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Is Housing Rounding a Bend?
David Lee Smith
July 28, 2008
Foolish film buffs may well recall Laurel and Hardy, the famous comedic duo of yesteryear. Whenever the pair found themselves in a pickle -- which was often -- portly American Oliver Hardy would scold his sidekick, the slight, British-born Stan Laurel, with a plaintive, "This is another nice mess you've gotten me into."
U.S. taxpayers should be recycling that old complaint these days, directed at a host of culprits behind our nation's housing apocalypse. Among them: Alan Greenspan; those who conceived of and continue to defend Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE); the past three U.S. presidents; a list of representatives and senators too long for individual mention; a number of Wall Street's "finest" firms; the ratings agencies; most mortgage lenders and originators; and on and on.
The bloated inventory slims down
With that out of the way, let's review the past week, which might be the most eventful in what could ultimately turn out to be the lengthy history of this century's housing crash. To wit:
On Thursday, the National Association of Realtors took off its usual rose-colored glasses long enough to say that sales of existing homes ("pre-owned" to you and me, since it's hard to sell a nonexistent home) slipped by 2.6% in June. The news was largely responsible for pushing the market over a cliff that day -- 283 points’ worth, as measured by the Dow.
The realtors were followed by a Friday report from RealtyTrac, which found that foreclosures are growing faster than Oliver Hardy's girth. Specifically, 220,000 homes were repossessed in the second quarter, and a whopping 739,714 foreclosure filings were recorded during the same period. That's up 14% from the first quarter and, gulp, 121% from the second quarter of 2007.
Also on Friday, the Commerce Department snuck in a positive note, reporting that sales of newly constructed single-family homes were stronger than expected in June. And by golly, beyond that, inventories were whittled away to a three-and-a-half-year low.
But -- sound the trumpets, please -- on Saturday morning, at least 85 senators found their way to Capitol Hill to vote on a new housing plan that, while generally rancid, may just pump new optimism into our nation's housing scene. In the midst of an election year, the group passed the measure 72 to 13.
The bill, which President Bush will sign, will permit homeowners who can't meet their payments to refinance into less expensive loans backed by the Federal Housing Administration, which itself will be overhauled by the measure. It also gives the Treasury Department unlimited power to lend to Fannie and Freddie -- both of which will be more closely regulated.
In two especially onerous moves, however, the package provides nearly $4 billion in "neighborhood grants" to help lenders buy up foreclosed properties, and it increases the low-income housing tax credit to help first-time home buyers. Seems to me that these latter two parts perpetuate the sort of thinking that got us into this mess in the first place.
The builders' slide continues
So with this ultra-busy week as a backdrop, let's take a quick look at how the builders are faring thus far this year:
Company Price 12/31/07
Price 07/25/08
Change
Beazer (NYSE: BZH)
$7.43
$5.16
(30.6%)
KB Home (NYSE: KBH)
$21.60
$17.12
(20.7%)
Pulte (NYSE: PHM)
$10.54
$11.31
7.3%
Ryland (NYSE: RYL)
$27.55
$20.61
(25.2%)
Toll Brothers (NYSE: TOL)
$20.06
$19.42
(3.2%)
Unweighted average
(14.5%)
Sources: Yahoo! Finance and TMF calculations.
With the average decline a month ago at 12.9%, the homebuilders clearly continue to give ground.
Conclusion: Time to reevaluate the stronger builders
What should we make of housing's latest adventures? And more importantly, how attractive will the homebuilders be once the rescue bill becomes law? Here are a couple of thoughts:
We shouldn't perpetuate for-profit entities like Fannie and Freddie that also can tap the government coffers whenever the going gets tough. In addition, we should take this opportunity to downsize the two government-sponsored enterprises, ensuring that they're are no longer the main thoroughfares through which home mortgages pass.
I also think the upside potential of some builders has now been pushed well beyond their downside risk. And, while I continue to believe that we're a ways away from a robust recovery in housing, I'm shedding my qualms about some builders as longer-term investments. But quality -- on the balance sheet and otherwise -- matters more than ever, and so I'd avoid Beazer, for instance, in favor of the far more promising Toll Brothers. The luxury builder could be especially attractive over the next 12 to 18 months.
Is Housing Rounding a Bend?
David Lee Smith
July 28, 2008
Foolish film buffs may well recall Laurel and Hardy, the famous comedic duo of yesteryear. Whenever the pair found themselves in a pickle -- which was often -- portly American Oliver Hardy would scold his sidekick, the slight, British-born Stan Laurel, with a plaintive, "This is another nice mess you've gotten me into."
U.S. taxpayers should be recycling that old complaint these days, directed at a host of culprits behind our nation's housing apocalypse. Among them: Alan Greenspan; those who conceived of and continue to defend Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE); the past three U.S. presidents; a list of representatives and senators too long for individual mention; a number of Wall Street's "finest" firms; the ratings agencies; most mortgage lenders and originators; and on and on.
The bloated inventory slims down
With that out of the way, let's review the past week, which might be the most eventful in what could ultimately turn out to be the lengthy history of this century's housing crash. To wit:
On Thursday, the National Association of Realtors took off its usual rose-colored glasses long enough to say that sales of existing homes ("pre-owned" to you and me, since it's hard to sell a nonexistent home) slipped by 2.6% in June. The news was largely responsible for pushing the market over a cliff that day -- 283 points’ worth, as measured by the Dow.
The realtors were followed by a Friday report from RealtyTrac, which found that foreclosures are growing faster than Oliver Hardy's girth. Specifically, 220,000 homes were repossessed in the second quarter, and a whopping 739,714 foreclosure filings were recorded during the same period. That's up 14% from the first quarter and, gulp, 121% from the second quarter of 2007.
Also on Friday, the Commerce Department snuck in a positive note, reporting that sales of newly constructed single-family homes were stronger than expected in June. And by golly, beyond that, inventories were whittled away to a three-and-a-half-year low.
But -- sound the trumpets, please -- on Saturday morning, at least 85 senators found their way to Capitol Hill to vote on a new housing plan that, while generally rancid, may just pump new optimism into our nation's housing scene. In the midst of an election year, the group passed the measure 72 to 13.
The bill, which President Bush will sign, will permit homeowners who can't meet their payments to refinance into less expensive loans backed by the Federal Housing Administration, which itself will be overhauled by the measure. It also gives the Treasury Department unlimited power to lend to Fannie and Freddie -- both of which will be more closely regulated.
In two especially onerous moves, however, the package provides nearly $4 billion in "neighborhood grants" to help lenders buy up foreclosed properties, and it increases the low-income housing tax credit to help first-time home buyers. Seems to me that these latter two parts perpetuate the sort of thinking that got us into this mess in the first place.
The builders' slide continues
So with this ultra-busy week as a backdrop, let's take a quick look at how the builders are faring thus far this year:
Company Price 12/31/07
Price 07/25/08
Change
Beazer (NYSE: BZH)
$7.43
$5.16
(30.6%)
KB Home (NYSE: KBH)
$21.60
$17.12
(20.7%)
Pulte (NYSE: PHM)
$10.54
$11.31
7.3%
Ryland (NYSE: RYL)
$27.55
$20.61
(25.2%)
Toll Brothers (NYSE: TOL)
$20.06
$19.42
(3.2%)
Unweighted average
(14.5%)
Sources: Yahoo! Finance and TMF calculations.
With the average decline a month ago at 12.9%, the homebuilders clearly continue to give ground.
Conclusion: Time to reevaluate the stronger builders
What should we make of housing's latest adventures? And more importantly, how attractive will the homebuilders be once the rescue bill becomes law? Here are a couple of thoughts:
We shouldn't perpetuate for-profit entities like Fannie and Freddie that also can tap the government coffers whenever the going gets tough. In addition, we should take this opportunity to downsize the two government-sponsored enterprises, ensuring that they're are no longer the main thoroughfares through which home mortgages pass.
I also think the upside potential of some builders has now been pushed well beyond their downside risk. And, while I continue to believe that we're a ways away from a robust recovery in housing, I'm shedding my qualms about some builders as longer-term investments. But quality -- on the balance sheet and otherwise -- matters more than ever, and so I'd avoid Beazer, for instance, in favor of the far more promising Toll Brothers. The luxury builder could be especially attractive over the next 12 to 18 months.
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