Deutsche Bank 2007 Real Estate Outlook Conference wrapup + another lender down.

I waded my way through three of the Deutsche Bank 2007 Real Estate Outlook panels and will give a mini-wrapup here for those who are interested.

The Homebuilders Panel, Ara Hovnanian, CEO of Hovnanian, Joel Rassman, CFO Toll Brothers, and Marc Baker, President of a N.E. local builder called The Baker Companies. Relatively uneventful conference, talked how this downturn surprised all of them and how it was different than most downturns (not recession driven). Both public builders thought cancellations would level out, also spent a lot of time talking about mergers and acquisitions as well as vertical integration. Asked how they will know the bottom is reached, most everyone was looking at the resale market and traffic of prospective buyers. Talked about affordability and was asked about renting being cheaper than buying, they all agreed that renting was cheaper but they believed the intangibles of owning win out every time over renting.

The Capital Markets Panel were mostly talking about where the smart money was going (mostly nowhere, everything overpriced, someone thought Mexico Commercial R.E. and Multi-Family might be good, another thought the same for Japan). They were also universal in their belief that far too much money was chasing far too few deals and people were taking extraordinary risks without comprehending exactly what they are getting into nor pricing appropriately. This theme was prevalent, there are many funds, pension funds for example, that basically have guidelines to invest a fixed percentage of funds in R.E. and expect a historical level of return which doesn't exist in today's market without much higher risk.

And finally the Mortgage Panel talking about what is driving origination's and how the landscape is changing. If you were to listen to any of the conferences this would be the one. Much talk about how Wall Street was driving origination's and how most of these lenders would touch subprime if it wasn't for the ability to lay off all the risk on the secondary market. Peter Norden, CEO of Opteum, said, "The Street really the ones that formed the paper that is out there causing problems. Let's face reality there isn't a mortgage originator out there that would produce a 80/20 subprime loan unless they had somewhere to sell it. Wall Street invented the product, bought the product, and is now forcing everyone to buy the product back.... There will be some some tightening of stated income, stated assets from a credit perspective it invites fraud."

And finally, new that subprime lender Funding America has shut its doors, a note on its website said:

Due to current market conditions in the mortgage industry, Funding America has
decided to discontinue accepting any new business.

Effective immediately, all loans in our pipeline will be processed out of our Houston location and we will work to close those loans in as smooth a manner as possible. For questions concerning any loans that are currently in process, you should contact
our processing team at (866) 782-0100 Ext.1931, 1928, 1924 or 1933 for further
information and status. From our start nearly two years ago, Funding America has provided countless opportunities for numerous team members, brokers,
investors, and home owners to have a more successful life.

Thanks to all of you for your support.

Funding America

Couple wins first round in Option-ARM lawsuit

We will be seeing more and more lawsuits regarding the dreaded Option-ARM, a court ruled that Chevy-Chase bank Truth in Lending Disclosure was unclear and the loan must be rescinded:

"A federal district court judge ruled banks must rescind certain option
adjustable-rate mortgages because they violate the Truth in Lending Act.

A suit filed by Susan and Bryan Andrews against Chevy Chase Bank claimed they
thought the 1.95% introductory rate on their option ARM was fixed for the first
five years. Two months after the mortgage was originated, the interest rate
increased to 4.375%.

The judge determined disclosures about the loan were “unclear and confusing,” according to the Wall Street Journal. The mortgage was also confusing because, while payments were fixed for five years, the interest rate was not.

Based on the ruling, Chevy Chase will have to rescind all the loans that have similar language in the disclosure forms. An exact number of how many customers this involves was not immediately known, but Chevy Chase originated more than $7 billion in mortgages in 2006, the majority of them option ARMs.

The bank plans to appeal"

Combine legal liability with underperforming loan portfolios in the secondary market and you will be seeing a significant change in how lenders market and underwrite these products to the general market.

Pardee homes backs down

It appears the homeowners of Moorpark Highlands (back story here and here) have won the Mello-Roos battle with Pardee homes. As reported in today's Ventura County Star:

After several homeowner protests, letters and telephone calls, Pardee ended the offer, which company officials said was meant to attract buyers in a difficult housing market.

...

On Jan. 12, some residents received phone calls from Jim Bizzelle, vice
president of community development, who said the incentive has ended. One couple
asked for it in writing, and received a letter from Bizzelle, dated Jan. 12.

In part it read: "After further consideration, we have decided to end the
New Community Facilities District (Mello-Roos) assessment incentive being
provided to new home buyers at our Moorpark Highlands community."

If this incentive was being offered "to attract buyers in a difficult housing market" it opens the question what incentive they will offer to attract buyers. If the issue is cost and they can't drop Mello-Roos there is not much more they can do to affect affordability. Fancy financing (which is becoming more taboo from the buyers perspective, buy-downs are temporary and people are much more wary) or price cuts seem to be on the horizon.

Northridge "charmer"

19221 Malden Street (Zip Realty account required) in Northridge might look like blight to you and me. But the agent representing the property assures us this is, "The bank-owned foreclosure fixer everyone wants!". With such enthusiasm being displayed one can't help but delve further, please tell me more. "Kitchen & baths have already been removed for your convenience."- Well that is good, last thing I want when buying a house is pesky kitchens and baths getting in the way. "Big living room, good appeal, it's a deal! "- A DEAL, heck I feel stupid not buying it myself but I feel honor bound to pass this good deal on to my loyal readers. "Verify with proposed lenders that they will accept the house as-is w/o kitchen & baths."- He might want to worry more about proposed buyers accepting the house as-is without kitchen and baths, but maybe that is crazy talk.

This little dreamboat can be yours for a mere $470,000.

Lender loss tally:

Lender Paid : $508,117 (previously purchased for $100,000 in 1999? someone milked the ATM dry)
Current List Price : $470,000
Loss minus 5% sales cost: $61,617

Dataquick numbers released.

Dataquick has released its December numbers, head over to Calculated Risk for comprehensive coverage (I'd also refer you to my opinion on median prices from a earlier post). I would just like to add that in parsing the release for Month over Month changes we see the following:

Release for November 2006:

Indicators of market distress are still at a moderate level. Financing with adjustable-rate mortgages is flat. Foreclosure activity is rising but is still below average. Down payment sizes are stable, as are flipping rates and non-owner occupied buying activity, DataQuick reported.

Release for December 2006:

Indicators of market distress are still at a moderate level. Financing with adjustable-rate mortgages is flat. Foreclosure activity is rising but is still in the normal range. Down payment sizes are stable and flipping rates and non-owner occupied buying activity is down, DataQuick reported.

Small changes in wording but lots of meaning.

KB Homes finalizes numbers, Indymac warn

KB Homes has finalized its writedowns ($255 million) and walkaways ($88 million). Indymac lowered its forecast from $1.35 to $0.97, this is nearly so interesting as some of the reasons they gave for the lowered earnings:

• "An increase in credit costs related to the loan loss provision, secondary market reserve, and marking-to-market delinquent loans held-for-sale and residuals and non-investment grade securities"- Setting aside more money for bad loans and selling bad loans "at market" (presumably for a even greater loss).
• "A reduction in net interest margin related to loans held-for-sale and the thrift investment portfolio due to yield curve inversion and the fact that our loan production mix shifted more toward fixed rate and intermediate term fixed rate loans;" - Making less per loans due to interest rates and the fact that people aren't nearly as willing to take out those more profitable short term ARMs

Credit tightening will be THE significant factor in any downturn, so it watching the lenders is always a good step for market directions. Once they start taking losses the easy money spigot will be shut off.

Centex reports a loss.

Centex homes just reported preliminary Third Quarter Results:

"Taking into account the option deposit and walk-away costs, land valuation adjustments and the tax provision adjustment, the company expects to report a loss from continuing operations of approximately $2.00 per fully diluted share for the third quarter. Before these adjustments, the company expects its third quarter earnings to be approximately $0.75 per share."

• 8,360 homes closed, down 12% Year-Over-Year
• 6,139 (net) orders, down 24% Year-Over-Year
• Declined/Cancelled options on 37,000 lots at a cost of $150 million
• Valuation writedown of $300 million on lots it controls
• Increasing its provision for taxes by $60 million due to federal audit

I am a firm believer of watching the public homebuilders actions for a general view of the housing market. Homebuilders are walking away from options just like home buyers are, homebuilders aren't buying land just like home buyers aren't buying homes. Whether you think homebuilders are lagging or leading indicators, either way it is a show that the downward trend is continuing. There is a thought among analysts that the homebuilders are loading up the end of the calendar year quarter with as much writedowns as legally possible in order to present a favorable view (their ferverent hope) next year at the same time for the stock. The next few weeks are ripe with data reports from homebuilders and real estate related companies, I will keep everyone updated.

Pardee / Moorpark Highland update + Big Sky Simi - Glenmeadows pic

I went by Pardee Homes Moorpark Highlands this weekend, unfortunately after a day out on the town my camera battery was shot. Not much to report, no protesters around the offices trying to inform people of the Mello-Roos issue. What was interesting was the number of lots clearly being worked on nearby. I am not sure, but I don't think very many of these were for the current Shenandoah, Cherry Hill, Magnolia Lane development, and if true it kind of leaves the door open for lower cost developments to come in during this slow time. I will grab some pictures later as there is a lot of new lots going in. There was a fair amount of lookers at all 3 developments for Sunday 3pm in January, imho.


Before hitting Moorpark I stopped by "Big Sky" north on erringer at the 118. This is a collaborative effort by such builders as D.R. Horton, Shea Homes, and Standard Pacific. This area was the former Big Sky Ranch where "Little House on the Prairie" and "Bonanza" were filmed. Lots of big new houses about half being able to afford to put landscaping in, and the other half just letting the weeds grow through. I drove through Crosspointe, Tioga, and Glenmeadows. Here is a higher end house and bigger lot than typical for the area, but the green you see in front is weeds with a dirt lot for a lawn.

All this can be yours for a mere $1,000,000+.

Simi short sale?

2859 Briarpatch (Zip realty account required) in Simi Valley, according to zillow it was sold on 10/12/05 for $563,000 now selling for $450,000 with 5% realtor fees that is a $136,000 loss that someone is going to eat. I can't imagine the bank will just happily accept that. My guess is that this house will be seen on the bank owned lists soon.

Simi Valley "hot" housing market.

Perusing the website of Runkle Canyon in Simi Valley it sure sounds like a wonderful housing development soon to come to Simi Valley. With such a "glowing" review, it is hard to see how anyone could have a problem with such a development. Well it turns out that back in 1959 the Santa Susana Field Laboratory nuclear reactor had itself a meltdown. Now Simi Valley residents and others are claiming the ground is contaminated with strontium-90 (among other things) and any development would cause these contaminants to be released. The Department of Energy says everything is fine, but the California Department of Health Services said ""found that, despite testing irregularities, the land was still reading high for Sr-90". Recently some work has been going on up in the Canyon but Mayor Paul Miller insists it isn't for development but instead for taking more soil samples.


The entrance for the Runkle Canyon development is at the very south end of Sequoia Avenue, it currently has a guard sitting at its entrance 24/7. Here is a picture of the entrance from earlier today:



It will be interesting to see if/when this development goes forward if this information of this incident will be disclosed to potential home buyers. You can find the plans for Runkle Canyon here. KB Homes and Lennar will be the developers of this project.

Chatsworth new home checkup

Today I was in Chatsworth on the west side of the San Fernando Valley. As I was driving around doing chores and going to Mission Burrito I saw a few housing developments off of Topanga Canyon boulevard.


At the very top of Topanga Boulevard is Toll Brothers new townhome development called "Vistas at Indian Oaks". Here is what the development looks like on the side overlooking the 118:

Since development on this land has been going pretty hard for 6 months or so I was expecting at least the foundations to be laid for the townhomes, but it still looks like they are getting the land ready for the foundations to be laid:

These properties range from 664k-809k, I'll keep everyone updated as the construction continues.

Next on the list is a Richmond American Homes at the corner of Chatsworth and Topanga:

This development doesn't appear on the Richmond American website, but the sign out front said "starting from the mid 1.2 million". The houses themselves are huge but the lots are minuscule. Typical Southern California Mcmansions, I have a real hard time thinking these will sell, but I will keep an eye on them in future.

And finally, at the corner of Lassen and Topanga Canyon is Centex homes Sojourn:

From the exterior, This development looks almost done all the houses need is landscaping and fencing. That is Topanga Boulevard in the foreground and for $734-850k you too can have the privilege of living right on top of a major road and have your neighbors staring in your windows.

Pardee / Moorpark Highlands homeowners fighting back

Here is a letter sent from the Magnolia Lane homeowners to Pardee regarding their decision to drop Mello-Roos for new home purchasers:

"Below is a copy of the letter we sent to Mike McGee with 100+ homeowner signatures.

Bill Busch
Moorpark Highlands Homeowner

Michael V. McGee January 6, 2007
President and CEO
Pardee Homes
10880 Wilshire Boulevard, Suite 1900
Los Angeles, CA 90024

Dear Mr. McGee

Re: Pardee Homes payment of Mello-Roos for new home buyers in Moorpark Highlighlands


On Thursday January 4 2007, it was brought to our attention that Pardee would be paying the Community Facilities District (CFD) Assessments/Mello-Roos, No. 2004-1, Zone 3 (Moorpark Highlands) for prospective homebuyers. We do not agree and find it unethical that Pardee would offer a new homebuyer in the same CFD "no Mello-Roos", while current homeowners would potentially have to pay Mello-Roos until 2044/45.


In the Community Facitilies District Subsidy Agreement dated September 2005, Pardee committed to pay the amount of the CFD Assessments for five (5) year period commencing on the close of escrow for all the Moorpark Highlands releases. On January 4, 2007, we were told that this commitment has been modified for new home buyers This decision has left loyal Pardee homeowners upset with this unethical decision.


We are upset because our commitment to purchase a home in the Moorpark Highlands CFD extends back to January 2005. The Builder Assessment and Tax Disclosure Agreement stated that "all prospective purchases" in the CFD No. 2004-1, Zone 3, would have pay a Mello-Roos/Special Tax, the amount of which is based on the square footage of the home. Your recent action has resulted iin selected lots being burdened with the assessment over the long term. If we had known that only our specific lots were subject to Mello-Roos we would have never agreed to such irrational terms. We are concerned about the re-sale value of our homes iin comparison to a prospective homebuyer selling their home absent any Mello-Roos. Those of us who in good fath closed escrow prior to January 4th, 2007, have been denied an equal opportunity to have this Mello-Roos stigma tax removed from our properties. We perceived this as a deliberate division in the community. Should we choose to sell our home, we will be handicapped by this tax assessment while our neighbor will not.


We have stood by Pardee for up to two (2) years during this entire building process and have referred friends and family to buy a Pardee Home - and this is how Pardee treats thier loyal homeowners? A slogan printed on a Pardee notepad states that Pardee Homes wants their customers "to feel they can trust the organization and its people". The division in this community you are deliberately creating is in direct opposition of what your company supposedly stands for.


To resolve this issue, the current homeowners and those in escrow request fair and equitable treatment. Specifically, we are requesting Pardee Homes to pay off our Mello-Roos assessment too! We are fighting to preserve the future value of our homes, to maintain equity in this community, and preserve the neighborhood you promised us.


We are confident that the City of Moorpark shares our concern of an unethical treatment that appears to be affecting their residents in Moorpark.


We would appreciate a timely response and resolution to this issue. We expect Pardee to do the right thing.


Sincerely,
The Undersigned Pardee Homeowners

cc: Jim Bizzelle, VP of Community Development, Pardee Homes
Patrick Hunter, Mayor, City of Moorpark
Amy Brandt, President and CEO, WMC Mortgage Corp. "

I will keep everyone updated with any new information I hear.

Median Price is often confused for the value of homes.

Every month you will see a news story regarding what the median price of homes were for a region. By itself, the median price tells you nothing about your local real estate market, it is necessary to take median price along with other data points to determine the health of your market. For very stable markets you can maybe take median a bit more seriously since much of the underlying variability is removed, but for boom/bust markets such as California much more data is needed to see where the market is headed.

Median prices is simply the midpoint between which half the homes sold for more and half the homes sold for less. It is used instead of an average because abnormal outlying data points won't skew the data very much (a big mansion selling could skew the average for a whole region for example).

Median prices tell you nothing about what you get for your money. During early stages of housing booms the declining value for what people are getting for their money are masked by the median price. The same is true for early stages of busts, people start getting more for their money and it isn't reflected in the median for quite some time.

As lay persons it is harder to get good data on what is going on in a particular market, but here are the items to look that are generally available to the public (usually in a official press releases) without too much digging:

1. Sales Volume- By far the most important, the number of sales happening. It is vital to take these numbers in historical context, because any one Month-over-Month (highly variable due to seasonality) or Year-over-Year (better, but not perfect) comparison is highly suspect and won't show the trends nearly as well as a looking as much of the volume data that you can find.
2. Inventory- Usually the realtor groups won't say "There are X number of homes on the market", they instead take the current sales pace and divide the current inventory and give the data as months supply. Real estate agents often say that 6 months supply represents a balanced market.
3. Days on market (DOM)- Average of how long it takes to sell a home. This statistic is highly suspect in a slow environment, many times real estate agents will take a house off the market and bring it back on to "reset" the DOM and make the listing appear "fresh" to the general public. Or as things get really slow, the sellers switch agents and this has the same effect. The published DOM stat will start rising rapidly at the beginning of a downturn and slow as it nears an upper limit (usually between 90-120 days depending on the market). As it gets high it becomes pretty useless indicator until it starts dropping significantly.

Now you have four data points you can watch to judge your local area. It is quite possible to have a rising median, lower sales, rising months supply, and rising DOM (actually, this is often the case at the beginning of a downturn). People just watching the median would think the housing market is doing great, but sellers entering the market would be treated to a harsh reality and buyers a pleasant surprise.

With access to the MLS, you can get much better data. You can get the number of New Listings, Pending, Closed sales, Expired, and Back On Market (BOM, expired listings which decide to try again). The ratio of pending transactions to new listings and closed sales to new listings gives you a very good snapshot of the market. As you can guess, lots of expired listings tell you that the market is slow and that sellers and agents are having a hard time finding (or willing to accept) the market price.

Dataquick has the following to say about the median: "Movements in sales prices should not be interpreted as changes in the cost of a standard home. Median prices can be influenced by changes in cost, as well as changes in the characteristics and size of homes sold. Due to the low sales volume in some cities or areas, median price changes may exhibit unusual fluctuation."

In good times you can see a drop in median price that actually represents the start of a housing boom. A new lower cost housing development in a growing area can drag down median price, but watching sales volumes you will see a spike in volume. And when things slow as prices become unaffordable, there are fewer buyers and the few remaining are generally more affluent. As it takes some time for a bust to develop the median will usually lag significantly unless there is a large motivating force (layoffs for example).

To me, the median price represents what the median price a segment of buyers are willing to pay at a particular time. Without historical context and more data it is impossible to say if the median price represents a "good thing" or "bad thing" for the general housing market.

Wednesday points of interest.

Every Wednesday I look at the weekly Mortgage Application Index which is a good leading indicator of the national housing market. After reading the release and adding the data to my charts I like to go over to the great blog Calculated Risk for their roundup and discussion, Please join us.



Also, once a week I take a sample of data Simi Valley inventory levels, this week was the first week since August that the inventory didn't drop. If inventory stabilizes here and starts going back up for the Spring selling season it would represent a starting inventory equal to almost 50% of last year at this time. This represents an extra hurdle to the new selling season as it is already starting behind the eight ball somewhat in regards to supply and suggests that the real estate agents are having trouble finding market price.



I also highly recommend reading todays O.C. Register article regarding L.A. County versus Orange County housing markets. They have a great graphic representation of what is happening in the housing market by price range:



The high-end is compressing down onto the low-end and this will be THE trend to watch in the coming selling season. The "spread" between the high-end and low-end widened during the housing boom and now it is coming back together. When things are running hot people are willing to stretch their finances more, but as things cool down people stretch less and are willing to buy in the lower end areas in order not leverage themselves. Keep an eye on the monthly DataQuick zip code chart for more information.

And finally, head over to the Wall Street Examiner blog for a wealth of charts and data on the state of the new home housing market. There is such a wealth of data there it will take some time to digest, but it is worth it.

Horton hears a D'oh!

D.R. Horton reported its orders today, with orders down a worse than estimated 23% YoY and an improved cancellation rate of 33% (last year it was 40%). Watching the public homebuilders is a good gauge of the national market, and their conference calls are always interesting to listen to for market specific flavor.

Donald R. Horton, Chairman of the Board, said, "Our people worked very hard to achieve these net sales orders during a time when the selling conditions in the homebuilding industry remain challenging. Although our cancellation rate decreased in the first quarter of fiscal 2007 compared to the fourth quarter of fiscal 2006, we continue to experience higher than normal cancellation rates and an increased use of sales incentives in many of our markets."