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Wednesday, June 20, 2012

More Good News

The good news continues.  Yesterday the NAHB reported that new housing starts are up sharply, although once again the story was reported in confusing fashion.  Housing starts for May were up a whopping 28.5% year-over-year, although the Wall Street Journal headline was that starts dropped 4.8% from April.  Housing is highly seasonal, and the best way to analyze trends is to compare current results to the year earlier period.  The real story is the recovery continues to gain traction.
On Monday, a report on the survey of builder confidence inched higher, to its best level in five years.  And a recent report from online housing company Zillow indicated that prices are now beginning to rise in more markets, and in particular that performance is beginning to vary by neighborhood.  The good news is that if you own a home in decent condition in a stable community, the housing market is now in full recovery.  This is comparable to the stock market.  Not every company prospers in a bull market.  Apple is selling iPhones as fast as they can build them, and Android phones are also flying off of the shelves.  Meanwhile, Rim, the parent company of Blackberry, and Nokia are losing market share and their stock prices are spiraling downward.  Good profits at Whole Foods haven’t stopped American Airlines from filing for bankruptcy, and so on.
The unevenness of the recovery by zip code augers well for the home builders.  Many homes are more than thirty years old, in poor condition, and in communities with sagging economies and under-performing schools.  With new home construction at depressed levels for five years running, even the current uptick only brings the annual construction rate up to 708,000 units, still more than 50% below long term historical rates of 1.5 – 2.0 million. 
The prognosis – expect more good news on housing, and a great environment for home builders for years to come.   And this is in a crummy economy.  Just imagine what happens if we actually have a real recovery.

Friday, May 25, 2012

A Pretty Good Week

All in all, a pretty good week.  On Wednesday, the National Association of Realtors announced that existing home sales for April were up 10% from a year ago.  Median prices rose 10.1%, inventory was at a 6.6 month supply vs. 9.1 months a year ago, and distressed sales represented 28% of all transactions down from 37% a year ago.  Every trend is pointing in the right direction.

Then on Thursday, the Census Bureau announced that April new home sales up 9.9% from a year ago, with a 5.1 month supply of inventory.  Total inventory of 146,000 units remains barely unchanged from last month’s figure of 144,000, the lowest number on record since this data began being collected in 1963.

Adding the slew of good announcements, Toll Brothers (TOL), known for building McMansions, released their Q2 financial results.  Earnings beat estimates, and the highlights included:

  • ·         Orders up 47% from the prior year
  • ·         Average prices up from $570,000 to $585,000, as compared to the prior year
  • ·         Best traffic since 2007
  • ·         Cancellation rate down sharply

Finally, Yahoo Finance ran a story with the headline “Don’t Look Know, But Here Comes Housing.”  Of course, I’ve been advocating this for months, but it’s nice to see the financial media realizing the recovery is finally underway.

Sunday, May 20, 2012

Making Good News Bad

Most news about business and finance, like most news in general, usually has a negative slant.  For example, last Friday’s IPO for Facebook may have been the most perfect transaction of its type in US financial history.  The deal valued the company at over $100 billion, and $18 billion of stock was sold in the offering.  Founder Mark Zuckerberg ended the day as the 29th richest person in the country (I suspect he is going to move up the list in the next few years). And, amazingly, the stock closed just slightly above the offering price, meaning that the underwriters accurately gauged investor interest for a deal that was unprecedented in size and demand.  It was a display of professional excellence comparable to the tossing a grapefruit out of an airplane and having it land on a pocket handkerchief.
And, given all of this, what were the headlines: Facebook IPO “Sputters.”  Somehow, the fact that investing in Facebook didn’t produce an immediate profit by the end of the first day of trading – maybe a new stockholder might have to actually hold on  for, like, a year or two – means the deal was a disappointment.  As usual, the negative bias of new reporting made the business equivalent of winning the Super Bowl into a discussion of questioning the coach at the post-game press conference as to why the commercials weren’t better.
Which leads me to the amazingly good news about mortgage defaults and foreclosures that came out last week.   On Wednesday, The Mortgage Bankers Association reported that  borrowers either more than 30 days past due or in foreclosure had declined for the second consecutive year, from 14.7% of all mortgages outstanding  two years ago, to 12.8% one year ago, and now 11.8% currently.  And the headline in the Wall Street Journal reporting this?:   “Foreclosures Show No Sign of Decline.”  It’s the same as running a “Dewy Defeats Truman” headline and then never printing a retraction.
And then on Friday, RealtyTrac reported that foreclosures in April fell 5% from March and 14% year-over-year.  The four states that have accounted for the worst of the foreclosure mess registered the following year-over-year declines: Nevada, a stunning 67%; Arizona, 44%, California, 30%; and Arizona, 26%. 
My prediction is that this steady reduction in foreclosures and mortgage defaults is only just getting going.  This is a trend I saw coming last December, when I first starting writing my new book. When the housing crisis started in mid-2007, an immediate response by lenders was the tightening of underwriting standards.  Fast forward to 2012, and that means that the new mortgage loans and refinancings closed over the past five years have been more carefully scrutinized and borrowers are much less likely to default.  The US mortgage industry got out of the “liar’s loan” racket years ago.  And banks have discovered that rushing to foreclose is probably a bad business decision.  The average time to foreclosure on a defaulted loan has doubled nationally to 370 days.  In Florida, it’s now 891 days, or more than two years.  Banks have learned that taking over the responsibility for taxes, maintenance and home owner association dues, and then trying to unload a home in a weak market, may actually be a worse business decision than sitting tight on a non-performing loan for a year or two, letting the market improve, and then taking action.  In short, the wave of foreclosures the “experts” have been predicting just isn’t going to happen. You could say I wrote the book on it.

Wednesday, May 9, 2012

More Good News

From the Wall Street Journal this morning, in an article entitled:

“Median Home Prices Up in 51% of Metros”
Here’s another sign that the housing market has found its bottom after nearly six years of price declines: Home prices actually rose in more than half of U.S. metropolitan areas in the first quarter of the year…The results were a turnaround from the fourth quarter of last year, in which median prices rose in only 29 out of 149 cities tracked by the real estate in that quarter.

Yes, after the long nuclear winter of the housing crisis, a recovery is really underway. 

Saturday, May 5, 2012

More Encouraging News

One of the great truisms of the housing crisis is that the wave of foreclosures that hit the market from 2009-2011 will be followed soon by an even greater wave that is just about to land with a thud and deliver a death blow to the nascent housing market recovery.  You can’t read an article about housing without this “fact” accepted as received wisdom.  I just this morning saw a bald man with dark glasses on CNN repeating this as he gleefully predicted the impending collapse.

But businesses, such as banks, are run by people, and people often display herd behavior.  The great rush from 2009-2011 to foreclose is now being followed by the “great hesitancy.”  A recent multi-party series, “Bad Neighbor Bankers “, by the south Florida-based Sun-Sentinel,, epicenter of the real estate crisis, dealt with the emerging problem of banks actually refusing to foreclose on properties, allowing them to sit and rot, rather than deal with the headaches of actual ownership, such as taxes, maintenance, homeowner association dues, legal liability and the like.  

     The Wall Street Journal also recently reported that foreclosures continue to decline on a year-over-year basis.

There probably are several reasons for this trend, including the recently $25 billion settlement the big banks signed with the government, which includes provisions to help underwater borrowers and more carefully document foreclosure paperwork.   But the biggest reason is simple economics – foreclosing on millions of homes fast was a disaster for everyone involved, both the banks and the unfortunate homeowners who got hustled out onto the street, often trashing the property on the way out the door.  With the hardest-hit markets such as south Florida and Phoenix recovering, and investors complaining about an actual shortage of properties, expect this trend to continue.   Also, banks stopped making stupid loans for home buyers four years ago, and tightened standards for refinancing, so loan quality has improved substantially. The pool of borrowers in trouble, while large, won’t get any larger.   

My prediction: as measured on a year-over-year basis (i.e., May 2012 compared to May 2011, etc.; the only meaningful way to track the real estate market, by the way) the national number of foreclosures will continuously decline on a monthly basis for at least the next three years.  Given how many analysts are predicting there is another foreclosure shoe yet to drop, this will translate to yet one more piece of good news for a healing market.

Tuesday, April 10, 2012

A Spring Bike Ride

The weather finally turned nice this weekend and I went for the first bike ride of the season through the neighborhood.  I was struck by how few homes were on the market.  I noticed four properties that have had "for sale" signs in front of them since last summer, indicating they are over-priced, but only a handful of newer listings, and most of those already had "sold" signs on them.  On a typical spring day, I should have gone past over a dozen homes for sale; this past Sunday, only about five or six.

I also noticed two small subdivisions, each with about 15 homes, one priced in the $600's and the other in the $700's, that appeared to very little unsold inventory. I looked up one of the houses on a real estate website: 3,400 square feet, 5 bedrooms, 3.5 baths.  Price: $689,000.  The subdivision had a nice look and feel, and, as they say in real estate, was just minutes from the freeway. Before the housing crisis, this home would have been close to $1 million, given the property features and location.

I am a housing bull, but not for every type of property.  A new home has a competitive advantage over a previously-owned resale.  Brand-new carpets, brand-new roof, brand-new appliances, up-to-date design, 100% modern wiring and plumbing, 0% wear and tear, no previous owner, no bank or other complications associated with closing, etc. etc.

This is the primary reason I am bullish on housing stocks.  Home builders, right now coming out of a depressed market, have the advantage.  I think within two years there will be a shortage of new inventory in most major markets, and then existing homes may gain the upper hand.

Tuesday, January 24, 2012


Housing is going to recover in 2012.  The recovery will take people by surprise.