Builder Confidence Soars – Don’t Believe the Hype

The National Association of Home Builders (NAHB) today reported its Housing Market Index (HMI) for the month of June, and it marked an important shift. For the first time since falling under the break-even mark of 50.0 at the start of the real estate collapse, the HMI rose back above it today. However, a closer look at the data shows it remains suspect and unreliable as a forecasting tool.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Builder Confidence

The HMI surged 8 points, rising to a mark of 52 for June. The last time it rose that much was in 2002, so this is strange to begin with. It’s the first time the index sat above breakeven since April 2006. Each of the three components of the index increased, though take note of the much lower level of the index measuring actual prospective buyer traffic. I view both the other two metrics as being speculative in nature or prospective, but the “prospective buyer traffic” figure actually accounts for what builders are really seeing in terms of activity. The current sales conditions index is measuring sentiment about “conditions,” not sales.

	June Level	June Change
Housing Market Index	52	+8
Current Sales Conditions	56	+8
Expectations Index	61	+9
Prospective Buyer Traffic	40	+7

Regionally speaking, the component indexes seem to say builders are buyers into the “grass is greener” philosophy. Because, when measuring their own operating regions, it seems they’re not seeing the best of circumstances. Otherwise, explain why each regional index sits under 50 while the national measure is above it.

	June Level	June Change
Northeast	37	+1
Midwest	47	+3
South	46	+4
West	48	-1

Builder confidence gained on what the NAHB chairman said was a lack of inventory in the existing home market. That’s a positive way to look at it from a biased industry viewpoint, but I see something else catalyzing the sudden surge. Builders are just coming out of the spring selling season, where business is generally better than the rest of the year. Also, they’ve likely seen some buyers pushed into action on the sudden surge in mortgage rates recently. However, I disagree, as I do not see that happening based on the real mortgage activity data; in fact I see the opposite occurring. Last week’s increase in mortgage activity was a flawed data point in my opinion. Anyway, activity driven by rising rates would be from the buyers on the fence, of which the number is limited. So such a surge would not be sustainable, and would not be driven by underlying economic catalyst, but instead by fear of missing the opportunity.

Housing stocks surged today on the news, but I do not see a good enough reason for it here.

Housing Security	6/17/13 thru Noon	52-Weeks
SPDR S&P Homebuilders (NYSE: XHB)	+1.9%	+55%
iShares Dow US Real Estate (NYSE: IYR)	+0.1%	+9%
PulteGroup (NYSE: PHM)	+3.6%	+140%
K.B. Home (NYSE: KBH)	+3.2%	+180%
D.R. Horton (NYSE: DHI)	+2.6%	+54%
Toll Brothers (NYSE: TOL)	+3.8%	+35%
Hovnanian (NYSE: HOV)	+2.6%	+158%
Beazer Homes (NYSE: BZH)	+2.7%	+53%
Lennar (NYSE: LEN)	+1.7%	+53%

Let’s not forget that the index is only at about breakeven, and that the perspectives of a large number of smaller builders surveyed is keeping it down. It’s the larger builders, who have gained market share on the failures of the smaller players, who have benefited most from the crisis shakeout. That is behind their numbers as much as anything else, because the general levels of activity, while improving, is not all that great yet. In any event, these stocks have had a great run, but they are probably extended and still vulnerable here.

The economy is slipping currently, in my view, and mortgage rates are moving in the wrong direction too quickly. This week, the Fed had better fix the mess it created in mid-May, or mortgage rates will continue rising and potentially derail the real estate recovery.

In conclusion, there is enough suspect data in the HMI to question the message that is being received by housing stocks today. With the Fed meeting being the obvious determining factor this week, I’m not buying housing stocks on this news, and recommend investors wait a few days before placing bets. We need the Fed to cut its economic forecast and hedge on its recent hawkish commentary, so mortgage rates will back up and the real estate recovery will be secured.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Phoenix Real Estate Investors: Time to Take Profits

Let’s step back 4 years to a time when the “Great Recession” was in full force and Phoenix, Arizona had fallen from the #1 builder market in the United States to one of the worst MSA’s (Metropolitan Statistical Area) in the nation. The Metro Phoenix Builder Community had completed over 60,000 new homes in 2006, a record year. Builders in October 2008 had thousands of finished homes completed and ready for delivery when “The Lehman Moment” changed everything.

Phoenix Real Estate

Builders, including major companies like PulteGroup (NYSE: PHM), D.R. Horton (NYSE: DHI) and K.B. Home (NYSE: KBH), had a cascade of buyers refusing to close and their finished homes became “Specs Available,” or expensive inventory on short-term construction notes that would eventually no longer belong to the builder, but become Real Estate Owned (REO) of many local and national lenders like Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC) and J.P. Morgan Chase (NYSE: JPM). The Arizona Regional Multiple Listing Service (ARMLS) listed a low of less than 6000 available properties in 2005 to a ballooning inventory of over 59,700 properties for sale and 9800 properties for lease in late 2008. The housing industry in Phoenix was in a depression with a glut of new and existing homes.

To exasperate the problem, over 300,000 individuals working in or connected to housing and new construction left the Valley of the Sun in search of other employment. In Phoenix almost everyone was connected to housing, which included the obvious roofers and framers, but also title and escrow officers, loan officers and loan underwriters, thousands of real estate agents and brokerage houses, surveyors, and the not so obvious furniture , electronic, decorating centers, and even movers. Tens of thousands lost their jobs and most had their income severally curtailed. The loss of business was felt everywhere in Metro Phoenix. Incomes and available capital were declining while underwriting standards for new loans was rising and excluding buyer after buyer. Phoenix had crashed and was burning.

As with any commodity, the law of supply and demand dictated terms in the market place, and the over-inflated prices tumbled past fair value to in some instances 50-60% below replacement costs. As costs declined, the over-valued status of Phoenix changed to an under-valued market, and then to an extremely undervalued market. Many local business people and employees alike were experiencing the loss of income, and many local homeowners were burning through their savings and capital to pay monthly expenses. Eventually, many depleted entire nest eggs while their real estate wealth evaporated as prices declined well below mortgage values, condemning them to future foreclosure or short sale. Incomes, down payments, and then credit issues excluded many potential buyers and shrunk the buying population, further reducing demand. The cleansing process is brutal, but necessary in the business cycle, and the excesses needed to be removed in order for the eventual recovery. Prices plummeted to ridiculous levels because there were very few buyers. Enter the original courageous and foresighted investors.

Everyone knew buying real estate was a very bad idea; however, the properties were priced below cost, and if unemotionally approached, were very compelling. Further, rental rates had declined about 15%, but properties had dropped 60-70%. Although rental rates were lower, the acquisition cost was much lower. So were operating expenses including: repairs, insurance costs, taxes, and long-term mortgage rates. Rents for the now distressed and depressed properties purchased at much lower prices were cash yielding investments. The gut wrenching declines, the turmoil of speculators buying high to sell higher, and the builders and developers caught in the final capitulation doomed the average homeowner. The simple indicators of value: Own vs. Rent; the Gross Rent Multiplier; and the Affordability Indexes all shifted wildly from indicating an overbought market to a hugely undervalued one. Cash flows began to yield 9-15%.

Much of the buying public had already purchased in the frantic years of 2004 to 2007 and was trapped in underwater homes. There was a void in the buying pool. Prices and returns were exceptionally compelling as a result. My recommendation for several years has been unabashedly bullish. Investors in Phoenix have helped clear the inventory and pave the way for a fresh set of homebuyers to replace the rental homes with owner occupied. Former homeowners that liquidated their properties via the short sale process are becoming eligible once again to purchase.

As demand began to enter the Phoenix market, prices rose steadily and have recovered a portion of the decline. Many early investors have seen cash purchases double and those that assumed more risk with leverage have realized huge capital gains as well as monthly cash flows in the range of 5% on cash to over 8%+ levered. The investment in Phoenix real estate has been exceptionally profitable. It may be time to take some profits now, and those properties not sold should be evaluated for long-term mortgages.

Real estate is local; however, real estate is economically sensitive. The economy may be heading for difficult times and if the economy enters a recession as Charles Nenner and the Economic Cycle Research Institute (ECRI) predict, and as our site's founder warns is highly possible, a better buying opportunity awaits just a few years away.

A specifically aggressive, but overall cautious approach may be the appropriate theme for the foreseeable future. A good price on a good property is usually profitable, but the low hanging fruit has been picked and much of the recovery is priced in current values. Low long-term rates indicate more potential for future capital gains, but rental rates are stabilizing indicating a normalization of rental growth rates. Some properties are gems and should be kept for the long-term; marginal properties may be considered for liquidation.

In 2006, I reviewed the market dynamics with my clients and advocated selling as I believed the direction of the market was down. Enormous profits had been gained. Most did not heed my advice and in fairness, I was 9 months early to the peak. Now once again enormous profits have been gained; my advice is to take some profits.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Higher Rates Exposing Underlying Housing Weakness

By The Greek:

For three straight weeks now, mortgage activity has been on the downslide and we cannot ignore it any longer. It illustrates how sensitive the housing market is to low interest rates and how vulnerable the housing recovery still is to disruption.

The Mortgage Bankers Association (MBA) reported its Weekly Applications Survey for the period ending May 24, 2013 on Wednesday. The MBA’s Market Composite Index collapsed by another 8.8% on a seasonally adjusted basis in the latest period, after dropping by 9.8% last week and 7.3% the week before that. Activity declined in mortgage refinancing activity and in mortgage activity tied to the purchases of homes over the three week period, though purchase activity improved in the latest week.

Week of	Market Composite	Repurchase Index	Purchase Index
May 24	-8.8%	-12%	+3.0%
May 17	-9.8%	-12%	-3.0%
May 10	-7.3%	-8.0%	-4.0%

Yet, you hardly hear whimper of it from the popular press and major media. News of this developing situation has not really reached the masses yet. Recent tests of the shares of mortgage bankers and homebuilders instead reflect the latest market uproar about potential Federal Reserve tapering of its dovish monetary policies. Well, that potential tapering would lead to higher mortgage rates, and that is precisely what is stalling activity here. So investors in real estate, and in the shares of the real estate complex, including of course mortgage bankers and homebuilders should be concerned. This is the issue impacting shares of the housing complex on Wednesday. Banks have strangely avoided the day’s demise, but as investors connect the dots, I expect we will also see concern reflected in finance, as it was on the relatively similar Fed flurry.

Company	Wednesday
Bank of America (NYSE: BAC)	+1.0%
Citigroup (NYSE: C)	+0.9%
Wells Fargo (NYSE: WFC)	+0.6%
PulteGroup (NYSE: PHM)	-3.3%
K.B. Home (NYSE: KBH)	-2.9%
Hovnanian (NYSE: HOV)	-1.8%
Radian Group (NYSE: RDN)	-1.9%
MGIC Investment (NYSE: MTG)	-4.2%

Just look at how much mortgage rates have increased over the last three weeks.

Mortgage Loan	May 24	May 17	May 10
30-Yr. Fixed Conforming	3.9%	3.78%	3.67%
30-Yr. Fixed Jumbo	4.07%	3.93%	3.87%
30-Yr. Fixed FHA Spons.	3.62%	3.53%	3.43%

If housing is so sensitive to synthetically lowered rates, it must reflect an economic reality that differs from what investors seem to see. It reflects a real unemployment level nearer to 12% than 7.5%, and the reality of 7.5 million unaccounted for jobless Americans. Some will say this issue is temporary, and simply reflects real estate investors holding off in the short-term for better rates. Only time will tell the truth, but put this on your radar nonetheless, and stay tuned, as your author here intends to keep a tap to this data.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Real Estate Spring Selling Season

Real estate enthusiasts are well aware of the seasonal strength usually seen in the business in the springtime. However, so far this season it’s been hard to find sign of a spring fling, save perhaps in the performance of the iShares Dow Jones US Real Estate ETF (NYSE: IYR), up 16% year-to-date through May 8. As far as real estate data is concerned, we have seen only weak indications of better activity thus far. Perhaps the most compelling evidence so far came this past Wednesday, but it was a questionable sign at that. Real estate remains in need of confirmation from its monthly measurements. Thus, it is still premature to say whether housing is ready to shift into a higher gear yet, especially considering the latest industry data and recent economic realities.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Housing Spring Selling Season

Reported last week, the Pending Home Sales Index edged up 1.5% in March, which was better than the 0.7% increase expected by economists. However, March’s growth was also lifted as a result of its comparison with a downward revised prior month change, which was revised to -1.0% from -0.4%. Excluding the effect of the revision, the growth was nothing to write home about. The Pending Home Sales Index is an important leading indicator, offering insight into activity in the existing home market. It measures contract signings, not closings, which are measured by the Existing Home Sales Index.

Last reported for the month of March, the Existing Home Sales Index slipped in its annual pace to 4.92 million from 4.95 million the month before. While still representing a 10.3% increase year-to-year, the monthly result offered no sign of a spring pickup either. Neither did the latest New Home Sales Index offer much sign of anything special. The New Home Sales Index edged up in March to an annual pace of 417K, up from 411K in February, but it fell short of economists’ consensus expectations for a sales pace of 419K.

The new home market did find some inspiration in the last reported Housing Starts Report, but it was false inspiration. The report showed the annual pace of housing starts broke a million, reaching 1.036 million in March, versus 968K the month before. Unfortunately, the increase was all on multi-family construction projects, where many can be attributed to rental property construction. That is not really good news for the broad real estate market. The annual pace of starts for single-family projects actually decreased in the period and the pace of permitting fell as well, deflating the data-point’s impact on housing stocks like PulteGroup (NYSE: PHM), Toll Brothers (NYSE: TOL), Hovnanian (NYSE: HOV) and K.B. Home (NYSE: KBH).

Up until now, we have been discussing March, however, mortgage activity increased in the much more recent week ending May 3, according to the Mortgage Bankers Association (MBA). The MBA reported Wednesday morning that its Market Composite Index climbed a steep 7.0% through the period, driven by both refinancing activity and applications tied to home purchases. The MBA’s Purchase Index, measuring activity tied to home acquisitions, increased 2% on a seasonally adjusted basis. The index actually rose to its highest point since May of 2010, which is very encouraging. The shares of Bank of America (NYSE: BAC), Citigroup (NYSE: C), J.P. Morgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC), major mortgage lenders, gained sharply on the day, at least partly due to this information.

Indicating that something else may also be at play, the MBA’s Refinance Index gained 8% against the previous week, rising to its highest point since December of 2012. Still, it’s not as if severely lower mortgage rates catalyzed the change, as the effective rates for conforming and FHA sponsored loan balances actually increased through the period, while other loan types moderated slightly. However, the latest jobs report, which was widely seen as positive for the economy, may have helped some people on the fence to move forward faster out of concern that mortgage rates could move higher on an improved economic outlook.

Thus, it may be that seasonal spring strength could kick in now for real estate. The mortgage data just discussed is fresher than the information provided by the monthly housing data, which mostly covered March. However, if evidence of intensified activity does not begin to show up in the monthly data for April or May, it would understandably be due to a U.S. economy that remains heavily burdened by unaccounted for unemployment and other domestic and external forces, including Europe. Those forces could very well continue to drag on the real estate recovery, which is still also working through its own inventory issues and operating in an altered financing environment. In any event, I see real estate in most markets and classification segments as offering a special opportunity now, whether the economy gains more traction in the near-term or not. See more on real estate and other investing topics at the Wall Street Greek blog.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.