Saturday, December 23, 2006

BNN – MUST SEE BUBBLE TV!

Twenty new bubbly videos were added to BNN today and some are really a must see.

First, there are quirky interviews with the home builders Robert Toll and Ara K. Hovnanian on the outlook for 2007 as well as their recent optimistic statements regarding housing setting a bottom.

There are several fairly humorous CNBC segments covering the most recent release of the Census Departments “New Construction Report” where the CNBC staff seemingly struggles with the idea that the bump up in housing starts from October to November means very little once put in proper context of the accelerating year-over-year declines to both housing starts and permit authorizations.

There is an excellent two part interview with Professor Susan Wachter of the Wharton business school.

Another CNBC excerpt pits Doug Duncan, Chief Economist with the Mortgage Bankers Association against Douglas Kass, analyst with SeaBreeze Partners Management.

Kass offers excellent analysis of why industry groups like the NAR and the MBA are incapable of seeing where this housing cycle is going as they cling to the traditional measures of strong economy and low interest rates while ignoring the overwhelming evidence that Fed induced easy lending and speculative binge of the last five years has left the nations housing market and economy in a significant bind.

Finally, a slightly disturbing SQARE OFF between Ellen Schloemer, Director of Research of the Center for Responsible Lending and Michael Youngblood of Friedman Billings Ramsey over Ellen’s the recently published study that suggests that 1 in 5 sub-prime mortgages could end up in foreclosure in the next few years.

Youngblood, who has on other occasions showed himself to be incapable of accepting even the possibility that the nations housing market experienced a bubble that is now transitioning to full pop, seems to be nervous, sweating, and even shaky with anger over the reports findings going on full attack against what he seems to see as an almost blasphemous analysis by Schloemer.

This brings BNN to a grand total of over 10 hours of continuous play footage of the Great American Housing Bubble!

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Friday, December 22, 2006

Shiller’s Failed Bubble Scenario?

The National Association of Realtors (NAR) recently published their list of “Real Estate’s 25 Most Influential Thought Leaders” in which they generally heaped excessive accolades on an assortment of real estate industry insiders.

Certainly, there is no harm done in taking note of the “contributions” made by a few individuals and the “thought leader” jargon seems pretty fitting for an industry so steeped in sales and marketing but what is interesting is that in addition to the main list of 25, NAR has included 15 other people who’ve “had an impact” in 2006.

This list is a little different, including such names as Ben Bernanke, The US Department of Justice, and the Participatory Consumer.

So, it appears that, to NAR, there is no venue or press release that is immune from a cleverly positioned talking point.

Nothing demonstrates that better than the inclusion of Professor Robert Shiller in the list of 15 and the accompanying assessment of his contributions.

Why was Robert Shiller included in the list?

According to NAR, Shiller “Got big media coverage equating rising real estate prices with the tech bubble, but we haven’t heard the pop yet.”

Additionally, the NAR assessment of Shiller adds:

“Robert Shiller scored instant media celebrity when his 2000 book, Irrational Exuberance, predicted the tech bubble’s explosion just weeks before the fact. Four years later, when he tried to apply the same principles to the real estate boom, he found out that all investments don’t behave alike. Shiller contended that rising home prices weren’t based in the fundamentals of population growth and supply and demand; they were bubbles, destined to pop. To the contrary, NAR economists predicted that market slowdowns would largely be gradual—a trend that’s playing out today. Shiller’s failed bubble scenario demonstrates that sometimes even smart guys get it wrong”

So, it seems that NAR has already concluded that Shiller’s analysis, indicating that much of the nations housing market had gotten excessively overheated and could now be in for a protracted period of decline, is wrong.

That’s some fairly confident sentiment, especially coming from an organization whose Chief Economist clearly stated in May 2005 (on NPR’s Dian Rhem radio show) that 2006 would NOT see a slowdown in the housing market.

So there you have it.

On one hand you have a blatantly self interested industry group that has consistently and in fact purposely been unable to accurately forecast the direction of the housing market instead favoring the propagandist “Pinocchio-economic” analysis that they desperately hope might re-ignite the insane speculative frenzy that served them so well during the last decade.

On the other, you have Professor Shiller who, although you can choose to agree or disagree with his analysis on housing, I would challenge anyone to find ONE example where there is even a shred of evidence that he acted in his own self interest when addressing his outlook on housing and the economy.

This includes the several televised events that pit Shiller directly against the NARs David Lereah who in all cases resorted to obnoxious spin-mistering (remember the Chicken Little slides and comments etc. as well as last summers CNBC town hall meeting) while Shiller, ever patient, confident and academic, put forth his analysis without even the slightest reprisal.

Once again, NAR has shown itself to be a foolish and despicable outfit more inclined to attempt to malign the reputation of a legitimate “thought leader” than to ever challenge itself to address its own obvious failings.


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Thursday, December 21, 2006

GDP Under Pressure

Today, the Bureau of Economic Analysis (BEA) and the Commerce Department jointly released their final revision to 3rd Quarter GDP showing the most severe decline to residential fixed investment seen in over 15 years.

As noted before, “Residential Fixed Investment” encompasses all investments to fixed residential structures including expenditures allocated for purchase, construction or improvements to new or existing single or mulit-family dwellings.

Many bullish economists and analysts had wrongly anticipated that the dramatic fall-off in residential investment seen in the preliminary GDP reports would inevitably be revised lower in the final version thus lessening its impact to overall GDP.

As we can now very clearly see, not only was the decline in residential investment NOT revised lower, but it has been revised UP twice since the preliminary release in October.

Ironically, this inability to clearly see the significance of the impact of the housing decline on the statistics of a GDP report may in fact allude to the very same ineptness that prevents bullish economists and analysts from seeing the considerable “spillover” effects this decline will have on the wider economy.

To put the decline to residential investment in better perspective, consider the fact that it chopped 1.20% from overall GDP, a value greater than the 1.14% contribution of all domestic services rendered in the quarter (think electricity, gas, transportation, medical care, housing services, etc.) as well as easily outstripping both the 1.01% contribution from all fixed non-residential investment (think all commercial structures, all investments in business equipment including computers software and transportation equipment) as well as the 1.00% reduction coming from all imports of foreign goods and services (i.e. imported goods and services are always subtracted from GDP).

The following chart (click for larger versions) shows the percentage change to real residential fixed investment on a quarterly year-over-year basis since Q1 2003.



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Wednesday, December 20, 2006

A Closer Look at New Construction Activity

In an attempt to shed a little more light on the severity of the decline to new construction activity, I have produced a series of year-over-year charts that easily dispels any notion of a bottom having been set.

Each chart shows the percentage change to monthly construction activity since January 2000 on a year-over-year comparison basis.

The charts are broken out by permit authorizations and housing starts and further divided by national and regional areas.

Notice that for both permit authorizations and housing starts, many charts show that declining construction activity is actually accelerating with indicators currently sitting at the lows of the cycle.

Additionally, regions that aren’t currently sitting at the lows of the cycle are generally sitting very close to cycle lows set within the last few months.

Furthermore, most charts show a marked change to the downside at or near January 2006 followed by consistently accelerating declines for the remainder of the year.

Note that both the Northeast and Midwest regions posted significant declines to permit authorization activity in 2005 and 2006.

This may be an early indication of what might materialize for the regional data in 2007 as multi-year declines continue to set deeper lows rather then flatten out as some real estate optimists are predicting.

All data used to generate the charts is freely available at the Census Department's "New Residential Construction" website.

Click on any of the following charts to see a larger, more readable version.

Permit Authorizations







Housing Starts







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Tuesday, December 19, 2006

Today’s New Construction Report

If ever there was a clear signal indicating that the nations housing markets are neither "stabilizing" nor “dancing on the bottom” as some in the residential real estate industry would have you believe it’s today’s “New Residential Construction Report”.

Continuing the consistent and ever worsening deterioration of the US housing market, today’s report provides unambiguous evidence that residential real estate is experiencing a protracted and atrocious decline.

Popularly (and negligently) reported as showing a “rebound” in housing starts from October to November, a little closer inspection of the numbers will provide more than enough evidence to suggest that holding an optimistic “soft landing” outlook is misguided to say the least.

Particularly interesting is that this months report show that every region is now recording high double digit year over year declines to housing permits.

Additionally, housing completions, a lagging indicator that measures the number of new homes that have actually just been completed, is now showing some significant declines which will no doubt soon begin to weigh heavy on the construction employment situation.

Here are the statistics outlined in today’s report:

Housing Permits

Nationally

  • Single family housing permits down 3.1% from October, down 33.3% as compared to November 2005
Regionally

  • For the Northeast, single family housing permits down 11.0% from October, down 28.8% as compared to November 2005.
  • For the West, single family housing permits down 2.3% from October, down 40.5% as compared to November 2005.
  • For the Midwest, single family housing permits down 5.7% from October, down 36.4% as compared to November 2005.
  • For the South, single family housing permits down 1.4% from October, down 29.4% compared to November 2005.
Housing Starts

Nationally

  • Single family housing starts up 8.1% from October, down 28.6% as compared to November 2005.
Regionally

  • For the Northeast, single family housing starts up 5.6% from October, down 13.6% as compared to November 2005.
  • For the West, single family housing starts up 1.4% from October, down 38.5% as compared to November 2005.
  • For the Midwest, single family housing starts up 1.5% from October, down 37.6% as compared to November 2005.
  • For the South, single family housing starts up 14.1% from October, down 22.1% as compared to November 2005.
Housing Completions

Nationally

  • Single family housing completions down 1.0% from October, down 5.5% as compared to November 2005.
Regionally

  • For the Northeast, single family housing completions down 12.8% from October, down 23.8% as compared to November 2005.
  • For the West, single family housing completions down 3.7% from October, down 9.5% as compared to November 2005.
  • For the Midwest, single family housing completions down 4.0% from October, down 9.3% as compared to November 2005.
  • For the South, single family housing completions up 3.5% from October, up 1.6% as compared to November 2005.
Keep in mind that this particular report does NOT factor in the cancellations that have been widely reported to be occurring in new construction.

As further reports are released, cancellations should show an even greater effect on permitting, starts and completions.

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Monday, December 18, 2006

MIT on the Bubble

Earlier this year William Wheaton, professor of economics at the MIT Center for Real Estate weighed in on the nations residential housing bubble in an excellent paper entitled “Past Housing ‘Cycles’ and the Current Housing ‘Boom’: What’s Different This Time?”.

The paper attempts to explain current home prices by developing an econometric model of home prices using home price data only up through 1998. Then home prices are “forecast” by applying actual 1998 – 2005 historic economic data to the model.

The main idea here is that prices could possibly be sound if there is a way to produce an analytical model that accurately predicts what has actually occurred since 1998.

Models were developed for 60 of the country’s Metropolitan Statistical Areas (MSA) and then the results were compared against what actually happened to prices during this cycle.

The result was a resounding failure for the models in that none of the models could accurately pick up the price movement that actually occurred.

In 47 areas, prices followed a similar pattern to the papers example area of Boston which, per its model, should have experienced a home price correction in 2001 as wages and jobs headed down in the wake of the dot-com recession.

But in reality, no home price downturn ever materialized. Instead home prices actually soared to historically high levels during this period.

In 5 other areas, the models called for little to no price movement which was not inconsistent for theses particular areas that, historically, had not seen cyclical price patterns. Yet, again the actual result did in fact see a substantial move up in prices over this period.

Additionally, in the remaining 8 areas, of which included 6 in Florida, and Phoenix and Las Vegas the statistical models failed completely. These areas were similar in that during the period between 1980 - 1997, they had actually seen steady declines to prices and then prices abruptly surged, doubling or more in just that last few years.

So, in the end the models either dramatically under-forecast actual upward price movement or completely failed to explain the erratic upward price movement exhibited by eight truly unusual markets.

So what was concluded by this study?

The paper concludes by finding that the astonishing upward price movement seen in the current housing cycle was NOT fueled by the often cited “fundamentals” such as baby boomer demographics or construction regulation restraining supply but was instead “driven by an explosive growth in credit availability – in particular the new emergence of the so-called ‘subprime’ lending market”.

Additionally, the paper does a good job of shining the spotlight on another important factor fueling the boom namely the explosive growth of the second home market.

As was noted before, second homes are a bit of a misnomer as the term seems to conjure up a vision of vacation home when in fact the overwhelming majority of second home purchases have been for investment properties that were purchased in an act that was tantamount to speculation.

Professor Wheaton hasn’t seemed to achieve quite the level of popularity that other notable economists such as Robert Shiller or Nouriel Roubini have seen recently but given his contributions and his clear, precise and personal manner hopefully he and his work will receive more notice.

Listen to Professor Wheaton spar with David Lereah back in May of 2005 where Lereah wrongly predicted that housing was NOT going to slow during 2006 as well as other more recent NPR appearances on “All Things considered” during September of this year.

Professor Wheaton Radio Appearances:


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Thursday, December 14, 2006

Wluka Strikes Back!

It is quite clear now that the Massachusetts Association of Realtors (MAR) intends on following the lead of its national counterpart with striking fidelity.

Not only does MAR have its own “leadership” who every month attempt to spin the states housing numbers with a level of artistry only equaled by the great David Lereah himself, but now they seem intent on funding a public awareness campaign that will be closely coordinated with the widely publicized $40 million crusade sponsored by the National Association of Realtors (NAR) that will commence in January.

Furthermore, the MAR president, David Wluka has seen fit to go on the attack against the local media for producing coverage of the housing decline that, as he puts it, “demonstrates a lack of understanding and objectivity”.

In a recent “Letter to the Editors of the Boston Herald”, Wluka is clearly aggravated by an article the Herald published on August 30th titled “Mass. home sale data MAR-red” and attempts to set the record straight while assailing reporter Scott Van Voorhis for his lack of “historical perspective”.

The Voorhis article (which follows below) merely recounted the obvious fact that in the summer and fall of 2005 MAR was presenting a flawed and overly optimistic impression of the states home sales.

But as Wluka sees it, it’s the local media, not MAR that is at fault for dubious housing market coverage.

“Today’s market is a tough one to navigate and consumers deserve credible coverage of current market realities. The housing bubble hyped so much by the media last fall still has not materialized, yet many continue to editorialize as if somehow it will become a self-fulfilling prophecy.”

One can only wonder what “talking points” MAR will be presenting to attempt to persuade the public to overlook the oncoming depreciation of the states home prices.

The following is the Boston Herald article by reporter Scott Van Voorhis:

Mass. home sale data MAR-red

By Scott Van Voorhis
Boston Herald Business Reporter
Wednesday, August 30, 2006

A bad storm is brewing in the once high-flying real estate market, and the Boston area, with its million-dollar fixer-uppers, is right in the eye of it.

For many hapless home sellers, desperately scrambling to find living, breathing buyers, this tempest appeared to come on as quickly as a Gulf Coast hurricane.

Or did it?

The monthly home sales reports put out by the Massachusetts Association of Realtors for years have been the main indicator of the health of the Bay State’s real estate market. And as recently as last fall, the trade group was crowing about near-record sales.

However, other data, collected by a respected local publisher and real estate data firm, paints a different picture.

A steady decline in home sales across the state began in the spring of 2005 and has been building steam ever since, data released by the Boston-based Warren Group shows. (A note of disclosure, I once worked as a reporter for Banker & Tradesman, a publication of the Warren Group.)

Year-over-year declines in home sales of roughly 10 percent or more began in April 2005 and continued steadily, hitting nearly 14 percent in October and nearly 27 percent in July.

Meanwhile, median home prices peaked at $364,000 as early as June 2005 and began dropping steadily after that.

By last summer, let alone last fall, anyone following the Warren Group data would have been well aware of the real estate storm clouds on the horizon.

Yet, except for a few experts and insiders, no one was.

The firm for decades has collected records of all sales transactions right from the courthouse, publishing a thick insert each week in its Banker & Tradesman. But it was not until earlier this year that the Warren Group began an alternative to the Massachusetts Association of Realtors’ monthly sales reports, offering up its version of the numbers to the local news media. As the real estate market began to turn sour last year, MAR, a group formed to promote the industry, was still the main source of statistics for most news outlets.

And the Realtors group saw more evidence for optimism than concern.

While MAR reported year-over-year declines in home sales in April, May and July, it reported increases and new home sales records and near-records in June, August and September.

No increase was too modest to celebrate.

A 0.5 percent increase in single-family home sales in September. Roll out the barrels.

“Sales of single-family homes remain strong last month, climbing to their second highest level on record for the month of September in state history,” the group touted in a section of its Web site called “talking points.”

That was a badly timed fit of happy talk.

Since October, the market’s downhill trajectory has been too steep for anyone to ignore, with prices, not just the number of sales, falling.

But there are no apologies from David Wluka, MAR’s president. He points to differences in how the MAR and the Warren Group collect data, though that doesn’t appear to account for the markedly different results. And Wluka further contends that MAR has always offered a sober appraisal of the market.

Not everyone is convinced of that, though, including Wellesley College’s Chip Case, one of the nation’s top experts on the residential real estate market.
“They (Realtors) have a stake in high (home sales) volume,” Case said. “They care if people are trading. They have a huge stake in optimism. When optimism goes away, people don’t spend money on big-ticket items.’


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Tuesday, December 12, 2006

What’s In a Word

The most significant result of today’s FOMC meeting was the simple insertion of the single word “substantial” in their statement regarding the housing decline.

It appears that Bernanke and the other Fed officials are not only firmly aware of the extent of the housing downturn but they are now also willing to share their outlook publicly.

Let’s examine the changes made to the FOMC housing sentiment in 2006.

May

“The Committee sees growth as likely to moderate to a more sustainable pace, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.”

June

“Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.”

August

“Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.”

September

“The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market.”

October

“Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace.”

December

“Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters.”


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Monday, December 11, 2006

April Showers Bring…?

This coming spring home selling season has got to be the most important event in residential home sales history.

The stakes could not be higher.

Think about it.

If, after all the pent-up inventory hits the spring market, buyers once again refuse to show, things are going to look horrendous especially if the economic and interest rate environment continue to appear favorable.

Here in the Northeast it’s clear that home sellers are taking a hiatus.

Perusing just about any town in the Boston metro area using the Inventory Tracking Tool clearly shows MLS inventories at the lowest levels since the tool became available last May.

Sellers have obviously pulled their listings until spring in hopes of reentering the market in a more favorable environment.

Unfortunately though, this practice is occurring in droves so unless buyers turn out as well, things will end up right where they were last spring except with an even greater numbers of homes for sale.

Additionally, it’s interesting to consider if winter weather conditions will help or hurt home inventories in areas like the Northeast.

If this winter is mild, then you should expect to see some homes start to reappear after Super Bowl Sunday on February 4th when home buyers will be free to spend their Sunday afternoons attending open houses.

A mild winter might help inventory levels as having more reasonably temperate days to sell homes could prompt an earlier start to the spring market.

On the other hand, if buyers don’t show, this could also result in even more inventory backup which is what appears to have happened last winter in the Northeast.

Only time will tell, but it does appear that spring 2007 could represent a significant turning point for the US housing market.

What do you think??


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Friday, December 08, 2006

Conflict of Outlook

The latest release of both the National Association of Realtors (NAR) “Real Estate Practitioners Survey” as well as the National Association of Home Builders (NAHB) “NAHB/Wells Fargo Housing Market Index Report” show that, although the industry groups are now simultaneously promoting the notion that the housing market is “stabilizing”, actual practitioners confidence is at record lows and continuing to slip.

Both reports are essentially surveys that ask practitioners to rate, with a fixed scale, their sentiment or outlook given a series of questions. Then the response scores are averaged and a value of 50 marks the threshold between “strong/good” or “weak” conditions.

Probably the most startling aspect of the NAR report is that is shows that with the exception of seller traffic, every measure of sentiment is now down below 50, in some cases way below, indicating that practitioners are currently experiencing significant weakness and continue to expect more in the future.

Perception of seller traffic, on the other hand, has increased 13.6% which when taken together with a 34.6% decrease in buyer traffic, offers some additional evidence that conditions are continuing to deteriorate.

Additionally, 23.9% of NAR respondents predict that home prices will drop in 2007.

The NAHB report also shows that record low sentiment continues to permeate the industry with all three component measures (current single family, future expectations of single family and current buyer traffic) falling high double-digit percentages bringing the current values down to depths only reached during the 1990’s real estate bust.

So it appears that we have a conflict of outlook and sentiment.

On one hand you have the industry groups who are promoting an optimistic “stabilization” view, on the other there are the thousands of industry practitioners who are indicating just the opposite.

The NAR report shows that versus November 2005:

  • Current Sentiment for single family home conditions has dropped 38.7% to 36.7 from 59.5.
  • Future expectations for single family home conditions have dropped 28.4% to 43.3 from 60.5.
  • Current Sentiment for town-home conditions has dropped 37.8% to 30.5 from 49.0.
  • Future expectations for town-home conditions have dropped 32.6% to 33.9 from 50.3.
  • Current Sentiment for condos conditions has dropped 36.9% to 29.8 from 47.2.
  • Future expectations for condos conditions have dropped 33.1% to 32.9 from 49.2.
  • Current traffic of prospective buyers dropped 34.6% to 32.2 from 49.3.
  • Current traffic of prospective sellers increased 13.6% to 61.9 from 53.5.
  • Current Sentiment for Northeast real estate conditions has dropped 36.3% to 27.9 from 43.8.
  • Current Sentiment for Midwest real estate conditions has dropped 30.8% to 29.8 from 43.1.
  • Current Sentiment for South real estate conditions has dropped 25.1% to 46.8 from 62.5.
  • Current Sentiment for West real estate conditions has dropped 53.7% to 36.5 from 78.8.

The NAHB report shows that versus November 2005:

  • Current sentiment for single family home conditions has dropped 50.7% to 33 from 67.
  • Future expectations for single family home conditions have dropped 29.2% to 46 from 65.
  • Current traffic of prospective buyers dropped 43.5% to 26 from 46.

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Wednesday, December 06, 2006

OH YEAAHH?

First, a major hat-tip goes to CalculatedRisk for posting the audio stream to yesterday's Toll Brothers conference call as well as SeekingAlpha who has posted the complete transcript.

After listening to the call, it’s remarkable to review the traditional media reports and see the shallow depth at which they covered CEO Robert Toll's outlook for the housing market.

It was widely reported yesterday that Toll was essentially calling a bottom in the new home market, particularly for a couple areas of Washington DC and Maryland.

But upon further questioning by analysts during the conference call, Toll backed way off his optimistic outlook suggesting that he was not forecasting optimism but rather simply reporting the market conditions that he seemed to be observing in the last few weeks.

“I don’t think I put my neck out. I think I made a statement with regard to what I witnessed and I thought I should make that statement because that I witnessed it, just as I made the statement many moon ago that things stink and that we were getting chopped but I don’t think that I made a statement with respect to the future.”

“I didn’t mean to project optimism... I only meant to project what I had seen in the past...”

Furthermore, when Toll elaborated on what he had been witnessing in the Washington DC and Maryland markets, he recounted that for some undisclosed number of communities, on average, two non-binding contracts were signed per community.

“… this past weekend for instance we had quite a few communities take non-binding deposits. These are the deposits before we go into the real deposits for the agreement of sale which are not returnable. We had taken two deposits per community and that would give us heart to believe that markets are responding better than it had in the past.”

Toll then further digressed on the Washington DC market and seemed to really be stretching for legitimate footing while justifying his optimism.

“Let’s just take the DC market as an example. Sales have fallen in the DC market. The DC market probably has an unemployment rate of about 0. And come to think of it, I think every committee in Congress, both houses, is going to change its staff entirely not to mention that there are 40 or 50 odd people that have not been in Washington that will be soon so there’s some minor demand coming from switching politics.”

It was surprising to hear a CEO of a leading national home builder that, in general, builds roughly 8000+ homes a year justify future demand in and around a major city by citing the possibility that 40 or 50 new federal legislators may want to buy a luxury home.

Not to mention that there are 40 or 50 federal legislators leaving DC as well the fact that many federal staff members are probably not exactly luxury home buyers in the first place.

Additionally, when asked about activity other areas around the country Toll seemed to get overly excited by recent results in Detroit.

“You know actually we commented this weekend… we sold 5 homes in Detroit.. that… that’s fabulous..”

Eventually though, Toll admitted that there was little to no margin being made on home sold in the Detroit area.

Possibly the best question was asked by Credit Suisse's Ivy Zellman who asked:

“… Here you are Mr. ‘much more bullish’, talking about big pent up demand and clearly you were surprised on the spiral downward. And for the first time in 15 years you are going to be down versus 06 and I think that you seemed like a very broken man last time you were on the call, and here you are a new man and I’m wondering which Kool-Aid your drinking because I want some…”

Toll obviously seemed a bit flustered by this line of questioning responding:

“I’ve just told the market what we have witnessed so that they have that information to deal with. I’m not making a prediction... “

In a follow up question Zellman asks:

“…you said the stock would continue to surge why only buy 12,000 shares of your stock why not buy a boat load of stock back if you really believe the stocks were headed north here?”

Toll responds oddly:

“… The answer is that I believe that I could make more money with my cash buying land and expanding the business than I believe that I could make by buying my stock. Buying stock is kind of a one time thing I think...”

To that Zellman concludes:

“I think a lot of people, if they ever follow you Bob, and you’re buying and selling, personally would have made a lot of money. And ill leave it at that.”

The following is a transcript of some of the better questions asked in yesterday’s conference call:

Q: Elaborate on you reports of stabilization...

TOLL: Sure, this past weekend for instance we had quite a few communities take non-binding deposits. These are the deposits before we go into the real deposits for the agreement of sale which are not returnable. We had taken two deposits per community and that would give us heart to believe that markets are responding better than it had in the past. And we saw this kind of pickup over the past month approximately so it would appear to us that whereas as I said in the monologue dancing along the bottom for a couple of months recently last month it appears that we are now off the bottom, a level above it and that heartens us. We also noticed approximately the same thing in Maryland though Maryland never went down as deeply, didn’t go into the ashcan as the northern Virginia market probably because there was much less speculation, there were fewer lots available for construction in the Maryland market it was a tighter market so there we are now at a level which is pretty acceptable. Florida picked up a little bit on the east gold coast on primary markets and I think it picked up in Jacksonville... one moment while I search for that... (flips pages) no not really it didn’t really pick up in Jacksonville. I guess that’s about it.

Q: With the glut of recently constructed used and investor homes on the market what differentiating features is Toll Brothers now including in its houses that did not exist a year or so ago.

TOLL: That’s actually a good question. What we’ve done, where we see that we have... I choose not to use the word glut thank you Michael… but where we have more specs than we ever excepted or wanted we have changed appliance packages so that when you walk into the home you see Bosch, Miele, Viking, Wolf and Sub-Zero instead of the great stuff that we have been using. Its just as good, looks just as good but just doesn’t have that brand recognition. So that’s an example of one of the tings we are doing to move.

Q: Realizing its the beginning of December which is typically a time where most builders we talk to are not willing to make a stand one way or the other on what the next several months or even a year will bring with respect to the outlook especially because most builders are waiting till post-super bowl to make a stand based on how the spring selling season actually pans out and Here you are Mr. ‘much more bullish’ talking about big pent up demand and clearly you were surprised on the spiral downward and for the first time in 15 years you are going to be down Vs 06 and I think that you seemed like a very broken man last time you were on the call and here you are a new man and I’m wondering which Kool-Aid your drinking because I want some because that not what we are hearing from a lot of the other.. no one else in the industry is willing to stick their neck out and a lot of people got burned so I’m wondering what do you see in the data because your numbers certainly don’t show it today and there’s clearly a lot of risk that 07 wont bring the optimism to reality that your seeing so why stick your neck out now Bob?

TOLL: I don’t think I put my neck out. I think I made a statement with regard to what I witnessed and I thought I should make that statement because that I witnessed it just as I made the statement many moon ago that things stink and that were getting chopped but I don’t think that I made a statement with respect to the future. I don’t think that I’ve said that because of what we have witnessed that we are going to. I’ve just told the market what we have witnessed so that they have that information to deal with. I’m not making a prediction... the pent up demand statement I believe is accurate and I think it falls logically. Lets just take the DC market as an example. Sales have fallen in the DC market. The DC market probably has an unemployment rate of about 0. and come to think of it I think every committee in Congress, both houses is going to change its staff entirely not to mention that there’s 40 or 50 odd people that have not been in Washington that will be soon so there some minor demand coming from switching politics. but with the unemployment in DC being near 0 and with sales going down and with more people moving into the district with business going up in the district it would logically not definitely but it would logically follow that demand is increasing in the DC market and yet sales were going down until we saw them recently coming off the bottom and dancing above the bottom and therefore we don’t thin that its illogical to assume that pent up demand is building using that market as an example but that is all that we are saying.

Q: I would wonder then why If your as optimistic as you seem...

TOLL: I didn’t mean to project optimism... I only meant to project what I had seen in the past...

Q: OK, well just say that you read an analyst’s work that you said the stock would continue to surge why only buy 12000 shares of your stock why not buy a boat load of stock back if you really believe the stocks were headed north here?

TOLL: Well, I referred to somebody else’s belief but let us say that I believed, which I’m unwilling to make a statement on... let us assume your proposition that I believe, which I don’t necessarily, but let us assume that I do.. Your question of why wouldn’t I buy stock. The answer is that I believe that I could make more money with my cash buying land and expanding the business than I believe that I could make by buying my stock. Buying stock is kind of a one time thing I think...

Q: I think a lot of people if they ever follow you Bob and you’re buying and selling personally would have made a lot of money. And ill leave it at that.

Q: What are the worst markets out there that you guys are operating in today?

TOLL: Las Vegas market in comparison to what it had been doing qualifies for a rotten market and most recently the Phoenix market which did well for us long after everybody else said poor things about it has turned sour for us. Reminding me of Detroit… You know actually we commented this weekend we sold 5 homes in Detroit... that that’s fabulous.. who knows what’s going on in Michigan but we’ve been doing that for a couple of weeks now.. and Minnesota is definitely an F market for us.

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Tuesday, December 05, 2006

Dancing On The Bottom

Today Toll Brothers released its “Fourth Quarter and FYE 2006 Earnings Results” report outlining both the dramatic drop-off in contract activity and income in 2006 as well as projecting a truly dismal future for 2007.

Particularly notable was the $92.7 million in after tax land write-downs to owned or optioned lots, a 94.5% increase compared to 2005.

Toll Brothers divested itself of some 17,200 lots in 2006 leaving them owning or controlling through options roughly 74,000 lots, a 19% reduction from the peak of 91,200 lots.

Worst of all though was Toll’s profound projections for a 50.5% - 60% decline in net income as well as a 17% - 29% fall-off in total revenues for 2007.

Additionally, Toll stated that they will budget an additional $60 million for land-write downs during 2007.

In the release CEO Robert Toll suggests the following:

“Fifteen months into the current slowdown, we may be seeing a floor in some markets where deposits and traffic, although erratic from week to week, seem to be dancing on the bottom or slightly above. The metro D.C. suburbs of northern Virginia, which was the first market in which we saw activity slow, seems to have stabilized, although at levels much lower than those we have enjoyed over the past few years. In metro DC’s Maryland market, a more lot-constrained region where builders built fewer spec homes and there were fewer speculative buyers, the market also appears to be stabilizing.”

“Right now is a great time to buy a new luxury home. Builders are motivated to sell their specs and the fundamentals that typically lead our industry out of a slowdown are already in place. Interest rates are near historic lows, unemployment is near an all-time low and the stock market is setting records.”

Although less than 30 days ago, this was Bob Toll’s sentiment:

“We continue to look for signs that a recovery is imminent but can’t yet say that one is in sight.”

Here are some of the interesting data points from today’s release:

Full Year Results

  • Net income was $687.2 million down 14.75% as compared to 2005
  • $92.7 million in after tax land write-downs up 94.5% as compared to 2005
  • EPS declined 13% as compared to 2005
  • Total revenues were $6.12 billion up 6% as compared to 2005
  • Signed contracts were $4.46 billion down 38% as compared to 2005
Forth Quarter Results

  • Net income was $173.8 million down 43.9% as compared to Q4 2005.
  • $68.7 million in after tax land write-downs up 97.9% as compared to Q4 2005
  • EPS declined 42% as compared to Q4 2005
  • Total revenues were $1.81 billion down 10% as compared to Q4 2005
  • End backlog was $4.49 billion down 25% as compared to Q4 2005
  • Signed contracts were $706 million down 56% as compared to Q4 2005
2007 Projections

  • $4.34 - $5.10 billion in total revenues for 2007 (a decline of 29% - 17%)
  • Net income between $260 mil - $340 mil (a decline of 62% - 50.5%)

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Monday, December 04, 2006

Unstable Stabilization

Today, the National Association of Realtors released its October “Pending Home Sales” report which showed that nationally, pending home sales had declined -1.7% as compared to September and dropped 13.2% as compared to October 2005.

The National Association of Realtors developed the “Pending Home Sales” index as a leading indicator based on a random sampling of roughly 20% of the month’s transactions for exiting home sales and indexed to the average level of contract activity set during 2001.

In typical fashion, David Lereah, Chief Economist of the National Association of Realtors attempted to spin the data to a more positive outlook while presenting yet another version of the now fatigued “market is stabilizing” analysis.

“It’s important to focus on where the housing market is now – it appears to be stabilizing, and comparisons with an unsustainable boom mask the fact that home sales remain historically high – they’ll stay that way through 2007,”

As usual, looking more closely at the results one might draw a less optimistic conclusion:

  • Nationally the index was down 13.2% as compared to October 2005

  • The Northeast region was down 13.5% as compared to October 2005.

    • Additionally, October marks the fifth consecutive month that this region has registered activity BELOW the average activity recorded in 2001, the first year Pending Home Sales were tracked.

  • The West region was down 17.4% as compared to October 2005.

  • The Midwest region was down 15.4% as compared to October 2005.

    • Additionally, October marks the fourth consecutive month that this region has registered activity BELOW the average activity recorded in 2001, the first year Pending Home Sales were tracked.

  • The South region was down 9.4% as compared to October 2005.
So it appears that, year-over-year, contract activity is dropping rather sharply with the All regions now showing significant declines.


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Saturday, December 02, 2006

Constructing Capitulation: November 2006

November seems to have brought back a smidgen of reality to real estate Bulls, having spent four magnificent weeks in October basking in the glow of Greenspan only to find that another month of truly heinous housing numbers were just around the corner.

Nevertheless, home building stocks began to present the initial stages of a rally after gaining votes of confidence from a round of analyst upgrades as well as the Bill and Melinda Gate Foundation.

Having only just entered the initial stages of this historic housing decline, it will certainly be interesting to see how investors function as accelerating weakness takes a further toll on the home builders.

November gave us the following:

  • NAR's Pending Home Sales report showed increasing declines to existing home sales both nationally and regionally, but most notably in the Northeast and Midwest regions where home sale activity has registered below 2001 levels for several months running.
  • A New Construction report showing housing starts plummeting to a six year low while regionally, housing permits showed some truly astronomical declines.
  • NAR's third quarter wrap-up showing that now 39 states are experiencing home sale declines with many of the formally hot areas showing high double-digit drop-offs.
  • The White House significantly downgrading its expectations for GDP for the remainder of 2006, 2007 and beyond.
  • An Existing Home Sales report showing the greatest single monthly drop to national median home price on record as well as a host of significant sales declines.
  • A Revision to Q3 GDP showing further declines in “Residential Investment” shaving a whopping 1.16% from GDP.
  • A New Home Sales report showing a host of truly astounding sales declines with the regional leader, the Northeast, presenting a 52.6% drop-off.
Now, December is opening with another, significant indicator that the housing decline is having a wider impact on the overall economy with the latest release of the Commerce Departments “Construction Spending” report.

The October report presented significant downward revisions to the August and September “residential construction” values resulting in an even more dramatic fall-off over the last 11 months.

Key Report Details:

  • The seasonally adjusted annul rate of private residential construction spending has now dropped 10.29% from the peak set back in December of 2005.
  • Overall private residential construction spending dropped 9.4% as compared to October 2005.
  • Single Family residential construction spending dropped 17.2% as compared to October 2005.
  • The latest 9.4% year-over-year decline is the LARGEST percentage drop in 12 years and the greatest drop to date for this year and for this cycle.





November clearly struck a dissonant chord to Octobers, maestro lead upbeat “worst is behind us” tune, now it will be interesting to see if December brings some sharp refocused expectations for the American Consumer and possibly even some reflection on housing related negative wealth effect should this holiday season be slow.

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Friday, December 01, 2006

Turning The Titanic

Like a colossal ocean liner executing a slow but concerted about face, the country’s housing market is in the midst of a striking transition.

After years of outstanding growth to home prices, the first three quarters of 2006 have brought certain evidence that price appreciation in most of the country is decelerating and in some areas even going negative.

Yesterday, the Office of Federal Housing Enterprise Oversight (OFHEO) released its third quarter report on national home prices showing the pronounced slowdown through its long running home price index series.

“Our newest data confirm last quarter’s data that the housing market is in a decidedly different stage,” said OFHEO Director James B. Lockhart. “With U.S. house prices growing less than one percent during the third quarter, it provides more evidence that the long forecasted national deceleration in house prices is occurring. Given the five-year appreciation prior to this quarter of 56.8 percent, the slowdown is not unexpected. There are still some areas where appreciation rates remain very high but now they are the exception rather than the norm,” Lockhart said.

To better help visualize the OFHEO home price index, I have implemented a tool that allows you to dynamically view and mix any of the 442 different statistical regions that are reported on.

Click HERE to use the tool which is also found in the upper right list of “Cool Tools”.

Below is a chart generated by the tool that displays the US states that are actually experiencing price declines (click for larger version).




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