Comments (7)

• greg

  First, if you use Nevada, Florida and Georgia as your basis of the state of real estate, you are being too bias to the depressed areas. I could easily counter your bias with results from the Carolinas, Texas and New York.

  Second, the 10 month supply of housing is based on current sales. With sales at a all time low, any move off the bottome will wipe that supply out in short order.

  Third, there are 1 million housing units (homes and apartments) lost each year to fire, natural disasters and demolition. We are currently building less than half of that number.

  Fourth, population growth creates a demand for another 1 million units per year. While people have moved in with family during these hard times, this trend will not continue.

  Fifth, you need to understand how the construction industry will recover. First to recover will be the low cost homes as new buyers and those that had to downscale get back into the market. Then the mid range homes follow with the high end homes close behind. Commercial will be the last to recover as business expands with the added construction jobs and people needing products for their new homes.

  PHM and CTX understand this recovery. PHM needed a low end homebuilder to capture the initial revenue from the first homes that sell. CTX needs the staying power that a mid range builder offers. Plus the Del Webb neighborhoods continue to sell to the over 55 group and will into the future as the baby boomers retire in greater numbers.

  Sixth, other builders all looking for mergers to position themselves to the move in the housing market. TOL needs to find a low end builder to balance their high end division to insure cash flow.

  Seventh, the construction industry is not going to return to the stupid levels in the past as it was held high by over speculation. You mentioned the Case Shiller Index which ETF's were tied to. And just like the effects of ETF's on gold demand, they had the same effect on over demand in many of the housing markets.

  Eighth, you may never see condos return to their lofty levels. All housing depreciates with age, it is the land or location that appreciates. The trick in real estate investment is to pick a lot that appreciates fast than the home depreciates. Most condo units don't offer the land or location value.

  And finally, if you are playing the odds, at the current price level of real estate, I would take the upside bet over it going lower. I am seeing good upward movement in Lumber Futures, material companies like PCL, WY, OC, USG, CX and LPX. And with interest rates below 5% for jumbo financing, sale will come.

  Published: April 9, 2009 11:54 AM

• Mac

  @greg

  How does rising Lumber Futures turn into homebuilders selling more?

  Wouldn't rising lumber futures mean higher costs for the builders? Or rising prices for homebuyers?

  And that rates are below 5% means that many buyers will buy what they couldn't afford normally.

  Published: April 9, 2009 2:22 PM

• Jonathan Finegold Catalán

  From the Economist:

  "Commercial property may also give investors as many headaches as residential. One of Boston’s most notable buildings, the John Hancock Tower, recently sold at a foreclosure auction for $660m. In 2006 it was bought for $1.3 billion. Standard & Poor’s, another rating agency, has said that many commercial mortgage-backed securities are highly susceptible to downgrades. The spread over Treasuries of the index by Markit, a data provider, of AAA-rated North American commercial mortgage-backed securities is now almost six percentage points, compared with just over one point last May."

  http://www.economist.com/finance/displayStory.cfm?story_id=13447001&source=hptextfeature

  Published: April 9, 2009 3:21 PM

• greg

  Mac,

  Lumber futures rising means demand for lumber is increasing. If it is increasing, then there must me more lumber being hammered into housing. When investing in home builders, watch this number very close as it will give you heads up on home building stocks. Other basic materials in construction give you the same heads up such as cement, insulation, drywall and roofing materials. Later on in the cycle you will see equipment manufacturers start to perform.

  When rates drop, it makes homes more affordable to more people. If a person can't afford a home at 5.25% they just can't buy, but if they can at 4.5%, then they enter the market. Each 1/10 of a point decrease brings more people into the market that are on the margin. And you are right that rising lumber cost will increase prices, that is why the smart buyers buy now with the total package being low. But in my experience, there are very few smart buyers in real estate.

  One other point I want to make about today's activity is the performance of Wells Fargo (WFC). The preannounced when their projected earnings will be for the first quarter. They are record profits and a lot has to do with that is the increase in mortgages. While a lot of them were refinances and the purchase of distressed homes, a good number was new and existing home purchases. This resulted in the major upmove in the market today. I look to other banks to announce the same which will reverse the effects of the short sellers as most of them will be rushing to cover their shorts.

  And I really must thank Mr. French for a contempory article today. As a small builder turned investment manager, I really enjoyed it.

  Published: April 9, 2009 3:23 PM

• pbergn

  I don't get it - why then the prices of residential and commercial real estate are not going down more steeply?! Isn't it the whole premise of market setting the prices right?!

  Why then the market would not regulate the real estate prices? What has broken?

  I don't get it - if there is weak demand, why then the builders or sellers are not lowering their prices so that their properties are sold? Or, is it that everybody is trying to outwait each other - hoping that the prices will climb back again?

  What really bewilders me is why market forces do not pull the housing prices down. It is not profitable for the sellers and owners of real-estate for sale just to sit on it, such as banks still clinging to their old and newly acquired real estate inventories...

  On the flip side, I don't see who can really afford any real estate without any leverage these days. If you think about it, 80% of all, so-called, real estate "owners" are borrowers. They all have a mortgage of some kind behind it. So, now, with drastically diminishing earning opportunities for ordinary Americans, I don't see how the whole real estate bubble is going to be re-inflated back, unless the foreigners, owning the Uncle Sam's debt swarm in and start buying stuff left and right like Japanese did in the 80's...

  Sure beats me...

  Published: April 9, 2009 10:49 PM

• AC

  @ pbergn

  I'm going to hazard a guess to your question why real estate hasn't come down further.

  I think the Fed putting large sums of printed money into the banks and institutions that were and are holding the junk mortgage paper has created a floor in the real estate market. If the banks were being liquidated, so too would their holdings be liquidated as quickly as possible. The fiat injection is in a sense currently inflating the real estate market.

  I don't know how well the injected fiat currency will hold the real estate prices. There are a host of other factors at work, but I'm fairly confident that had banking institutions began failing en masse, the real estate prices which were and are backing a good portion of the financial sector would've also fallen much, much further.

  Published: April 10, 2009 5:28 PM

• filc

  @pbergn
  "I don't get it - why then the prices of residential and commercial real estate are not going down more steeply?! Isn't it the whole premise of market setting the prices right?!"

  Because the bubble hasn't popped yet, we haven't let it. Quiet a silly question to ask after two trillion dollar bailout packages in addition to the monstrous amount of money the fed created last year.

  Published: April 10, 2009 8:42 PM