and Foreclosure Impact

  • Housing Woes In Lenders' Hands (Hartford Courant, Apr. 19th): "Lawmakers, regulators, consumer groups and bankers all agreed Wednesday to let the marketplace fix the crisis in sub-prime lending and avoid new legislation or government bailouts. Senate Banking Committee Chairman Christopher J. Dodd: "I'm not overly anxious to legislate," he said. "We think there may be enough laws on the books." Instead, he is turning to lenders, as well as to Fannie Mae and Freddie Mac, to help ease the problem, and he's making it clear to regulators he wants them to watch lenders more carefully… Fannie Mae and Freddie Mac officials promised Wednesday to work with borrowers, perhaps by rewriting many loans."
  • Fannie, Freddie and WaMu Spearhead Subprime Borrower Help (Seeking Alpha, Apr. 19th): "Government-backed Mortgage company Freddie Mac announced it would be purchasing up to $20 billion of subprime loans to help stem the wave of defaults plaguing subprime mortgage borrowers. Fannie Mae also said it could purchase "tens of billions of dollars in loans." Lender Washington Mutual announced separately that despite subprime losses, it would also set aside $2b to help borrowers… But there are an estimated $1- 1.4 trillion worth of subprime loans outstanding to reset in coming years. And Freddie and Fannie's motives may be guided less by altruism and more by currying favor after recent accounting scandals had regulators calling for Fannie and Freddie's mortgage divestiture."
  • Florida Foreclosures 2007: A Golden Year for Investors (PR Web, Apr. 18th): "An investor… featured in the August 2006 issue of Forbes Magazine… got rich buying distressed homes in wealthy Miami neighborhoods. He picked one up for $550,000, did $150,000 worth of repairs, and turned around and listed it for a cool $1.1 million… Foreclosures are typically caused by unexpected personal tragedy such as illness, job loss, or divorce... Ironically, a significant percentage of those facing defaults [now] are homeowners with relatively good credit and white-collar jobs. Lenders burdened by vacant foreclosed properties have to pay for taxes, insurance, and upkeep, and usually prefer to cut their losses."
  • Kansas Foreclosures Jump, but State Still Ranks Low (Kansas.com, Apr. 18th): "RealtyTrac: There were 447 foreclosures in Kansas last month, a 5.6% increase over February and a 126% increase over March 2006. However, Kansas remains below the national foreclosure rate, ranking 35th out of 50 states and the District of Columbia. It had one foreclosure for every 2,523 households in March, compared to the national average of one for every 775 households. Nevada was worst in the nation, with one foreclosure for every 183 households. Colorado was second, with one for every 292 households."
  • Metro Detroit Foreclosures Drop (Detroit News, Apr. 18th): "The number of Southeast Michigan homes in foreclosure fell from February to March… suggesting the region may be bottoming out in terms of foreclosure activity… Only Oakland county saw an increase… foreclosures climbed 19.2% from 799 homes in February to 952 in March… Wayne County: Foreclosures dipped 23.8% from February to March... Total homes in foreclosure in March: 4,194. Macomb County: Foreclosures down 16.8%, from 1,099 to 914... St. Clair County: Foreclosures down 31%, from 71 to 49... Michigan: The state's foreclosure rate was one of every 490 households… Foreclosures dropped 11.4% from February to March."
  • Ad Campaign Aims to Reduce Foreclosures (Milwaukee Journal Sentinel, Apr. 18th): "Wisconsin home loan borrowers will be urged to seek foreclosure prevention counseling as part of a national ad campaign to start in June… The public service ads will run in troubled areas such as Wisconsin, which the Mortgage Bankers Association now ranks as 11th worst in the nation for mortgage foreclosures… Realty Trac: March foreclosure cases showed a 67% year-over-year surge in Wisconsin and 47% climb nationwide. That pushed the nation's pool of homeowners facing loss of their property for unpaid debt past 900,000."
  • Foreclosure's Shadow Falls Across Diverse Set of Homeowners (WBOC, Apr. 18th): "High-interest loans (often subprime) are common at the smaller end of the loan spectrum, but in 2005 they also accounted for 19% of large loans - those for $250,000 or more. Those large loans were just as numerous, and were growing faster, than those for less than $100,000, according to a Federal Reserve study published last fall… Center for Responsible Lending concludes in a recent analysis: "The negative impact of foreclosures falls disproportionately on communities of color… Yet, white homeowners received three times as many higher-cost mortgages and therefore will experience a significant number of foreclosures as well."
  • US seeks Chapter 11 trustee for New Century (Reuters, Apr. 17th): "The government is seeking the appointment of a Chapter 11 bankruptcy trustee for New Century Financial Corp. (OTCPK:NEWC)… potentially depriving the subprime lender's executives of control over the sale of assets. New Century also expects next week to release results of an internal probe… [on] why it needed to restate results for the first three quarters of 2006… In a court filing… U.S. Trustee Kelly Beaudin Stapleton said "the failure by current management of New Century to ensure accurate financial accounting and to institute adequate internal controls constitutes cause mandating the appointment" of a trustee."

Global Impact and Alternatives To The Housing Slump

  • Macquarie CountryWide Buys Shopping Centres in Europe (The Star Online, Apr. 19th): "Macquarie CountryWide Trust, an Australian REIT, agreed to buy shopping centres in Germany and Poland for 351mil euros (US$477mil) in its first foray into Europe… The trust has flagged buying assets in Europe or Asia to accelerate profit growth, after establishing itself in the US through a venture with Regency Centers Corp. Australian trusts are looking offshore amid a lack of opportunities at home, where most investment-grade property is already owned by funds."
  • US Transparency Product the REIT Move for Europe (Citywire UK, Apr. 19th): "SNL Interactive… is to be rolled out across Europe and the Asia-Pacific region [in] July. SNL Interactive, launched by SNL Financial in the US in 1997, was the first tool to allow subscribers to delve into the underlying portfolio of REITs, including geographical spread, financial statements, the value of individual buildings and number of tenants… Reveal[ing] aggregate data on a region’s REITs industry, offering a snapshot of how much is invested in different sectors of the property market. SNL Interactive will initially cover 95 listed real estate companies in the Australia/ Asia-Pacific region and 103 in Europe, although the latter will increase dramatically once REITs are rolled out across Germany over the next few years."
  • US Slowdown Would Have Limited Impact on China (People's Daily Online, Apr. 19th): "Morgan Stanley chief economist Stephen Roach: US deceleration had not had much effect on global growth mainly because the US's housing sector, which has been leading the slowdown, was mainly a domestic problem. However, the world should be prepared… the recession in the US housing sector could infect American consumer spending, which forms the key link between the US economy and the rest of the world, particularly Asia… World Bank: Although China is less sensitive to changes in the US than most other Asian economies, an unexpectedly rapid US deceleration could also affect China."

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

Homebuilders And Housing Stocks and ETF's

  • Still Short Downey Financial Despite Stock Jump on Q107 Earnings (Amit Chokshi in Seeking Alpha, Apr. 19th): "Downey Financial Corp. (NYSE:DSL) released Q1 2007 earnings yesterday… the uptick in shares of DSL is… surprising considering today’s valuation is essentially the same as last year’s, if not more expensive on a forward looking basis, despite a deteriorating balance sheet… and earnings quality that has become progressively weaker… The key basis for shorting DSL is that the Company’s earnings model is being increasingly driven by capitalized interest income from negative amortization [“CINA”]… this cannot be sustained over time… And DSL, despite having less subprime exposure, is still at risk based on regional conditions in a historically volatile market."
  • Labor Ready Jumps 25% - Short Opportunity Today (Notable Calls in Seeking Alpha, Apr. 19th): "[After] Labor Ready (LRW) released better than expected Q1 results last night: Goldman Sachs: [Maintains] another leg down in residential construction employment is a matter of WHEN not if, contrary to the company's outlook for a slight 2H07 recovery. Stifel: Is raising their '07 EPS estimate to $1.36 from $1.25 and '08 EPS estimate to $1.48 from $1.40… [But] they believe that it is still too early to call a positive turn at LRW… The stock traded as high as $23.50 in after hours action... If you can get a fill around $23-$23.50, you'll make money shorting LRW today. There will likely be another leg down in housing and LRW will get hurt."
  • Subprime Loan Trouble Can Hurt Mutual Funds (MAX Funds, Apr. 18th): "Your mutual fund portfolio could take a hit when home prices fall. While most of the damage would be to real estate sector funds that invest in companies that could see their businesses sink if a glut of foreclosed homes hit the market – funds like Fidelity Real Estate Investors (MUTF:FRESX), Third Avenue Real Estate Value (MUTF:TAREX), T. Rowe Price Real Estate Fund (MUTF:TRREX), American Century Real Estate Inv (MUTF:REACX) - mutual funds that only own REITs (Real Estate Investment Trusts – primarily companies that operate properties for rental income) like Vanguard REIT Index (MUTF:VGSIX) would also suffer."
  • Pulte Homes Warns of Deeper Net Losses (MarketWatch, Apr. 18th): "Pulte Homes said it expects a net loss from continuing operations to come in between $0.34-$0.38/share for Q1… including between $130- $140 million in land-impairment charges. The nation's second largest homebuilder based on market cap - had previously expected results to range from break even to a loss of $0.10/share—not including land-impairment charges... Net new orders fell to 8,499 for the quarter - a 21% drop from the same period last year. Closings dropped 37% to 5,420 homes during the period… The cancellation rate [was] 24% for the quarter. During Q4'06… the cancellation rate was 35%."
  • Icahn Pushes to Oust WCI Board That Advised Against Takeover Bid (Miami Herald, Apr. 18th): "Billionaire investor Carl Icahn urged shareholders of luxury homebuilder WCI Communities on Wednesday to elect a new, hand-picked board, less than two weeks after the current board recommended rejecting his $22/share takeover offer. Icahn asked WCI stockholders to elect a new slate of 10 people, including himself, to the board of directors at the company's June 15 annual meeting.... Icahn's companies control more than 14.5% of WCI… On April 5, the company's current 10-member board called Ichan's unsolicited $920.8 million buyout offer "opportunistic and inadequate" and unanimously advised shareholders to reject it."
  • Options Update: Lennar, Your Foundation for a Return to Investing in Housing (Schaeffer's Research, Apr. 18th): "Housing concern Lennar (NYSE:LEN)… could be an opportunity… More than 31,000 puts have changed hands so far today, with open interest standing at just 15,573 contracts… Much of today's volume could translate into fresh positions come translation tomorrow… It also hints that the speculative options crowd is [still bearish] on the security… getting in on the ground floor of a rebound in the sector could be… a boost to the more adventurous investors… LEN looks… good for those looking to jump back into housing: plenty of pessimism, a budding technical rebound, and ample support for any pullbacks."

Commercial Real Estate and REITs

  • Office Space Demand up at Ground Zero Site (USA Today, Apr. 19th): " Rents are up and vacancies down in the financial district surrounding the World Trade Center site, improving the market prospects for the four office towers now being built at Ground Zero, including the 1,776-foot, $2.9 billion Freedom Tower… Office rents in lower Manhattan returned to pre-9/11 levels for the first time during Q1'07, according to a report from real estate agency Cushman & Wakefield. The vacancy rate for prime office space in the neighborhood fell to 6.3% in Q1'07 from 12.5% in Q1'06."
  • A REIT Review (Briefing.com, Apr. 19th): "Commercial real estate, which is driven by job growth and the economy, remains relatively healthy… CB Richard Ellis Group (NYSE:CBG): Commercial building occupancy is growing nationally... rents have climbed about 4.25% over the past year… Manhattan [rents] reached a record $53.43/sf during Q1, as vacancy rates declined to 5.7% on limited supply and steady job growth. This may be reflected in quarterly results of office REITs such as Boston Properties (NYSE:BXP), Mack-Cali (NYSE:CLI), and Vornado Realty Trust (NYSE:VNO), which have a strong presence in land-restricted markets such as New York, San Francisco, and Boston... [these REIT's] offer the best opportunities."
  • Zell Says Real Estate May See Weakness in 2009 (Reuters, Apr. 18th): "The commercial real estate industry should expect another two years of good times but may see some weakness starting in 2009, real estate mogul Sam Zell said on Wednesday at the New York University 12th Annual REIT Symposium... "All subprime loans were about the hot potato game," he said, describing loans that were quickly sold, repackaged and securitized to be sold again... "I think there's a certain amount of that in commercial real estate today, where people are really stretching limits… lenders will begin to raise their standards to compensate for risk."
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