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.

[rffrydr]

Balloons are for clowns but got their roots in the high and mighty. Those coming into an inheritance through the decrepit and in-probabate, trust-funds payouts and legal settlements.

Clown-funnily enough it's also the basic CMBS structure....but that's another story.
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Today is the Tomorrow you worried about Yesterday!

[nodoodahs]

It never was the ARMs per se that were problematic.

It was mostly the ARMs with the balloon and teaser rate (and sometimes features like negative amort).

A vanilla ARM is a full-term mortgage going 15, 20, or more commonly 30 years. It might have a little bit of a teaser rate, slightly below market initially, but generally is close to the market rate and stays close due to the reset feature. Generally the lender gets protection long-term from interest rate risk (or in high-rate environments, from repayment/refinancing risk) by conceding a short period of below-market rates to the buyer.

Balloon ARMs had very short terms, usually 5 to 7 years. They typically had teaser rates lower than vanilla ARMs and amortized at a long schedule, i.e. payments based on the teaser at a 30 year amort but at the end of the 5-7 year term, the buyer was on the hook for the remainder of the principal, hence, they needed to refinance or sell before term ended. The low teaser in balloon mortgages allowed overqualifying for loans based on income and encouraged buying to flip for equity appreciation. The only environment in which balloons make sense is one of drastic appreciation and high turnover. Add to that the negative amort feature in some balloons near the end of the bubble, where the buyer could have avoided paying principle at all during the 5-7 year term! Balloons are for clowns.
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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.

[rffrydr]

There are a happy few still amongst us. All too easy to writeoff the whole period. This taken from a newgroup discussing ING's current ARM program (yes, they had a Black Friday special last year so check it out if you're in the market):

[rffrydr]

The "troubles" are of course structural and we should not expect the usual "headline" contrarian effect:

[rffrydr]

Background on the "MERS" mortgage nominee gridlock:

http://ftalphaville.ft.com/blog/2010/10/08/363801/mers-an-acronym-of-of-mass-foreclosure-destruction/
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

"The Mortgage Market in a Time of Low Interest Rates and Economic Distress"

http://www.federalreserve.gov/pubs/bulletin/2010/pdf/hmda2009.pdf
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

The drawdown on equity funds is the story now, but this was also the story going into '07. Why? Since '02 there's only been ONE asset:

http://seekingalpha.com/article/224030-why-wall-street-might-spur-a-bull-market-in-2011
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Today is the Tomorrow you worried about Yesterday!

[diesel]

With a 12% current account deficit the UK should be doing better! The problems will start if they cut that deficit too quick...
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All cats are gray in the dark.

[rffrydr]

Family formations averaging 1.5 million are down to .5 million last two years.

Meanwhile best construction stats since 1982 lead UK GDP numbers today:

[diesel]

A pick up in housing starts can’t be far off as they are very low given 1-3% GDP growth supported mainly by income helped by the govt deficit spending, lower home prices, and reasonable mortgage rates.

The surviving companies are those that have figured out how to make money in this environment, and most have massive operating leverage should GDP pick up to more normal recovery levels.
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All cats are gray in the dark.

[rffrydr]

Nice beat by Toll with six consecutive quarters of lower inventory writedown:


http://www.marketwatch.com/story/toll-brothers-swings-to-profit-on-tax-benefit-2010-08-25?dist=countdown
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

$ Million-plus home sales were up BTW. And RYL rallied all day on upgrades.
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Bridgewater on today's existing home sales numbers:

[rffrydr]

My Fall surprise is surprising me:

http://www.cnbc.com/id/38774985

4-year cycle lows into seasonal is now the orthodoxy. Vacations have turned against us. The BP cap is turning into one big anti-climax.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Looks like that second tranche of rolling ARMs will be taken care of. Figure 4.25% to kick off any refi boomlet:

http://research.mfglobal.com/dailyres/financial/intraday_files/image003.gif


This prolonged slowdown is also doing alot of gooood.
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Today is the Tomorrow you worried about Yesterday!