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Thursday, October 22, 2009

Housing 2009

housing 2009Year of Transition

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Housing 2009


real estate marketThe huge glut of vacant, unsold builder inventory across the nation is almost completely gone. National builders and bank asset managers discounted the existing new homes until the specs were sold, often at huge losses. The land-bank accumulated by anxious builders for future development and sales is virtually gone. The greed driving more and more development gave way to fear of a spinning interest meter attached to the income-depleting vacant land. Unfortunately for most, it was 12 months too late.

The third and fourth quarters of 2008 devastated many local and national builders as the recession took hold and Wall Street disintegrated. Bear Stearns, then Merrill Lynch, and finally Lehman Brothers were effectively dissolved, causing panic as the stock market declined and the Federal Reserve Chairman and Secretary of the Treasury begged for funds. Thousands of speculators and home-buyers refused to close on new home purchases, and walked away from earnest money and deposits held by builders. The inventory of finished homes burned through fully phased construction loans, and that coupled with depleted and fearful banks unwilling to extend lifesaving lines of credit, were the death knell for under-capitalized and over-extended builders.

In many cases, lenders needed to repatriate the funds from individual new home closings, and demanded all the proceeds to clear the title and to reduce debt on other lines of credit. The fear of loss overcame greed for lucrative fees and interest charges; lenders protected their loans. Many builders were left with no proceeds to continue operating, and were left with no choice but to close the operation. Tradesman, suppliers, superintendents, sales and office staff, as well as owners and directors lost jobs and positions. The fear of expanding capital loss drove banks and lenders to acquire unsold inventory in an unfriendly environment. Primary lenders received partial re-payment, and those further downstream received nothing, resulting in many suppliers and sub-contractors facing financial difficulty. In true "trickle down" fashion, losses mounted.

"Greed gave way to fear!"

In an attempt to anticipate future growth and development, expensive land holdings were acquired during the greedy years of 2005-2007. Many national builders recognized the potential devastation inherent in their leveraged land banks and liquidated early into the down cycle. Some builders refused to sell their holdings, but eventually their lenders sold at huge losses, often for less than the development costs. As the de-leveraging reached crescendo, anyone over-encumbered was financially swept away. Greed gave way to fear!

The financial storm seems to be passing. Fears of a double dip or "W-shaped" recession are not materializing. There has been much damage done to the economy, and there is a huge clean up underway. Unemployment will be high for the next 12 months, but should start to decrease by the spring of 2010. The trillions of dollars earmarked for the recovery have not been fully deployed, and as the capital enters the economy, there should be a very noticeable improvement... possibly soon.

"...the supply of bank foreclosures should dwindle to a trickle, and the financial storm will have been reduced to showers from an epic hurricane."

The surviving home building companies have written down balance sheets and incurred huge losses. They are different organizations now than a mere 12 months ago. They will encounter far less competition going forward. They will have better sub-contractors because the inferior companies are no more, and the surviving builders will get better service and better pricing. New land acquisition will be at a much-reduced cost basis, and lower interest rates will reduce holding costs. Possibly within the next 12-18 months, the supply of bank foreclosures should dwindle to a trickle, and the financial storm will have been reduced to showers from an epic hurricane.

The natural growth of the US population will likely seed pent up demand for new homes; cautious and wiser builders may start to grow again and be profitable. The markets appear to be normalizing; the new business cycle is starting. The cycle will again swing from fear back to greed, but hopefully our experience with excess leverage will not be soon forgotten; nor the ugly face of fear!

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7 Comments:

Anonymous Anonymous said...

All good points about builders

But I disagree on recovery overall

Commercial real estate and credit card losses are looming, presently marked ficticiously on balance sheets

Banks still are not lending, small businesses not borrowing, ...no top line growth

There is no such thing as a joblesss recovery

3:43 PM  
Blogger kocho said...

FNM and FRE returning to normal is crucial to housing recovery! FRE will come up with good earnings report second in row. As of today they sold 220 B worth of paper this year alone! Housing stimulus with proping up credit supply tru local housing finance agencies and ownership subsidy are good strategies ..

4:17 PM  
Anonymous Anonymous said...

This is an interesting point of view, but I think the outlook for house builders is way too rosy and the time line is greatly compressed. We still have hundreds of thousands of underwater mortgages, ARMs of various kinds and underemployment for many in our future. The peak of ARM resets is still ahead. There is still a large amount of shadow inventory along with people wanting to sell, but waiting for prices to improve. We are not at the bottom yet, and when we are we are going to bump along for quite a while.

9:25 PM  
Blogger Unknown said...

This article has a rosy outlook with a compressed time line. The peak of ARM resets is still in the future. Hose builders have done a good job of selling standing inventory, but they still have developed lots and the debt that they incurred to get them. Every sale is a loss, but the debt must be serviced.

db

10:49 AM  
Anonymous Anonymous said...

What are your thoughts regarding this: http://bespokeinvest.typepad.com/bespoke/2009/10/groundhog-day-september-vs-october.html

5:36 PM  
Anonymous Anonymous said...

Congatulations on the excellent well thought-out comments!!

Commercial loans are still being worked out with heavy losses yet to come. However, the commercial properties are much better capitalized with typical loans carrying a 75% LTV and much better borrowers; many with additional assets supporting the projects. The problem for many commercial projects is not the cash flow for debt service, but rather the appraised value which in many instances is lower than the previous. Most lenders require a 75% LTV to re-cast the loan requiring property owners to bring in additional funds, sometimes substantial additional funds, to close the loan. This is a hardship. A typical commercial loan has a term of 5 years then is re-financed; those bought in the 2004-2005 are coming due. When asset prices are the problem, then asset prices will be the solution forecasting possible future inflation.

Residential properties are due to re-set; in my opinion, the Federal Reserve is caught in a bind; not only is the economy in the beginning stage of recovery, but the typical ARM is indexed to either the LIBOR or the 1 Year Treasury Index which the Fed controls. At current short term rates of less than.5% for the One Year Treasury Index, the loans
will re-set under 4%; a manageable payment. Partly for this reason,I believe the short term rates will remain low through most of 2010 giving a strong boost to the economy as well as setting the stage for future higher inflation.

The Supply-Demand equation is also becoming out of balance. Every 11 seconds an additional American is added to our population; over 3,000,000 per year. With 2.3 Americans per household that is well over 1,000,000 new dwellings needed to accomodate the demand. The US has fallen far short of that last year accounting for the excess inventory absorption; additionally, this year will also be in the 450-500,000 unit range. A pent-up demand is being created which should be very evident when unemployment starts to fall which should be in the 2nd or 3rd quarter of 2010. The new cycle has just begun; it is only a few months old. Business owners would want to wait until the cycle is firmly underway before hiring additional staff. For this reason, employment is a lagging indicator.

Regards,

Michael Douville

3:11 PM  
Anonymous real estate agent said...

Hmm...this topic is more difficult as it could seem at the first site. No one of us can predict or just guess how this trend is going to develop.
I really don't agree with koho that stimulus which should be provided through local finance agencies is a "good" strategy...I have real feeling that money than will disappear in some big black hole...
Julie

2:58 PM  

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