Rag 2005

Housing and Consumer indicators continue to Sag

But Deutsche bank analyst upgrades Housing Stocks; Stock Market Rallies

Graeme Irvine 9/29/2005

For starters the conference Board’s Consumer Confidence Index dropped to 86.6 in September from 105.5 in August. Sentiment was affected by rising gasoline prices, Hurricane Katrina and a less than sanguine job outlook.

What hasn’t been factored into housing and construction yet is the impact of soaring material costs particularly energy.

On 9/26 Existing Home Sales rose 2% in August to a seasonally adjusted annual rate of 7.29 million units. August sales were up 7.8% from August 2004 and were the second highest on record. However inventories rose 3.5% in August to a 4.7 mos. supply, the highest since November 2003.
Gina Martin of Wachovia Bank says affordability is becoming an issue.
Existing homes represent 85% of the market the balance being new homes.

On 9/27 Commerce Dept. data showed that New Home Sales slid 9.9%

Gary B. Smith of the TheStreet.com gives a detailed chart analysis of the housing stocks and says they can fall further and still be in an uptrend line to satisfy the long term bulls. Intermediate lows can be as follows:
TOL 36, BZH 45, HOV 30, KBH 45.
Chartman Takes On the Homebuilders

As a contrary view Gregg Schoenleber of Deutsche Bank launched coverage of the Homebuilding sector with 14 stocks and a bullish outlook:
“Macro-economic factors continue to support the housing market and builders are larger, better capitalized, more risk averse and significantly more diversified than they were 15 years ago,” said Schoenleber. “Additionally, increasing land constraints and entitlement delays will continue to push housing prices higher.”
Gregg apparently sparked a rally today as housing stocks are up.

Graeme Irvine in his London Irvine report excerpts the following:
California housing at ‘tipping point’
Forecasting group says state’s economy to take a hit once its hot real estate market starts to cool.
September 28, 2005: 2:37 PM EDT
SAN FRANCISCO (Reuters) – California’s housing market is overvalued by up to 45 percent and at a “tipping point” that will end its red-hot growth cycle, the UCLA Anderson Forecast projected Wednesday.

California’s housing market, one of the strongest and most closely watched in the United States and the engine of the state’s economic recovery, is heading toward a “soft landing” that will slow the state’s economy, UCLA Anderson Forecast senior economist Christopher Thornberg wrote in a report.

The forecasting group said in June that California was facing a housing bubble and predicted it would deflate slowly rather than pop as many analysts have projected.

As the state’s housing market cools, many of the building and finance jobs it created will start to disappear and consumers, who are currently emboldened by rising home values, will pull back on spending, Thornberg wrote in his latest forecast report.


Many local real estate markets such as Boston already are experiencing a slowdown due to growing inventory and unaffordable prices for the new buyer. Many boomers want to downsize or urbanize.

On 9/26 Fed Reserve Chairman Greenspan drawing on his first own personal research since 1996 said consumers have become enormously dependent on borrowing against home values like $600 B last year equivalent to 7% of personal disposable income. A rise a mortgage rates could slow consumer spending as home equity extraction slows down. Greenspan Warns Of Reliance on Housing Loans

The CEO of Newmont Mining 47+ (NEM), Pierre Lassonde said today that he expects Gold to hit $525 oz. in the near term. Currently gold is at $469.

Sell housing stocks, stay long energy and precious metal stocks.
REITS are still a hold with a downside on the IYR to 61. If 10 yr tsy yield continues up REITS may decline.
If you want a short on commercial real estate Doug Kass of The Street Insight is recommending a short on CBG 48.76 up 4% today (CB Richard Ellis).
Gold, silver energy and housing stocks were all up today in an afternoon rally that also included tech stocks:

GLD 47 UP .62% Many bulls on gold
NEM 47.92 UP .8% Blue chip of the gold stocks
PAAS 18.08 UP 1.8% Blue chip of the silver stocks
XLE 54.49 UP .9% Energy ETF
HOV 50.59 UP 1.38% Housing
BMHC 94.4 UP 2.3% Builder supply
PHM 42.34 UP 1.24% Hoisings
TOL 43.25 UP 3.1 Housing
IYR 63.30 UP 1.34% REIT/ETF

NAZ 2141 UP 26, DOW 10,555 UP 82, S&P 128 UP 11 closed at high, tech a leading group.
Advances over declines by 2:1


Housing Stocks Can’t Get No Traction

Consumer sentiment hits 2 year low; Treasuries sell-off; Dow, NAZ UP

Rod Raynovich 9/16/2005

The University of Michigan consumer sentiment indicator hit a two year low dropping to 76.9 in September from 89.1 in August.
Obviously the costs of Katrina and the War in Iraq are beginning to take their toll and the hit on retail stocks was evidence of this earlier in the month.
Also U.S. Treasuries fell today pushing the 10 Year Note to its biggest weekly drop since March on concern about inflation and the cost of cleaning up and rebuilding the Gulf States after Katrina. As of this writing 10 Year Tsy’s yield 4.26%. The yield curve is steepening with the gap between the 10 year and the two year up to 37 basis points. Investors sold U.S. treasuries reacting to the consumer survey and expectations of inflation. Stagflation talk resumed as we await the FED meeting on September 20. Gold is at 458 up $3.80 just off today’s 17 year high.

However as a crosscurrent crude oil was down 1.75 at 63.
Stealth Rally: As of 12:19 PDT Dow and NASDAQ are up.

Housing stocks were in a big sell-off today despite recovery from Katrina “rebuild” and low i rate speculation:

  • HOV 54.67 down 4.14%
  • TOL 45.50 down 3.74% close to August low; intermediate support at 40; 52 wk high at 58.67
  • PHM 44 down 4.35%– upgraded on SEP 9, received highest ranking in customer satisfaction by JDPower &Assoc
  • ^HGX Index 537 down 1.88%

REITS were also weak with IYR (65.4) down .71% –watch retail store property sales as Office Depot recently wrote down the value of stores it bought from Toys “R”Us last year.

BMHC( high of 92 in early SEP)-a building material supply stock, is down 2% today but has recovered from a low of 70 in July due to boost from bulls saying Katrina rebuild will drive stock.

Sell Housing stocks hold REITS (call made on August 5)


Economic News Buffets Real Estate Markets: New Homes gain Market share over Homes for Resale

Bubblettes continue. Plateau in the market? …But $67 oil cools off housing stock rally late in the day.

Rod Raynovich 8/24/2005

One thing is for sure-there is a bull market for real estate journalism. There are more articles on the real estate bubble and the market for housing than there are for the War in Iraq or the latest escapades of the rich and famous. Pat Robertson would have gotten more viewers talking about real estate rather than knocking off Venezuelan President Chavez.
First the market today:

Record in sales of new homes brings in buyers and short covering in housing stocks:

  • HOV up .09 at 57.95
  • TOL up 2.07 at 50
  • PHM up 1.36 at 84.84
  • IYR up .17 at 64.07
  • HGX up 4.50 at 529

These stocks were up much more today before the oil spike.

The consensus from pundits, stock performance and economists goes something like this:

  1. Condo sales are slipping vs single family homes.
  2. REITS are more stable than housing stocks and less susceptible to i rate increases.
  3. Macro implications for Real Estate and related construction: they are still major drivers of the economy including retail sales.
  4. A slowdown but not a collapse in housing sales is forecasted for 2006 . More of a plateau with weaker pricing.
  5. Housing markets are regional and bubblettes will come and go. Pricing and markets can be a psychological phenomena e.g. if people continue to read about a bubble then they may put their property on the market.

Sell housing stocks. Hold REITS

Selected excerpts from articles:

Bubble-Metrics: Economists Handicap Housing Markets

Raft of New Studies Offer Clues About Risk of Declines; Time to Cash Out of Flint?

JAMES R. HAGERTY THE WALL STREET JOURNAL
August 23, 2005; Page D1

Can economics save you from losing your shirt in the housing market? Bubble-Metrics: Economists Handicap Housing Markets

Housing-Bubble Talk Doesn’t Scare Off Foreigners

Global Investors Gobble Up Mortgage-Backed Securities, Keeping Prices Strong

RUTH SIMON, JAMES R. HAGERTY and JAMES T. AREDDY THE WALL STREET JOURNAL
August 24, 2005; Page A1

Strong demand for mortgage-backed securities from investors world-wide is allowing American lenders to make more loans — and riskier ones — in a way that is helping prolong the boom in U.S. house prices.

The cash pouring in — not only from U.S. investors but increasingly Housing-Bubble Talk Doesn’t Scare Off Foreigners

Near Nation’s Capital, A Hot Market Cools

Global Investors Gobble Up Mortgage-Backed Securities, Keeping Prices Strong

THE WALL STREET JOURNAL August 17, 2005; Page B1

NORTH POTOMAC, Md. — After seeing his neighbors sell their high-priced homes in just a few days two months ago, Brian Rabin expected a similar experience when he put his family’s three-bedroom townhouse in Gaithersburg, Md., on the market in mid-July.

But after almost a month — and after lowering the asking price by $30,000, to $649,000 — he had not a single offer. He decided Monday to take it off the market temporarily. “We are finding it frustrating,” he said. “We were hoping to sell quickly, but so far that hasn’t happened.”

This ‘For Sale’ sign is one of many observed last weekend in Sully Manor, a new development in Centreville, Va.; on one street, six dwellings had similar signs.

From Boston to San Diego to Washington, D.C., there are signs that the red-hot housing market may be cooling. The number of listings is up, sales are down and more sellers are being forced to trim prices or offer incentives to entice buyers.


Be Warned: Mr. Bubble’s Worried Again

DAVID LEONHARDT – August 21, 2005

ABBY JOSEPH COHEN, the Goldman Sachs strategist then making a name for herself as Wall Street’s optimist in chief, sat directly to Alan Greenspan’s right. One chair away was Robert J. Shiller, a largely unknown Yale economist.

Nicole Bengiveno/The New York Times
Robert J. Schiller, a Yale economist, says housing prices may drop sharply, as they did 300 years ago on the Herengracht in Amsterdam.

Nicole Bengiveno/The New York Times
Robert Shiller and his wife, Virginia, near the vacation home they bought in 2002 near a Connecticut island. “This is the biggest boom we’ve ever had,” he says, and predicts a bust.

As they ate lunch in a stately dining room at the Federal Reserve that day in December 1996, Mr. Shiller argued that the stock market had risen to irrational levels. In a soft, Midwestern-tinged voice, he asked Mr. Greenspan, the Fed chairman, when the last time was that somebody in his job had warned the public that the stock market had become a bubble.

Mr. Greenspan listened without giving his opinion, and Mr. Shiller went home assuming that he had been farther away from Mr. Greenspan than Ms. Cohen in more ways than one. Three days later, however, driving his son to school in the family Volvo, Mr. Shiller heard on the radio that stocks were plunging because Mr. Greenspan had asked in a speech whether “irrational exuberance” was infecting the markets.

I may have just started a worldwide stock-market crash ……etc. Be Warned: Mr. Bubble’s Worried Again


Housing and REIT sell-off continues

Are we shifting to a buyer’s market for homes?

Rod Raynovich – August 8, 2005

Housing stocks got pummeled again today by the dramatic sentiment shift triggered by Fridays’ interest rate fears and the fine print in Hovnanian
and Toll Bros financial details.

  • HOV 62 down 5.46%
  • PHM 86.75 down 3.56%
  • TOL 48.76 down 4.3%
  • BMHC 69.36 down 5.1%
  • IYR 62.45 down 3.33%

These stocks have rallied before, but since they are still up over 40% this year there is a lot of money on the table for the prudent to get out now.

You all remember the bearish articles on real estate in June and July that were largely ignored. However, the bad news may be gaining
followers as Sunday’s LATimes article on the fragile San Diego housing market was #1 on the LATimes WEB site.

All Eyes on Home Market in San Diego

Two and three year treasury yields are in the 4%+ range, comparable to many REITS.


Housing Stocks and REITS decline on interest rate fears and Hovnanian earnings details

Rod Raynovich – August 5, 2005

Housing stocks hit a wall today after the torrid July performance. The trigger for the downfall was apparently Hovnanian announcing that the number of net contracts in the NorthEast declined although the net value of the new home orders rose. In the West, HOV said that both the number and value of contracts declined due to development delays.

In summary we feel that the outstanding 5 yr. growth in the real estate sector is over due to the following factors:

  1. As evidenced today the housing sector and potentially the REIT sector is very sensitive to tiny bits of adverse financial news. Year over year earnings comparisons will become more difficult as we go forward diluting the 20% growth, low PE story.
    Are downgrades coming next?
  2. Many funds and ETF’s have huge positions in housing and REIT stocks potentially creating a selling downdraft.
  3. The FED will continue to plunge ahead with interest rate increases eventually taking away the easy mortgage money driving housing demand
  4. If the economy improves, interest rate vehicles pay 5% or more, and the stock market continues to gain traction investors will have an alternative to housing and real estate speculation.
  5. Housing is becoming less affordable even to 1031 speculators. Many people are reluctant to sell their homes due to the price of upgrading to a home with higher taxes and carrying costs. 1031 investors cannot get a return on investment due to higher costs and insufficient rental income.
    REITS may also become squeezed due to higher prices paid for their new properties.

The real estate bulls retort that we are in a new paradigm due to demographics and limited supply of land and housing. They believe that real estate and housing are no longer cyclical but is positioned for secular long term growth. For example Jim Cramer on his “Mad Money” program calls housing stocks “land banks”. One question we may ask housing executives is if growth is secular why not pay a higher dividend comparable to blue chip stocks?

The other technical factor is that so many hedge funds are short housing stocks that we can have buyers come in as these stocks fall.

These stocks have faltered before and come back. But we believe it is time to SELL OR SHORT housing and we downgrade REITS to HOLD.
BTW— The REIT ETF IYR is paying a 4.15 dividend the same a 2-3 yr. treasuries. Why take the risk??


Housing Stocks Blow their Tops up 3%+ Today

Analyst downgrades(CSFB) countered by upgrades (Friedman-Billings) and good forecasts

Rod Raynovich – July 7, 2005

Why buy a house or apartment for investment when you can do it at your desk with a click? 16-30% returns in 3 months!
(no escrow required and $8 in commissions per trade)

REITS are up 16% for the quarter and housing stocks are up 25-30% for the three month period ending June 30 2005. In a blow-off day spurred by Pulte Homes stating net new orders were up 26% over last year.

Stock market pundit/gurus such as CNBC’s Cramer says this is the hot place to be and pumps so-called “land banks” daily on his 3PM PDT program.

REIT lobbyists such as NAREIT’s Steve Wechsler says REITS will do well as the interest rate conundrum draws on:
….”With 10 year treasuries at the 4% level ya gotta have REITS. Prospects continue to look good as economy rolls on.”….
BEARS abound saying housing is cyclical and not scalable over time.
Some REIT experts say properties are getting too expensive for normal rate of return going forward.

How many POD and McMansion houses can be built on the ever growing “land banks”. Many expert economists and market mavens are proven wrong as hard assets bubble up courtesy of the FED’s fiat currency printer.

In Today’s WEB based digital world you can trade virtually anything, even condos in Florida.
The RAG group signal is still bullish but one commercial real estate member has turned bearish and housing stock holders should be in a profit taking mode.

Two stocks to watch:
TOL at 102 and IYR at 65 both near tops.

MarketWatch

Market Pulse: Pulte Homes higher after upgrade, orders data
Thursday July 7, 10:18 am ET
By John Spence

BOSTON (MarketWatch) — Shares of Pulte Homes Inc. gained 3.6% to $87.43 in early dealings Thursday after Friedman Billings upped its price target on the stock to $82 from $75 after the company said that preliminary net new orders for the second quarter increased 26% from the year-ago period to 13,581 homes. The Bloomfield Hills, Mich.-based homebuilder said late Wednesday it sold from 649 communities during the second quarter, up 17% from last year.

From the Wall Street Journal

Real-Estate-Sector Funds Post the Best Returns

LAURA SAUNDERS EGODIGWE

The second quarter gave mutual-fund investors reason for cautious optimism after the first quarter’s bumpy ride.

All diversified U.S. stock funds posted gains for the quarter ended June 30, with an average rise of 1.8%, according to investment research firm Morningstar Inc. in Chicago.

That is a reversal from the first quarter, when just about every diversified U.S. stock fund lost money. The S&P 500, meanwhile, was up 1.6% for the quarter.

Growth funds, which invest in stocks with fast-growing earnings, perked up after several years of dominance by value-oriented portfolios. Small growth funds led the growth category with an average return of 3.6%.

But the best returns of the quarter came from sector funds, which focus on stocks in a single category or geographic region. Housing bubble or no housing bubble, real-estate portfolios, which invest only in stocks related to real estate, such as real-estate investment trusts and home builders, topped the list. Real-estate funds jumped 13.1% in the quarter alone thanks mostly to the strong performance of REITs.

Every quarter, The Wall Street Journal highlights some of the best-performing mutual funds over the short term and longer term. We usually look at funds over the 12-month and three-year periods. But this time, to add some variety, we took a look at the 10-year time frame instead of the three-year period. The winners include a Latin America fund and a real-estate portfolio. The decade’s champ, though, is a fund that invests only in the smallest of small stocks. All data come from Morningstar. Real-Estate-Sector Funds
Post the Best Returns


Bubble or Bunk?

June Kim and Beth Belton, Business Week, June 22, 2005

Settle in for a long read with John Mauldin’s multi-page musings on the (is it or is it not a) housing bubble, leading to a discussion of “Bad Growth,” and the “Muddle Through Economy.” Skim over his proud crowing about his own way of hedging the housing market and plough through to his explanation of how a 4 percent, 30-year-mortgage and another wave of refinancing are yet on the horizon, which will enable our economy to “muddle through,” until the end of this decade, at least, with deflation the inevitable conclusion.

If that article is too much, refer instead to this more concise (albeit older and less philosophical) piece in Business Week, for a nicely edited collection of interviews on the bubble (or not a,) with economists Frank Nothaft (Freddie Mac), Dean Baker (Center for Economic Research), James Smith (Society of Industrial and Office Realtors), and Mike Englund (Action Economics).


Rod Raynovich – 6-23-05

U.S. Existing Home Sales fall 0.7% in line with expectations

Prices up 12-19% year over year depending on region. Unsold inventory of homes at 4.3 mos.–2.55 million units.

Bubble bubble TOL and trouble-the “Land Banks”

TOL had a blow-off high of 104 on an analyst upgrade last Friday afternoon and has since sold off to the 100 area.
Not to be outdone LEN (Lennar) reported record earnings Tuesday which boosted its stock to 63.45 a new high as well.
The new paradigm being proclaimed is that new housing inventory is only 4.1 mos and PE’s are in the 10 or lower range.
Cramer the CNBC stock picker is one of the new evangelists of housing stocks and proclaims them ‘Land Banks”.
Ebullient analysts proclaim no end to housing, scalable even through a downturn due to “the new demographics”, an endless
food chain of buyers to the sky. With ~5% mortgages sliced and diced anyway you want them (i only, variable, fixed,hybrid,
AND get this Option ARMS) you’d be a fool to rent.
Housing stocks hold fast following Cramer’s rant:

  • HOV 65
  • KBH 73.8
  • PHM 83.7
  • TOL 101.2

Sell housing stocks. Be prepared for “short” signal from technicals or economic event.

The Economist reiterates its warning on bubblicious behavior.
Excerpt:

….”The whole world economy is at risk. The IMF has warned that, just as the upswing in house prices has been a global phenomenon, so any downturn is likely to be synchronised, and thus the effects of it will be shared widely. The housing boom was fun while it lasted, but the biggest increase in wealth in history was largely an illusion.” The danger of a global house-price collapse

More Bubble Talk from Yale Economist Robert Schiller: The Bubble’s New Home

Note in the current issue of Barron’s above two of the panels Faber and Neff have been short housing since the beginning of the year and are down 30% or more.
Even the experts are blind sided by the housing boom. Short positions in TOL are at a record high.

On June 21 Morgan Stanley reiterated their caution on REITS specifically:
UP on CUZ,MAC,PSB
DOWN on TCO,HIW,AIV,ARC,REG,DDR
Comment: “we believe current valuation levels leave it vulnerable to higher Treasury rates….
Check IYR chart….at 63.7…the ETF looks toppy having gone up from 55 in March. Hold on REITS for now.
FRESX 31 ^RMS 826

In the meantime the WSJ on Monday p20 continues to pound away at risks to the economy should the 22 boom markets falter.
The “bubblicious markets” (like Cali, NY, NJ, LV,FLA etc.) now account for 35% of the total housing market. Booming Local Housing Markets Weigh Heavily on Overall Sector

“Bubble buster” Prof. Christopher Thornberg at UCLA continues to talk trash about the housing bubble:

Excerpts from LATimes article:

….The state’s economy has been boosted artificially by increased spending from Californians feeling wealthier thanks to home price rises of 40% in the last two years, the UCLA forecasters said. When those prices stop rising, consumers will rein in spending, possibly triggering a recession, they said.

And it won’t even take home prices to fall, just to flatten out, they said.

“This process will have a detrimental impact on the economy even if prices don’t fall,” UCLA senior economist Christopher Thornberg said.

UCLA economists, among the first to predict the 2001 recession, began to call the housing boom a “bubble” two years ago. That view wasn’t widely shared then.

But lately the bubble belief has gained traction. Federal Reserve Chairman Alan Greenspan earlier this month cited signs of “froth in some local housing markets.”

On Monday, Merrill Lynch added to the bubble concerns, releasing a report that said U.S. economic growth could slow by a full percentage point next year if home prices were to stagnate in the biggest cities.

Merrill Lynch senior economists found that six California markets – San Diego, Inland Empire, Los Angeles, San Francisco, San Jose and Sacramento – were “well in bubble territory” with above-normal ratios of home prices to household incomes…….

See full articles below: UCLA Economists Still See a Bubble in Housing Market


Rod Raynovich – June 17, 2005

Smith Barney Upgrades Housing Stocks

Analyst who downgraded in February upgrades today

Stocks set to roar today KB Home blows out estimates Stocks already up 30-50% for the year etc. etc.etc.

Also from The Street.com another bear throws in the towel: Geoff Johnson


Rod Raynovich – June 17, 2005

I admit it I’m wrong: no housing bubble.
Can I stick with “bubble in the making?”
What the smart money is doing: Waiting for the public to be “all in.”
As my bank teller handled a recent transaction of mine, I noticed the book she was reading between customers: A Beginner’s Guide to Real Estate. Epiphany #1 struck: The real estate investment craze is not about to end, but rather it was about to pick up a new head of steam (or should I say froth). In fact, I now think entire legions of would-be real estate investors are just getting revved up to avenge their bear-market tech-stock losses.

Note to Self: “Shut up already!”
Epiphany #1 begat Epiphany #2: I’ve been wrong about real estate. It may be overvalued, but it’s not a bubble, at least not yet. We’re all wrong pretty regularly in this business and this time I’m wrong. I happily direct my admission to the likes of Cramer, Marcin and others on these pages who have made the no bubble, not yet argument. In fact, the clincher came when I myself got sick of hearing me argue that there was a bubble in real estate.

Sure, I still cling to the argument that housing is a disaster in the making.
However, as long as rates and creative mortgage products permit the ranks of speculators to increase faster than the pitiful lot of honest to goodness homeowners priced out of the market then demand keeps growing. Perhaps already hot markets will fail to see rapid price appreciation due to affordability issues (e.g. California), but other less frothy markets can take up the slack as investors in those locations drive prices up and become a larger portion of the purchaser pie.

Ramping up the percentage of the market controlled by speculators, further driving down affordability and mixing in waves of resetting IO mortgages against a backdrop of a sudden rate shock and then look out below. But we’re not there yet.

Smart money is selling.
If real estate is not a bubble yet can I at least claim it overvalued? In my opinion, yes, and enough so that a bust would have harsh effects, but not what we’d get from a worst-case situation. In fact, as far as overvalued goes, smart money is either scratching their collective head or even selling. As my bank teller prepares to buy I offer a WSJ quote from a chief executive of a high-end condo builder defining prices in his Miami market as “unexplainable” and as in an “area that’s uncharitable.” He’s a seller and I can’t argue with that; frankly, I wish I had some condo inventory to unload. I also recall a couple months back that real estate Pooh-Bah, Sam Zell, was selling off selected properties citing the fully-valued-ness of it all. But “full-valued” is not the same thing as a bubble.

Should the real estate ramp take another leg up I suspect we’ll hear more stories of smart real estate money selling and that same smart money called stupid by the masses. It’s part of any bubble game plan. I’m also watching for more price instability like that seen in the Las Vegas market last year. You may recall that the builders and the speculators got too greedy, ramped prices too quickly and they collapsed briefly. For now the dip buyers came in.

Waiting for the public to be “all in.”
In spite of the media focus on real estate newbies making oodles of cash flipping homes and condos, I actually think there are too many potential real estate investors who still believe they could lose money in real estate; too many who believe real estate still has cycles. I bet my bank teller was one until recently. I think a bubble requires more of the public to be “all in” on real estate and convinced they can only make money.

For example, we need stories not just of the twenty-something who gave up his job to flip real estate, but of his father who was skeptical and derisive of his son, yet has now realized his son was right all along and has plowed his savings into as many homes he could buy with minimum down payments in an effort to catch up. We’re not there yet. Interest rates willing, I bet we get there. However, at this juncture I have been wrong.


Real Estate Juggernaut Rolls On Globally

All the cautionary “bubble talk” ignored by investors

Ray Raynovich June 16, 2005

Housing starts were a tad above 2 million in May slightly below forecast
Multifamily starts were down and mortgage rates remain near all time lows. many experts say that as long as mortgage rates stay in the 5-6% range then there will be no bubble bursting only a decline in appreciation rate to 1-2%.

Nonetheless with forecasts of i only and variable i mortgages increasing to $300bln. in two years and trillions within five years nobody can predict the outcome.

One economist cited housing appreciation over 9 years at 45% above the rate of inflation and rents at record low relative to housing price index as evidence of a “bubble”.

The number of articles on the real estate bubble reached a new high this month(contrary indicator?).

In fact Today’s WSJ front page has an article talking about a Global Boom in Home Prices with So. Africa, China and Spain showing one year increase of 17-28%.
Amid Low Rates, Home Prices Rise Across the Global Village

Brian Bethune of Global Insight said the current backlog of building permits should translate into housing construction moving “at full bore for several more months.”

The Mortgage Bankers Association reported that mortgage applications jumped by 17.4 percent last week from the previous week with mortgages to finance new purchases hitting an all-time high.
Housing stocks roll on squeezing shorts:

  • HOV 64 up 2% , up 26% since April 4
  • TOL 103 up2.5%, up 20% since April 4

High octane performance due in part to high short positions since many MM’s and hedge funds hate these housing stocks. We do not recommend buying these stocks and think it is time to take profits. Eventually housing stocks will be shorts.

REITs more subdued:

  • IYR 64 up .42%, up 15% since April 4
  • RMS 816 up 13% since April 4

We recommend holding (but not buying) REITS.
See attachment.

Issues:

  1. Can pod housing boom go on beyond next six months?
  2. Will FED rate increases begin to affect long rates hence bargain mortgage rates?
  3. Will material costs begin to squeeze homebuilders?
  4. Are REITS overvalued in terms of cash flow since property values are in line?

One of our advisors in the commercial sector has gone bearish. He says more lower end deals are coming to market indicating new supply.
RAG Index dropped from 7.5 to 7.


Real Estate Hype mimics dotcom mania

Front page headlines suggests time to sell housing stocks

Rod Raynovich – June 8, 2005

Bubble Bubble TOL and trouble??

We go with smart money CGM real estate fund manager Ken Heebner and recommend profit taking on housing stocks. There may be another 5-10% upside to go with this sector
but we think it is a good time to trim positions. HOV for example is up about 50% over the past one year period.
PHM (Pulte) shows a double top on the chart. The stocks are selling off today possibly due to a report from the Bush administration on a tad weaker than expected 2005 growth of 3.4% compared to a forecast of 3.5%. HOV TOL and PHM are down about 2% today.

REIT stocks are more stable and we recommend a HOLD but one should closely track the IYR and ^RMS for sell signals.
David Simon of Simon Properties at the REIT conference in NYC says,”The REIT market is a lot less volatile than the housing market”.
Check for news on the REIT conference.


Market blows off “bubble talk” and cautionary comments on housing stocks:… “Up forecast a slam dunk”…..

Prologis/Catellus $3.6 bln. deal sparks REIT equities

Rod Raynovich – June 6, 2005

ProLogis (PLD) the largest owner of warehouse and distribution centers said it would buy rival Catellus Development Corp.(CDX) for $3.6 bln. in cash and stock to expand U.S. holdings. CDX was up $3.75 today to $32.
With long term money paying way under 5%, REITS are hot.

Big Deal: Last Thursday a consortium led by the Canada Pension Plan Investment Board and Brookfield Partners agreed to buy O&Y Properties and a related REIT for about $880 mil.

In a recent WSJ article by Yale Economist Robert Schiller on June 2 noted that Home price increases have been getting stronger each year.

The Case Schiller home price Index rose as follows:
2,1% in ’97,5.4% in ’98,5.4% in ’99,5.8% in ’00,5.8% in’01,8.1% in ’02 8.5% in ’03 and 11.2% in ’04..

It is even more striking in cities such as LA. The article goes into detail, pros and cons,of the mass psychological phenomenon known as the bubble with the usual talk that real estate markets are psychological but dependent on low i rates. People Are Talking…

With 10 Year treasury bond yields under 4% and mortgage rates in the low 5% range the real estate investment boom is likely to continue despite the FED headwind.

Today on CNBC “bubblevision” Ken Heebner a manager of the CGM realty Fund cautioned on housing stocks saying he has sold TOL and HOV positions.
Heebner feels the Jumbo Loan market is the Wild West of lending and i rate only loans with little or nothing down will shake out the high end of the market.
The CGM Realty Fund is up 36% for the year, 31% annually for 3 years and 20.4% over 10 years. The fund has an “A” rating compared to comparable funds.

A local long time home builder in Manhattan Beach cautioned,
“Things are getting too aggressive so I am laying back. Liability for builders is high and can go on for ten years.
A lot of multimillion dollar homes are being built for speculation because of cheap i only money. They figger make a quick $500k in nine mos. I’m tired of these “in your face investors” with their black Mercedes 600 series telling me what to do.”

Housing stocks ignored the anxious chat and were up 1% or more today:

  • HOV up 1.47% at 61.4
  • TOL up .74% at 95
  • IYR REIT Index up .98% at 125

REITS are up about 10% since early April and housing stocks are up 18%.
Our Advisory Group says no change with a bullish 7+.