Trouble on the Home Front

[HenryTo]

FYI:
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Trouble on the Home Front
By Nicholas Yulico
TheStreet.com Staff Reporter
1/25/2006 9:48 AM EST
URL: http://www.thestreet.com/markets/realestate/10263958.html

Homebuilders Centex (CTX:NYSE) and Ryland (RYL:NYSE) both reported strong quarterly earnings, but their new-order numbers, which will drive future growth, look dismal.

Calabasas, Calif.-based Ryland said its net income rose 49% to $162 million, or $3.32 per share, compared to $108.7 million, or $2.17 per share, a year earlier. The results handily beat the consensus $3.12 estimate on First Call.

But Ryland's unit orders fell 5% year-over-year for its latest quarter. The lackluster performance led A.G. Edwards analyst Greg Gieber to cut his rating on Ryland to sell. He also dropped his 2006 EPS estimate to $10.25 from $10.90. In a research note Wednesday morning, Gieber noted that the only area of strength in Ryland's orders came from Texas, where unit sales were up 27%. However, the average selling price in Texas is 36% below the company's average, with equally low gross margins, he said.

"Using our new 2006 EPS estimate, Ryland currently trades at a 7.3 times multiple. That is a 12% premium to the group's current average 2006 multiple of 6.5 times. We don't believe Ryland warrants any premium to the group," Gieber wrote.

Centex, which reported a 30% increase in its quarterly earnings, reported order growth, but it was weaker than analysts expected.

The Dallas-based builder said its new orders rose 4% to 8,128 homes. Sales were strongest in the Southwest, where orders spiked 28% year over year. On the West Coast, orders rose 10%. But orders fell 15% in the Southeast, 8% in the mid-Atlantic and 3% in the Midwest.

"This is not particularly positive to hit only 4%, though we don't know all the details behind it," says Gieber, who was expecting nearly 11% order growth.

Centex said net income rose to $329.3 million, or $2.49 a share, for its fiscal third quarter ending Dec. 31, up from $253.8 million, or $1.91 a share, a year earlier. Excluding discontinued items, Centex posted earnings of $332.7 million, or $2.52 a share. Analysts expected earnings of $2.48 a share, according to Thomson First Call.

Revenue rose 25% to $3.74 billion, shy of analysts forecast of $3.81 billion.

Centex's earnings growth came amid an 18% increase in home closings, which rose to 9,504 units from 8,047, and a 130-basis-point jump in operating margin.

The weak orders will likely be a focus on both companies' conference calls Wednesday morning. Homebuilder Meritage (MTH:NYSE) will also report earnings today at an unspecified time.

The existing home sales data comes out at 10 a.m. EST from the National Association of Realtors.

[HenryTo]

Stephen Levy on California housing and on the potential "multiplier effects." Note that the NY market should also taking a hit, given the upcoming bonus cuts in both the hedge fund industry and in Wall Street this year. Following is courtesy of the WSJ (and Herb Greenberg):
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MarketWatch / Weekend Investor
Don't Own a Pricey California Home?
You Had Best Still Watch That Market
By HERB GREENBERG
September 1, 2007; Page B3

Stephen Levy is worried about the health of the housing market in California.

Even if you haven't heard of him or are simply tired of hearing about anything having to do with housing, Mr. Levy is a man who should be listened to. Senior economist at the Center for Continuing Study of the California Economy in Palo Alto, Calif., which he co-founded more than 35 years ago, Mr. Levy has seen more than his share of cycles.


This cycle doesn't look like it is going to end well, he says. His reasoning is deceptively simple: "There's a limit to what people can afford." When the coastal areas of the state were reporting home prices that seemed unrealistically high in the late 1990s, Mr. Levy was among those who thought prices throughout the state, on average, could go even higher.

The centerpiece of his theory at the time was that prices remained below or in line with the national average in places such as Sacramento, Riverside and Fresno. "People would say, 'It's a long commute, but I can get a good home,' " Mr. Levy says.

Since then, fueled by what Mr. Levy terms "bizarre mortgages," home prices have ballooned to 80% more than the national average in some of these markets. The median home price in the state -- recent price declines, notwithstanding -- hovered at $586,000 as of late July, according to the latest figures from California Association of Realtors. That is more than double the national average of $228,900.

This is where Mr. Levy's thoughts about affordability come into play. For many Americans, creative mortgages or not, a purchase price of a few hundred thousand dollars with a small down payment using conventional financing is a lot of money. So is the $1 million-plus to be paid for the privilege of living a few feet from neighboring homes in a tract development in many parts of the state -- where housing already is considered by some observers to be in a recession, as defined by sharp drops in the level of new construction and sales activity.

A bigger economic upheaval, Mr. Levy says, "isn't about foreclosures," which are making the headlines now, "it's about the spending behavior of those who aren't going to lose homes but have seen their wealth evaporate." Either they don't have as much home equity to borrow against, he says, or they are afraid to spend as they watch the value of their home decline.

From their peak, home prices in California's fastest-growing areas have fallen 6% to 11%. For a while, the so-called wealth effect of that decline was offset by the rising stock market. "But the stock market is coming back to earth," Mr. Levy says. At one point in August, in intraday trading, the Dow Jones Industrial Average was down 10% from its 14000.41 record close.

Making matters worse, he says, the first baby boomers turn 62 years old next year. They will be retiring soon and may want to sell their homes to downsize. As long as home prices remain at such lofty levels, California could have a hard time recruiting replacements who like the idea of homeownership, especially first-time buyers. "That's where this hits the economy," Mr. Levy says. "It will be hard to attract new people and firms to the state," which has seen a slow net migration in recent years.

Even multiple cuts in the Federal Reserve's target federal-funds rate, he argues, won't necessarily help until prices become more rational. With 10.7 months of unsold inventory, not counting homes that would be on the market if sellers thought there would be buyers, he believes Californians can expect another few years of difficulty, depending on the speed of this housing correction.

Why should non-Californians care about the California housing market, especially when the S&P/Case-Shiller Home Price Index shows year-over-year increases in such cities as Charlotte, N.C., Portland, Ore., and Seattle? Because the Golden State accounts for 13% of the country's gross domestic product -- or the total value of all goods and services produced -- nearly double the No. 2 contributor, New York. That means that what happens in California, home to such growth industries as high-tech, biotech, venture capital and film, doesn't necessarily stay in California. The impact of slow economic growth, or even recession, in the state will ripple through the rest of the country.

California, alone, wouldn't be enough to put the country into a recession, Mr. Levy says. "What would be serious would be if there are other markets like California." And based on prices well above the average in places like New York, Boston and Boulder, Colo., and the Miami-Fort Lauderdale area, we know there are.

[HenryTo]

FYI:
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"Blood in the water" in Florida property market

By Tom Brown

CAPE CORAL, Florida (Reuters) - Phone books that were delivered but never opened rot away next to empty driveways and overgrown lawns, telltale signs that once-booming southwest Florida is now the center of the U.S. housing storm.

Until two years ago, middle-class retirees vied with property speculators for houses and apartments in Cape Coral, a town near Fort Myers on Florida's sun-drenched Gulf Coast. Now almost every other house on some of its streets has a for-sale sign outside.

With a bloated inventory of unsold homes and a growing number of homeowners forced by mortgage delinquencies to sell -- thanks to the subprime crisis and ensuing credit crunch -- southwest Florida's once warm clime for property has turned stone-cold.

Linda Setterlund, 61, owns a pristine three-bedroom, two-bath, Cape Coral house that has been on the market for about a year.

At a reduced asking price of $183,900, she said the house had been priced to match what she and her husband owed on it, after moving in three years ago with a 30-year fixed mortgage.

Setterlund said she and her husband had decided to leave the area to join family in Tennessee, but their decision was also prompted by growing real estate taxes and skyrocketing homeowner insurance rates after an active 2005 hurricane season.

"They're saying that we're heading for a recession but I think we're past that," said Setterlund, referring to the housing glut and its effect across much of south Florida. "I think we're headed more into a depression."

Setterlund and other local residents, many of them retirees from the Midwest, complained of low wages in the Fort Myers area, where leading employers include the Publix supermarket chain and the school board.

There was a nearly 27-month supply of existing single-family homes on the Fort Myers market last month compared to a three-month supply at the height of the local boom in housing in August 2005, according to Denny Grimes, a top real estate agent in Fort Myers.

At the same time, more than 40 percent of single-family homes were listed at prices below $250,000 versus just 18 percent at the market peak.

"There's a lot of blood in the water and there's a lot more to come," Grimes said.

OVERSUPPLY IN "WORST" MARKET

Making things worse, Grimes said builders were still churning out new housing units at big discounts in and around Fort Myers, where many investors bought houses during the recent boom market without ever considering the long-term cost of holding properties.

Fort Myers "is by far the worst housing market that we're in," J. Larry Sorsby, executive vice president and chief financial officer of home builder Hovnanian Enterprises Inc., told Reuters.

Hovnanian bought the largest home builder in the Fort Myers in August 2005 just as sales in the city were starting to dry up.

"They were the last one aboard the Titanic," Grimes said.

Ever the realtor, Grimes said now may be the time for buyers to seek opportunity in adversity, since Fort Myers housing prices have fallen back to levels where they could already offer buyers the potential deal of a "lifetime."

"The best time to buy is when the sellers fear tomorrow is worse than today," said Grimes.

While business is slow for Grimes and other real estate agents, it has been booming lately for Jonas Elliott, a so-called "short sell" specialist at Southwest Florida Home Buyer Services in Fort Myers.

Elliott specializes in buying properties from banks or other lenders that are at a risk of foreclosure, usually at a large discount, and then "flipping" them at a profit.

"In this particular county I have about five years of good business," Elliott said.

"I'm so inundated with properties I couldn't tell you," he added. "We have a ton of inventory, a ton of new properties coming into inventory."

Noting that losses on local properties had hardly been limited to medium-income retirees or "snowbirds," traditional residents of towns like Fort Myers escaping the harsh winters of the U.S. Midwest and Northeast, Elliott said one current customer of his was about to swallow a $1.5 million loss on four properties he could no longer afford to finance.

"That's a hefty sum of change," said Elliott.

[HenryTo]

ABX indices still hanging out at all-time lows:

http://www.markit.com/information/affiliations/abx.html

Per the WSJ, the ABX indices are now discounting a 30% decline in housing prices in both the California and Florida housing markets in the next five years. Consensus is that the decline in these ABX indices is an overreaction (although I dare folks to try to do an arbitrage here), but if these indices don't bounce by the end of this year, then things are going to get very ugly.

[rffrydr]

Secondary market in mortgages frozen:

http://www.marketwatch.com/news/story/parts-secondary-mortgage-market-freeze/story.aspx?guid=%7BD9CA32E7%2DF43A%2D4C62%2DBBB4%2DAC120A34C615%7D&dist=SecMostMailed
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

The SEC investigation on Beazer Mortgages may be the problem today.
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Yes, but we're probably due for another bounce here, but I think there are still more surprises lurking over the next couple of months. The builders are just a small part of a market portfolio, unless you're Bill Miller, of course.

[dash]

Yet unlike AHM yesterday, this news isn't dragging markets lower (at least for the moment).

Isn't this the kind of thing which normally happens at inflection points?

[HenryTo]

BZH down about 40% today. XHB down more than 6%.

http://www.thestreet.com/_yahoo/newsanalysis/homebuildersconstruction/10371616.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

Someone could've shorted the homebuilders yesterday and still have made a lot of money.

[HenryTo]

D.R. Horton and Beazer Homes report losses:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aCgCXXEagtzI&refer=home

[HenryTo]

Moody's Economy.com says Florida could be in recession as early as October, driven by a huge glut in the local housing market. Obviously, nobody told these folks about the subprime problem and that housing prices have pretty much stopped rising across the US:

http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=a4qa.rYTWyYA

[rffrydr]

Well Spring is behind us: let's see how we did?

http://www.businessweek.com/bwdaily/dnflash/content/jun2007/db20070626_408546.htm?campaign_id=rss_daily
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

I know an executive at a major builder: three months back he was ridiculing the media; today, he's looking for a new "position." Money came from his "bonus." Bonus has gone bye-bye.
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Lennar reports "surprising" loss:

http://www.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr=LEN:US&sid=aP3YBFazXJlA

[rffrydr]

Hovanian reports 3rd quarterly loss:

http://investing.reuters.co.uk/news/articleinvesting.aspx?type=basicIndustries&storyID=2007-05-31T220437Z_01_N31248989_RTRIDST_0_SP_PAGE_023-N31248989-OISBI.XML&pageNumber=1&imageid=&cap=&sz=13&WTModLoc=InvArt-C1-ArticlePage1

Interesting in CC having to build on land banked in order to sell land. Building inventory AFTER prime buying season.
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Even the optimistic NAHB is stating on the record that housing starts won't return to its peak levels until 2011:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aKQoeHb1MraI&refer=home