Thursday, October 27, 2005

Wanted: Skilled Labor in Nevada

Back on August 5th of this year, when certain readers of this blog goaded yours truly into making an actual investment call—as opposed to merely tossing out “sarcastic and rambling” content, as BusinessWeek put it—I stated then and there that the housing cycle as we knew it had peaked.

At the risk of doing a Bob Dole by referring to myelf in the third person, here’s the quote from that day’s piece called “Playing the Spot Market...For Houses”:

I guess—like the old-time money managers in 1999-2000 who either closed up shop or got with the New Economy—I'd better either jump on the real estate bandwagon or stop barking at the tires.Nope. I'll put a stake in the ground right here, and say what so many others have been saying for so long that they've shut up already: the housing cycle is over. The high-water mark has been reached, today, August 5, 2005, when the 2 year yield hit 4.10%.

Now, the point of today’s piece is not to talk about how smart that call looks. It could still be wrong, and, in hindsight, very dumb.

After all, Tuesday’s Wall Street Journal reported that the hurricanes that have caused such havoc and destruction along the Gulf Coast have also caused something else…real estate mania:

“It’s like we got on the map with the storms,” said one Pensacola realtor: “We’re getting investors from Massachusetts, Colorado, Oklahoma—places we never saw buyers from before.”

Recently, one such buyer from Oklahoma bought a property for $200,000 and sold it weeks later for $395,000…

Now, I am sure somebody from Massachusetts or Colorado or Oklahoma is much smarter than a chuckle-headed Pensacola native willing to sell his battered house to a speculator from Wellesley and take a rental down the street.

But before leveraging up to the eyeballs, those somebodys had better check their Bloomberg screens, or, at the very least, the interest rate tables in their Daily Oklahoman and Boston Globe.

If they do, they will see that the yield on the two year note, which bottomed at a mere 1% before the Fed started jacking up rates last year, reached 4.37% yesterday—higher even than the 4.10% yield which, I concluded on August 5th, was high enough to put the kibosh on the housing bubble.

Why, you may ask, is the two year yield so high relative to the benign “core inflation” number of 2% that all the TV economists toss around?

Well, perhaps the bond market is no longer restricting its reading material to Federal Reserve meeting minutes and Steve Roach End-of-the-World forecasts, but is observing what is actually happening out in the real world, by, say, listening to some of the third-quarter earnings calls that are freely available to all comers.

If so, the New Bond Vigilantes would have heard management from the King of Beers last night discuss “significant” increases in packaging costs and “huge” increases in utility and energy costs.

For the moment, those higher-than-core-CPI costs will not show up in the price of a can of Bud, because the company is engaged in a market-share battle with a newly revived Miller while both lose drinkers to hard liquor. So Bud eats the cost increase.

Not so for home builders and cruise line operators, however.

Pulte Home’s average selling price was up 9% over last year, while Royal Caribbean Cruises raised prices enough to more than offset a 6.4% increase in cost per passenger. And while it is quite literally coining money thanks to decade-high prices for gold, Newmont Mining is struggling to deal with “shortages of skilled labor in Nevada and higher prices for energy.”

And thus the “core inflation” rate—i.e. “ex food, energy, beer cans, utilities, housing, gold, insurance, health care and skilled labor in Nevada”—can be manipulated to look pretty much as it always has: 2%.

But the bond market is no longer fooled: it wants 4.37% for a two-year commitment to government paper.

Housing buyers beware.

Jeff Matthews
I Am Not Making This Up

Note: this piece was written prior to the announcement of an SEC investigation into accounting practices at General Motors, which has caused an early-morning “flight to safety” in the treasury markets, bringing the two-year yield down to 4.35% as I write this. Still a far cry from the 4.10% of August 5th, and the 1% bottom in 2004.

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


bison said...

Yesterday Centex (CTX) announced a 5% discount plus other incentives on some homes in the Atlanta market. Not signs of a hot market, to say the least.

DaleW said...

If so, the New Bond Vigilantes would have heard management from the King of Beers last night discuss “significant” increases in packaging costs and “huge” increases in utility and energy costs.

For the moment, those higher-than-core-CPI costs will not show up in the price of a can of Bud, because the company is engaged in a market-share battle with a newly revived Miller while both lose drinkers to hard liquor. So Bud eats the cost increase.

Last time I checked, you can't just order your beer from Budweiser is not a distributor or a retailer -- they have to get price increases through an increasingly consolidated retail industry and I doubt that is happening in real time. Every vendor I see is getting squeezed by the big boxes, supermarkets, and other distribution points. Budweiser's margins are under attack and it will get worse.

As for "core" vs. headline CPI, it was never meant to divert attention from what a household's total budget might be, but as a measure of how inflationary pressures are being fed through to final pricing of consumer goods ex food and fuel. We're talking about 85% of consumption expenditures there, so it's not like "core CPI" is some small number that doesn't reflect reality. It's also meant to provide a less volatile, more secular view of inflation in the economy.

A child of an inflationary era

dthorn said...

There's no I in Jeff Matthews

Whew! that was close if you had just substitued 'Jeff Matthews' each time you wrote 'I' you would have pulled a Bob Dole. Blogging is full of risks

blackbenz said...

From Furniture Brands International (FBN) "America's largest home furnishings manufacturer" most recent earnings report:

Mr. Holliman concluded, "Business conditions in the middle-price points remain challenging, and we see nothing in the marketplace to indicate improvement in this segment in the near term.

Additionally, we are managing around unprecedented raw material price increases, particularly with reference to polyurethane foam, a situation that will likely continue through the fourth quarter. With respect to the fourth quarter, we expect net sales to be off low single digits versus the year ago period and net earnings to be in the 19 to 23 cent range, which includes the effect of 4 cents in restructuring, asset impairment and severance charges. As is our practice, we will provide an update on our fourth quarter expectations in early December."

hundredyearstorm said...

In red-hot housing markets around the country, most homebuilders have enacted strict anti-flipping clauses to deter speculators from buying in their new communities. Now, Lennar (LEN:NYSE) , one of the country's largest builders, has quietly taken the unusual move of dropping the restrictions at several of its South Florida developments.

Local brokers say the decision shows just how much Lennar needs the flippers to keep order numbers up at certain communities.

Over the past year, speculators have been portrayed as the cockroaches of the housing industry. These pesky investors who buy homes with the intent of flipping them for a quick profit have been blamed for much of the supposedly irrational pricing in markets such as Miami, Phoenix and Las Vegas.

Much of the speculative activity takes place in the condo market, where investors used risky interest-only mortgages to buy condos before they were constructed.

In the greater Palm Beach, Fla., market, Lennar recently dropped the stringent anti-flipping clauses at several of its townhome communities: Martins Crossing and Whitemarsh Reserve in Stuart; Newport Isles, which also offers single-family detached homes, in Port St. Lucie; Cielo, in Jupiter; and Central Park in Boca Raton, according to Lennar's local sales offices.

The clauses, inserted in sales contracts beginning in August, aimed to deter speculators by requiring owners to pay 10% of the resale price to Lennar if they sold the home within a year of purchase.

"When you go from making sales to making no sales, you've got a problem," Mike Morgan, broker-owner of real estate brokerage firm Morgan Florida, says about Lennar's decision for its Palm Beach properties. "With the investor policy, there was no way they were going to make their next quarter numbers."

The Palm Beach market, like the rest of South Florida, has seen booming housing prices over the past few years. Port St. Lucie has been one of the fastest-growing cities in America, according to Census Bureau data. But lately, the market has slowed down a bit, local brokers say. Morgan says Lennar recently boosted its commission to outside brokers like himself back to 3%, after dropping it to 2% earlier this year. The company has also been offering more incentives -- such as $15,000 off certain new homes -- to move product, he says.

Lennar spokesman Marshall Ames wasn't aware of the move to drop the restrictions at certain properties. "We have long had a policy for discouraging speculators," he says, explaining that it is not a uniform policy but rather a market-by-market decision by the company.

Public homebuilders began enacting anti-flipping clauses for several reasons. One was the public relations factor, with builders saying they would rather have buyers inhabit their homes rather than immediately hang for-sale or for-rent signs across the community. Builders also don't want to compete with the resale market when selling their own homes. Many flippers are selling homes in communities where builders haven't finished selling their own stock.

Calls to Lennar sales offices in Miami and Orlando confirmed that one-year anti-flipping clauses are still in place for properties there.

"You don't want the investors because they ruin your market. The investors are driving pricing unrealistically, we believe," says Ray Gilbert, a sales consultant at North Shore at Lake Hart-Mallard Landing, a Lennar property in Orlando. Gilbert says the anti-flipper policies for Lennar's Orlando properties were enacted a year ago and require that owners selling a home within a year pay 50% of the profits to Lennar. In Miami, like the former Palm Beach policy, if you sell your home within a year, you pay 10% of your resale price back to Lennar. It's not clear when the Miami policy was enacted.

In the Palm Beach market, Lennar was one of the last of the builders to enact anti-flipping policies, according to Morgan, the local broker. But the policy ended up being a bust for sales, he says.

Centex Homes (CTX:NYSE) , which is also very active in the Palm Beach market, has kept its strict investor policy in place. If you buy a Centex home and sell it within a year, Centex keeps all of the profits, according to the company's local sales office.

Greg Gieber, an A.G. Edwards analyst who wasn't aware of the Lennar move, says he hasn't heard of any homebuilders reversing clauses like Lennar has. He expects speculative activity might be dying down nationally but remains concerned about its influence on the national market. "If it's in the condo market, I'm less worried than if it's in the detached single family market," he says. Townhomes lie somewhere in between condos and single-family homes in terms of his concern, Gieber says.

Rebecca Adams, a Realtor with Re/Max in Stuart, Fla., says speculators have accounted for a good portion of the buyers of newly constructed homes in the Palm Beach market over the past year. Once builders starting deterring them more, inventory piled up, she says.

"Now because they've said 'no more investors,' now they have to offer the incentives," Adams says. "I think things are slower than they had anticipated."

Adams says some builders are now offering everything from free appliance upgrades -- like a $250 to $500 sink upgrade -- as well as agreeing to pay a percentage of the closing costs (about 3%), and paying for title insurance (which on a $400,000 home amounts to about $2,400). Adams says offering to pay for title insurance is new, and that the percentage paid on closing costs has risen lately.

She also says the anti-flipping clauses were never a great deterrent for speculators, who are still hanging around looking for properties to buy. If speculators can sell for a $100,000 profit in under a year, they'll happily give builders a percentage of that -- even as high as 20% -- she says.

With speculators now welcome at the Lennar properties once again, perhaps demand will shoot up. If anything, the move points to how certain areas in South Florida have cooled off compared to 2004 as homebuilders attempted to drive away speculators. "A year ago, this was an order-taking market," says Gieber, the A.G. Edwards analyst. "I think things are slowing. Things are not falling out of bed."

Stuck_in_Sarasota said...

I live in one of the biggest housing/condo bubble markets in the U.S. (Sarasota, FL). The cracks are already starting to show.

Three times in the past 7 days, the local newsrag has run articles about the local real estate market weakening. Of course, in each article, they quote 1-2 local realtors, who are in complete denial and cry that this is just a blip and not a trend. Here was yesterday's:

The condo market is downright dead here. A new condo 2 blocks from my house was finished 3 months ago. To this day, it sits completely (no exaggeration) empty, with realtor advertisement signs in front of the building. Directly across the street from this empty condo, another condo project sits half-built.

A few blocks away (downtown), there are condo-for-sale signs everywhere, as the Five Points condo project is nearing completion.

I had to laugh yesterday morning...was taking my greyhound for his morning we walked by the aforementioned 100% empty condo, my dog took a large dump in the gated entryway to the empty parking lot of this condo. I usually "clean up" after my dog, but not this time - a big pile of dog crap in the driveway to this condo was akin to a picture saying 1,000 words. Welcome to Sarasota - "Condo Bubble-ville USA."

Counter Trey said...
This comment has been removed by a blog administrator.
Maja said...

I am on a rant. America’s economy has always been able to sustain political storms, but I am not sure it can weather the current hurricanes and tornadoes ripping through the balance sheets of so many states, counties, cities, towns and villages. Of course, housing prices have been pushed up in the wake of all the devastation. However (there’s always a “however”) my Boca Raton real estate site deals with what is starting to look like a slowdown in the velocity of home sales. End of the rant. I’m currently in the mood to hit the "next url" link at the top of the page, which brought me to your site, and this rant. I did enjoy your blog. Off I cyberskip to the next site :o)