Put Stock Profits to Use in Real Estate

This sounds sooo self serving! However, profits from virtually all stock indices have been absolutely outstanding. It may very well be time to take some of those gains and diversify into a separate asset class. As a very active Real Estate Broker, my clients’ greatest mistake in the huge run-up in 2005 was not heeding advice to “take some off the table” believing the mercuric rise would continue indefinitely. It was a display of pure GREED! Although stocks climb a wall of worry, the red flags gathering seem to show we are beginning to approach much more than a wall. Rather, it may be more like the small rise before the edge of a canyon cliff!

Decisions are difficult to make without the clarity of solid information and the confusion from differing sources. For instance, the January employment numbers showed 129,000 (revised) new jobs, which was above the revised 84,000 jobs added in December, though neither was robust! It conflicted with the Household Survey implication that 616,000 new jobs were created in the economy, which would be euphoric.

It’s a statistical anomaly, though, as John Hussman explains. January is a Bureau of Labor Statistics adjustment month. The increase of 523,000 people in the US labor pool skews the January numbers. John Hussman further explains that it is not unusual as two prior ominous times easily illustrate:

1. In January 2000, household employment figures jumped by 2,036,000 jobs.
2. In 2003, they jumped by 871,000.

The Main Stream Media failed to discuss this very relevant statistical adjustment implying a huge explosion in employment. Employment is soft at best. Hours worked continues to decline. GDP has declined to under 2%. The Federal Reserve is still committed to its asset purchase tapering. Capex spending is stagnant, and the credit markets continue to shrink. Civil unrest globally is rising and several nations are on default watch. The markets may continue to rise, but cash flowing assets will be valuable in whatever environment prevails.

This is the self serving part
I am not advocating new money, but a transfer of funds from one risk asset to another. It is time to buy conservative cash flowing real estate to preserve an income stream against volatile or declining stocks.

Real estate is long-term, generally 5 years or greater. Although subject to declines in value, as any financial asset is, any decline should be less severe than the bubble years of 2004-2006, and would probably be contained to well less than 20%. Further, high quality rental properties such as Class B apartment units or well located single family homes will probably fair even better. The huge population of former homeowners who have lost properties through the foreclosure process or short sales will become eligible to purchase again in the next few years as their financing penalty period expires. This will cause pent-up demand to be unleashed. This should drive the next cycle starting in 2016 as I see it. These former owners, plus the annual increase in household formations, will fill the available rentals. Should one of the red flags around the world cause a disruption to securities markets, these rentals will continue to flow cash.

Not all real estate will be suitable, and consultations with Tax Advisors, Financial Planners, and a good RE Broker is advisable. Retail may be very negatively impacted, as it is subject to both changes in the economy and changes in marketing and sales via the Internet. Medical, entertainment venues, properties with Class “A” tenants and some government entities such as the IRS will probably qualify as strategic real estate, and should also provide dependable cash flow. Conservative long-term financing may be appropriate, as there are many models forecasting much higher rates in just a few years. Current rates may look extremely attractive in the next cycle.

It may be time to become a little more conservative. Good to excellent properties that are real tangible assets with cash flow components should be very dependable. They will have the flexibility to adjust to conditions, and should perform well in good markets and maintain an income stream during bad markets. That will help mitigate downturns in equities and a downturn in general business conditions. This strategy will keep cash flowing into accounts when perhaps all others have stopped. As always, my best to you all.

This article should interest investors in iShares US Real Estate (NYSE: IYR), SPDR S&P Homebuilders (NYSE: XHB), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), Citigroup (NYSE: C), J.P. Morgan Chase (NYSE: JPM), US Bancorp (NYSE: USB), Pultegroup (NYSE: PHM), K.B. Home (NYSE: KBH), Toll Brothers (NYSE: TOL), Annaly Capital (NYSE: NLY), American Capital Agency (Nasdaq: AGNC).

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 Slip - It's Just the Weather

So often when things do not go by design we’ll hear those responsible blame it on the weather. You know what I’m talking about, because you are hearing about it in conference calls as we speak. But as far as the latest slip in real estate goes, I believe it really is the weather this time that is slowing things down. So, as real estate relative stocks get cheaper, I suggest you not fret and rather consider it a buying opportunity generally.

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.

Real Estate

Real Estate Relative Security	Year-to-Date	Last 12 Months
iShares US Real Estate (NYSE: IYR)	+4.4%	-3.1%
SPDR S&P Homebuilders (NYSE: XHB)	-3.9%	+12.6%
Wells Fargo (NYSE: WFC)	-0.1%	+30.1%
American Capital Agency (Nasdaq: AGNC)	+13.9%	-31.6%
MGIC Investment (NYSE: MTG)	+0.1%	+207%
PulteGroup (NYSE: PHM)	-2.8%	+1.7%

As you can see via the table here, for the most part, real estate relative stocks have come under pressure so far this year, save this past Friday’s burst higher. Whether it be the major mortgage lenders like Wells Fargo (NYSE: WFC) and Bank of America (NYSE: BAC), mortgage insurers like MGIC Investment (NYSE: MTG) or homebuilders, the stocks of companies in the sector have mostly been lower this year. The chart above shows the SPDR S&P Homebuilders (NYSE: XHB) leading the downtrodden. Now, there are exceptions of course.

For instance, in the case of the mortgage REITs like American Capital Agency (Nasdaq: AGNC), where 2013 was a pure nightmare, capital is now seeking shares of deeply discounted stocks as a safe haven to protect capital gains made elsewhere last year. American Capital Agency and Annaly Capital (NYSE: NLY) are also benefiting from what I see as a Goldilocks sort of Fed and economic environment today for them. Now, I recently wrote that mREITs are losing their safe haven appeal, but that is mainly because of the distress seen in real estate data lately. As a result, until investors come along to my way of thinking about this seasonal issue I’m discussing here, NLY and AGNC may still soften. Though Friday’s trading seems to illustrate an epiphany like what I’m discussing. The performance of the IYR has also been anomalous, I believe because rents and property values are still rising.

Housing Data Has Been Soft

Economic Report	Recent Result	Economists’ Est.	Prior Result
Pending Home Sales (Dec.)	-8.7%	-0.5%	-0.3%
New Home Sales (Dec.)	414K	450K	445K
Existing Home Sales (Dec.)	4.87 Mln.	4.9M	4.82M
Housing Starts (Dec.)	999K	985K	1.107M

There’s no doubting December’s weakness in housing, and when reported January should be even worse because the forward looking data has indicated so. For instance, while Existing Home Sales actually improved modestly from November to December, Pending Home Sales data shows existing home sales will run into a road block in January. The same goes for New Home Sales, though the annual pace of those dropped dramatically in December. Housing Starts data, which is a forward looking indicator for the new home market, slipped from November. Even worse, the pace of permits issued, which is a forward looking figure for future starts, fell to 986K from a pace of 1.017 million in November.

I believe the weather is the culprit behind this real estate slowdown, despite some economic data indicating there could also be a slowing in economic activity. That is also likely weather affected in my view. My reasoning is simple, and was recently verified by a reporting agency as well, when weather was blamed for the deep drop in Pending Home Sales.

While the data reporters make seasonal adjustments to these figures, this winter has been extraordinary. The seasonal adjustments made to data account for the average impact of the seasonal period. Therefore, this year’s extraordinary winter is likely impacting data more than the adjustments compensate for. Just look at the facts about the weather and you’ll see why I believe this is true. There were 4,406 record cold temperatures set across the U.S. in January and 1,073 snowfall records.

1-Month Chart at Yahoo Finance

Obviously, when record cold temperatures are plaguing the nation and snowfall is far above average, consumer activity is going to slow as Americans bunker down and wait out the bad weather. So never fear real estate relative investors, and get ready to buy again once investors start to come in line with our way of thinking about this temporary weather issue. That spring selling season could literally spring these stocks sharply higher in short time and Friday’s market performance may have offered the first green shoot.

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.

Did Home Builders Just Warn Us of Trouble?

The National Association of Home Builders (NAHB) released its Housing Market Index (HMI) on Thursday. The builder’s group would have you believe that everything is hunky dory in housing, except for complaints about materials costs and foreclosure afflicted appraisal values, but the fact is that the HMI measured lower in January than it did in December. I’m a believer that change matters, and so we have to wonder if the lower result, however small the change, portends new trouble in real estate.

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 Market Index

The HMI fell in January to 56 from the revised December reading of 57 (58 at initial reporting). Now, readings over 50 still signify that more builders view things optimistically than pessimistically today, so it’s a good thing. However, a drop in the level of overall confidence may say something else. It indicates that some builders view things a little less positively currently than they did last month. Add that information to data dips in other metrics over recent months and we form a question, a question about the stability of the real estate recovery.

All three HMI components fell in January:

• Current Sales Index fell 1 point to 62
• Future Sales Index fell 2 points to 60
• Prospective Traffic Index fell 3 points to 40

The NAHB quotes a 3-month moving average for its regional reporting, which of course will mask whatever happened in the last third of that period. It only makes me worry a bit more about exactly what the month’s data would have shown.

Three month moving average for regions:

• Northeast +4 points to 42
• West +4 points to 63
• South unchanged at 56
• Midwest -1 point to 58

The one-day chart for Thursday shows that after the 10:00 AM ET release of the data, home builder shares broadly fell. However, by the close of the day they had recovered. Builder’s shares have not fared so well this year, though, and many are questioning whether they have priced in a better real estate recovery than is today’s reality.

Home Builder Shares	Year-to-Date
SPDR S&P Homebuilders (NYSE: XHB)	-3.1%
PulteGroup (NYSE: PHM)	-3.3%
K.B. Home (NYSE: KBH)	-1.4%
D.R. Horton (NYSE: DHI)	-1.5%
Toll Brothers (NYSE: TOL)	-2.0%
Hovnanian (NYSE: HOV)	-8.0%
Beazer Homes (NYSE: BZH)	-7.8%

Other real estate data points have recently shown a stumble for the sector as well. We talked about the October lull in the Pending Home Sales Index in a previous article; it was attributed to the government shutdown and debt ceiling debacle. In that report, we also noted that construction spending had declined in October within the private sector. Fear of Fed taper was also relevant at the time, so we looked for a temporary excuse on that issue as well.

We thought that perhaps home builder sentiment might just be lagging this information, but this morning, Housing Starts data showed the annual pace declined to 999K in December, from 1.107 million in November. Permits declined as well, to 986K from 1.017 million. Looking back a bit further, New Home Sales drifted in November to a pace of 464K, down from 474K. Existing Home Sales likewise declined in November, to an annual pace of 4.9 million, from 5.12 million. And we just debunked the supposed positive news reported this week about mortgage activity.

So, perhaps the dip in home builder sentiment is relevant, however slight it may be, since there are signs of issue in other data points. That’s not to mention the year-to-date price action in the home builder shares, which seems to also reflect trouble ahead. My colleague and real expert at my own blog, Arizona’s Michael Douville, just posted an extremely pessimistic real estate forecast for 2014. It was so negative that it put me on edge, yet he still suggests investment, though in a strategic manner in anticipation of tougher times. Given all the subtle signs and my colleague’s warning, perhaps home builders are also offering us an early indicator that we should take heed of.

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.

Strategic Real Estate in 2014

There is no clarity only confusion in the economy. The unemploy- ment rate is heralded at 6.7%, yet the percentage employed of the entire working age population is at a historic low. Fewer people are working, yet the rate of unemployment declines! The stock market has exploded to new highs, yet 75% of the gains are from P/E multiple expansion and not profit growth. Further, household income, hours worked, and the all important GDP have all declined significantly while securities march to record highs. The number of food stamp recipients has nearly doubled in the last decade with almost 50 million people on SNAP. Almost 50% of the American population receives some sort of government assistance, and student loans have risen to over one trillion dollars. These obligations, along with the new Obamacare debacle, attempting to force some families into higher premium insurance policies, do not forecast a robust economy. It is time to reexamine portfolio holdings. The possibility of a recession, possibly a severe recession is climbing; since World War II the average expansion is thought to last about 44.8 months and it has been 57 months since March of 2009!

2014 Real Estate Forecast

In past posts, the recommendation has been to raise cash by liquidating marginal properties. Should a recession begin, the length can be from 11 to 43 months with the extreme during The Great Depression. A new downturn could be the 2nd leg of the Financial Crisis, as predicted by Reinhart and Rogoff in their work This Time Is Different: Eight Centuries of Financial Folly, where the colossal excesses of the debt cycle are finally corrected. Many economists believe the recession was only interrupted by the Federal Reserve’s flooding of the marketplaces with, as former Congressman Alan Grayson reports, up to $26 trillion. This may be a very volatile time and if The Great Recession can be used as a guide, most asset classes will be dramatically affected. The central banks of the world have already used most of their ammunition to force the global economy to escape velocity, but the economies of the world are heading to stall speed. The Federal Reserve is using untested methods, with its quantitative easing of $85 billion a month in Treasury and Mortgage-Backed Securities purchases, in its attempts to raise the inflation rate to beyond 2%. The Personal Consumption Expenditures Index (PCE) is at 1.2% and declining, stubbornly resisting the Fed’s efforts. All this enormous liquidity and capital added to the financial system, and yet inflation refuses to ignite; the forces of deflation must be gargantuan! Cash flow will be a very valued item!

Should the world enter another recession, real estate investors need to focus on 2017 and beyond where an enormous buying opportunity will be presented; an opportunity of generational proportions. Surviving intact will be paramount to investors, and strategic real estate may be one of the lifeboats. Strategic real estate will provide the cash flow that is absolutely necessary to survive a difficult economic environment, as yield will become increasingly scarce. Strategic real estate needs to have low or no debt, and if encumbered, any balloon or re-finance clause needs to extend beyond the 2018 period, preferably completely fixed and amortized. Rates could trend considerably higher in the coming years and properties financed now will be perceived as having favorable terms going forward. Not only may rates be higher, but appraisals may be much lower and underwriting criteria vastly more restrictive than today. Rates are currently trending lower; another re-finance opportunity may be at hand. In a downturn, prepare for lower valuations but fairly stable cash flow. A decline of perhaps 15-20% is possible. This should eventually be mitigated by lower vacancy, lower taxes through a lower tax assessment, lower insurance costs, lower labor and material costs.

The tenant quality needs to be excellent. The tenant credit rating should be above average and care should be used in accepting tenants in economically sensitive segments. An economic slowdown will affect everyone, delinquencies will rise, revenues will shrink, and job losses will ensue. However, losses can be mitigated by observant and proactive management addressing expenses and tenant quality. Not all segments will be as badly impacted and some will even prosper. Long-term government leases with such entities as the IRS, FAA, FEMA, etc., or commercial tenants in the medical sector, the defense industry, entertainment, or food and beverage businesses etc. should be less impacted, and their employees as well. Rental homes and apartments serve a basic need and will retain much of their appeal. New construction will probably suffer a severe downturn limiting additional supply, which will lower vacancy rates. Tenant migration would probably reverse as “A” tenants migrate to “B” complexes as price points should become very important. Rental rates would probably suffer as they will follow the economy lower, but rents may not suffer the full impact if the property is well located in a strong multi-industry market, another requirement for strategic real estate. Rentals in demand areas will fare the best.

In conclusion, strategic real estate properties are well located in growth and demand areas; they are leased by strong creditworthy tenants in industries that are less likely to be affected by economics, have no or very low long term debt, and have dependable cash flow. These properties will do well in an expansionary market and perform better against their peers in a challenging market. Review holdings and adjust accordingly. There is no clarity; the economy does not have to turn down, but the odds are rising and the time to prepare is running out. The current year should be the defining year if a downturn is imminent.

This article should interest investors in the iShares U.S. Real Estate ETF (NYSE: IYR), SPDR S&P Homebuilders (NYSE: XHB), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), J.P. Morgan Chase (NYSE: JPM), MGIC Investment (NYSE: MTG), Annaly Capital (NYSE: NLY), American Capital Agency (Nasdaq: AGNC), PulteGroup (NYSE: PHM), K.B. Homes (NYSE: KBH), Equity Residential (NYSE: EQR), Apartment Investment & Management (NYSE: AIV), AvalonBay Communities (NYSE: AVB) and others.

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.

Hold Your Horses! The Mortgage Report is Misleading

The Mortgage Bankers Association (MBA) today reported is Weekly Applications Survey, which measures applications for mortgages. It showed a surge in activity, giving real estate relative stocks and especially mortgage originators, a lift in early Wednesday trading. Temper your enthusiasm, though, as the latest gains are not to be misread; the mortgage market is not quite that hot.

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.

Mortgage Activity Report

The MBA showed that its Market Composite Index of mortgage activity gained by a seasonally adjusted 11.9% in the period ending January 10, 2014. Purchase activity, or mortgage applications on home purchases, rose by 12%, while refinancing activity improved by 11% on the week. That is amazing right? Wrong!

I have been following the real estate sector for over two decades now, and have gained some familiarity with the regular reports and their flaws. I have noticed something in particular about the MBA’s weekly mortgage report that keeps me from writing wildly varying summaries from week to week on the often volatile data point. For instance, last week we might have said the sky was falling given the decline in mortgage activity. This week, we would have climbed back off the ledge and celebrated life. Let’s take a closer look shall we?

Obviously, a weekly measure is going to vary around holidays. “But the report is seasonally adjusted Greek!” you might yelp in response. Yes, it is seasonally adjusted, as evidenced by the unadjusted 61% increase in the Market Composite Index week-to-week. Still, I have noted that around holidays, activity still seems to be more volatile than through regular periods. In the past, I’ve noted my belief that while the report may be adjusted for the one-day holiday, it may not adequately account for business drop-off that occurs on the day before and the first workday after the holiday, as Americans prepare for it and recover from it. This is something that number counters focused on the pure math might miss, but it makes perfect sense nonetheless. And the evidence is in the wild swings week-to-week, which I have noted in my regular following of this data point.

Chart at Yahoo Finance

As you can see, the shares of nation’s most important mortgage originators are moving sharply higher Wednesday. Now, a good bit of that is due to the strong EPS report from Bank of America (NYSE: BAC), which we recommended again yesterday in our EPS preview piece. BAC is up more than 3% today after a gap open start to the morning, and we are proud to have recently called it our top real estate play of 2014.

Mortgage Originator	1/15/14 Morning Gain
Bank of America (NYSE: BAC)	+3.1%
Wells Fargo (NYSE: WFC)	+1.5%
J.P. Morgan Chase (NYSE: JPM)	+1.1%
Citigroup (NYSE: C)	+1.1%
U.S. Bancorp (NYSE: USB)	+0.9%

Certainly, the company’s good news had something to do with the gains of the other major mortgage originators for real estate today, but it did not have everything to do with it. That is evidenced by the 1.0% gain on the morning by mortgage insurer MGIC Investment (NYSE: MTG). This latest stellar mortgage report from the MBA certainly is providing some uplift. Unfortunately, it is a bit overdone, and so I suggest you temper your enthusiasm in the real estate relative stocks today.

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.