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]

Federal Reserve unveils its $500 billion GSE mortgaged-backed securities buying program - revealing the four money managers that will be running the program as well as its target (next June) for finishing the purchases. This should dramatically lower conforming fixed mortgage rates across the yield curve spectrum:

http://www.bloomberg.com/apps/news?pid=20601208&sid=a160y41WSJvk&refer=finance

[rffrydr]

Qualitative overview of housing here in So. Cal:

http://www.latimes.com/business/la-fi-cover21-2008dec21,0,1066800.story
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

More moving out of sunny southern CA than in...4yrs in a row:

http://www.latimes.com/business/la-fi-leaving-california18-2008dec18,0,5838.story
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Treasury working on plans to bring mortgage rates down by as much as 100 bps, per the WSJ. Assuming a 30-year fixed rate mortgage, a decline from 5.5% to 4.5% should reduce one's monthly payments by about 12%, all else equal.

http://online.wsj.com/article/SB122833771718976731.html?mod=testMod

[HenryTo]

Here's the empirical evidence. The Feds buying another $500 billion of agency MBS at current levels would add a significant amount of liquidity to the US economy via another round of refinancing and lower mortgage rates across the board - the latter of which would also put a cushion under housing prices.
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Mortgage applications surge by record amount
Wednesday December 3, 7:13 am ET

NEW YORK (Reuters) - Mortgage applications surged by the largest amount on record last week as a new Federal Reserve program pushed interest rates down to their lowest level in more than 3 years, data from an industry group showed on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended November 28 soared a record 112.1 percent to 857.7, the highest reading since the week ended March 21 when it reached 965.9.

Potential borrowers were lured by enticing mortgage rates, which dropped dramatically after the Federal Reserve unveiled a plan last week to buy up to $500 billion of mortgage securities backed by government-sponsored enterprises, Fannie Mae (Pacific:FNM - News), Freddie Mac (Pacific:FRE - News), and Ginnie Mae. The program also entails buying up to $100 billion of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

"Many borrowers missed an opportunity to take advantage when rates dropped sharply for a brief period when the GSEs were placed under conservatorship," Orawin Velz, Associate Vice President of Economic Forecasting, said in a statement.

"When rates plummeted following the Fed's announcement that it would buy GSE debt and MBS, many of those on the sidelines decided to quickly jump in and take advantage of lower rates before they began to rebound," she said.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.47 percent, down a whopping 0.52 percentage point from the previous week, the largest drop since 1990 when the MBA started conducting the weekly survey.

Interest rates are at their lowest level since the week ended June 24, 2005, when they reached the same level. Interest rates are sharply below the peak of 6.59 percent reached during the summer, but only slightly below the 2008 low of 5.49 percent in January, according to the trade group.

Interest rates were below year-ago levels of 5.82 percent.

The MBA's seasonally adjusted purchase index rose 38.0 percent to 361.1, the largest rise since the week ended February 24, 1995. The index, however, came in well below its year-ago level of 464.3, a drop of 22.2 percent.

Overall mortgage applications last week were 8.3 percent above their year-ago level. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 29.7 percent.

WEEKLY REFINANCING ACTIVITY SURGES

Cameron Findlay, chief economist at LendingTree.com based in Charlotte, North Carolina, said they are seeing a positive uptick in refinancing volume due to the drop in interest rates.

"Consumers who were previously on the fence to refinance or purchase a home are in a position to take advantage of the decline in rates," said on Tuesday.

"Now it'll be a matter of qualification as lenders evaluate each borrower individually," he said.

The low interest rates can help many drop their monthly payments, and is especially good news for those who have adjustable- rate mortgages and are looking to lock in a secure fixed-rate mortgage, he said.

The group's seasonally adjusted index of refinancing applications jumped 203.3 percent to 3,802.8, the largest rise on record. The index was up 37.7 percent from its year-ago level of 2,761.3.

The refinance share of applications increased to 69.1 percent from 49.3 percent the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 1.4 percent, down from 3.0 percent the previous week.

Fixed 15-year mortgage rates averaged 5.13 percent, down from 5.78 percent the previous week. Rates on one-year ARMs decreased to 6.61 percent from 6.87 percent.

The U.S. housing market is currently suffering the worst downturn since the Great Depression. A huge supply of unsold homes, tighter lending standards and record foreclosures have pushed down home prices, deflating a bubble from the early part of this decade.

While U.S. housing market indexes tend to be volatile, data from the MBA may help gauge how the hard-hit sector is faring.

[rffrydr]

From 6.28 to 5.5 on 30yr fixed in one day! My friend in the Mortgage biz phones did not stop ringing:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aQ86JoZr_VFY&refer=home
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

I agree - this gives the best "bang for the buck" in terms of inducinig investors to invest not just in GSE-backed MBS, but also other assets aside from Treasuries, such as bank loans, bank debt, etc. This will also directly lower the cost of buying a new house. $500 billion (four times the size of the PIMCO Total Return Fund) should be sufficient to bring GSE MBS spreads back in, as this purchase represents about 10% of the entire agency MBS market:

http://www.sifma.org/research/pdf/AgencyMortgageOutstanding.pdf

[rffrydr]

Finally--straight into MBS

[rffrydr]

Rents showing effects of overbuilding....not just homes:

http://seekingalpha.com/article/105728-how-to-solve-the-excess-supply-in-housing?source=feed
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Economists trying to discount a housing bottom based on inventory (all important vacant inventory), or spiking starts that are just coming to fruition are forgetting the number three rules of RE: location, location, location.

The boom vastly increased supply in marginal areas (excluding Las Vegas which could be said to be one of these in its entirety). Some of these are so far out (ie Baker in CA) that no bulldozers are necessary. They will just sit. And while livable structures succomb to the demographics of household creation (still 2X supply) this outside supply will stand as if it has never existed. And those were the subprime loans already well written off.

[rffrydr]

So.....at long last: Citi et. al. are suspending foreclosures and setting mortgage payments at 38% income. This cudda/shudda/wudda been done for subprime a year-half ago. With govt. buying in structures and negotiating them out at cost and it'd be a differnet world right now.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

[nodoodahs]

FWIW, I am still taking the "over" on hard economic numbers in the U.S. This includes housing, GDP, etc. My opinion remains this is a financial speculation event far more than a broad economic event.

Not that there's no bleedover ... just that mainstream perception of that bleedover is overestimated.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[HenryTo]

New home sales surprise on the upside. Home Depot rallying in response:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aCnoEGB5FdDo&refer=home

[HenryTo]

Housing starts drops to its lowest level since January 1991. This should help clear out more "idle" inventory going forward:

http://www.ft.com/cms/s/0/96e3994e-9c4f-11dd-a42e-000077b07658.html