Tuesday, January 30, 2007

Housing Bubble and Real Estate Market Tracker

Judy Weil submits: Here's our summary of articles and data points on the housing market. It's part of Seeking Alpha's coverage of the real estate market and homebuilder stocks. Like all other topics and stock coverage from Seeking Alpha, you can get this sent to your Blackberry or desktop email by signing up for our no-spam free email subscription service.

Real Estate Sales and House Prices

  • US Housing Slump Continues - Boom Bust Cycle - Silicon Valley Housing Market Report / Housing-Market (Market Oracle, Jan. 29th): "Some time in 2007 the prices should be down more than 10%, YoY, and down 15-20% from the peak in June-July 2006... Thus far, listings are up 25% and the listing price is down 10%, YoY. Things could get [a] lot worse in another two months when the supply-in-the-waiting comes to the market and all those new homes that got started in the second half of 2006 get completed for the spring selling season. The slowdown in permits and starts wouldn't have any material effect until later in 2007."
  • The Housing Paradox Could Mean Further Price Erosion (Caleb Sevian in Seeking Alpha, Jan. 29th): "Towards the end of the year housing appeared to have settled, and may even have appeared to bottom...We are now set up for an interesting paradox: for housing to stabilize we need interest rates to fall, but the only way that interest rates will fall is if the economy deteriorates -- perhaps crimping the consumers' ability to afford a new home. This paradox sets the stage for further home price deterioration. As anecdotal evidence, the Case-Shiller Housing Index, which projects future home prices, is anticipating a 4% decline in housing prices by the end of the summer."
  • Housing Slump Short-Lived? (Daytona Beach News, Jan. 27th): "Federal Home Loan bank economist: Median housing prices in the Daytona Beach area soared 128% between 2005 and 2006... Daytona is one of 90-plus metro areas considered significantly overpriced... [He cites] the law of supply and demand: The nation's household growth and aging of its housing stock require about 2 million new homes each year, but for the past two years, builders have turned out 2.2 million homes annually. Not surprisingly, sales of new homes last summer ran 21% below the boom period of the summer of 2005."
  • Private Properties: Real Estate Briefs Of The Rich And Famous (Post Gazette.com, Jan. 26th): "Unable to sell his Beverly Hills, Calif., estate for almost a year, billionaire investor Kirk Kerkorian has cut $7 million, or 28%, off the price. He's now asking just under $18 million for the 30-acre property... The Los Angeles County home market has had mixed results in recent months. Sales volume there fell 12.9 percent in December compared to a year earlier, according to the real-estate research firm DataQuick. But the median selling price of a home rose 6.5 percent to $522,000."
  • Houston December Sales Broke Real Estate Records (San Antonio Express, Jan. 26th): "Houston Association of Realtors: Houston real estate sales rose for the 15th straight month in December... 7,136 total property sales recorded last month in the metro area, a 1.1% increase over December 2005. Sales of both new and existing single-family homes, which now have posted growth from their year-earlier levels for the 35th straight month, came in at a record 5,884 in December, up 2.3% from last year's 5,752. The overall median price of a single-family home also hit a new high in December at $150,000, up 1.4% from a year ago."
  • Garfield County Real Estate Sales Hit $1B In '06 (CBS4Denver, Jan. 26th) Glenwood Springs, CO: "Real estate sales in Garfield County surpassed the $1 billion mark last year... Land Title Guarantee Company reported $1.04 billion in real estate transactions in 2006 in the county. That's a 21% increase from 2005, when there were $855 million worth of transactions. The number of units sold in Garfield County also increased in 2006 to 2,852, from 1,873 in 2003. Sotheby's: Much of Rifle was a hotbed for real estate activity, where the oil and gas boom has led to a huge influx of residents to the area."
  • State's Unsold Home Inventory Index Eases In December (East Bay Business Times, Jan. 25th): "Home sales decreased 15.3 % in December in California compared with the same period a year ago, while the median price of an existing home increased 3.7 %. Statewide, the 10 cities and communities with the highest median home prices in California during December 2006 were Los Altos, $1.46 million; Burlingame, $1.33 million; Manhattan Beach, $1.28 million; San Juan Capistrano, $1.17 million; Santa Barbara, $1.01 million; Danville, $995,000; Los Gatos, $970,000; Rancho Palos Verdes, $947,500; San Clemente, $916,000; and Santa Monica, $833,000."

Housing Affordability

  • After Years Of Sputtering, Silicon Valley Economy Revs Up (San Luis Obispo.com, Jan. 29th): "Silicon Valley's economy has revved up thanks to plucky Internet and alternative energy startups, according to a new report. Local technology companies created 33,000 new jobs last year - the first increase since 2001, a year after the dot-com downturn. The region's median household income jumped 6.5 % from 2005 to 2006, to $76,300 - the first uptick since 2001. It decreased 13 % from 2001 to 2004... [But] housing costs force many families out of state."

Mortgates and Real Estate Lending

  • Comparing Mortgage Markets (Paul Kedrosky in Seeking Alpha, Jan. 28th): "L.A. Times: A comparison of cross-national differences in mortgage markets... Great Britain: Variable-rate mortgages dominate... the English version of our adjustable-rate mortgages. But unlike our ARMs, which usually come with annual and life-of-the-loan caps that protect borrowers against uncontrolled spikes in their monthly payments, those in Britain are held in check solely by the competition. When market rates change, lenders in the United Kingdom review what their borrowers are currently paying and decide at their own discretion whether to raise or lower the rate. But if lenders adjust too much (or more than their competitors), borrowers take their business elsewhere."

Global Alternatives To The U.S. Housing Slump

  • Warburg Pincus to buy into Shanghai ZK Real Estate (Reuters.com, Jan. 30th): "U.S. private equity firm Warburg Pincus has agreed to buy a 25% stake in Shanghai ZK Real Estate Development Co. Ltd. for an undisclosed amount... Under the deal, ZK Real Estate would issue new shares to Warburg Pincus... [And] Warburg would provide at least $30 million for housing projects invested and managed by ZK Real Estate...WP: "More overseas investors are investing into China's real estate sector despite Beijing's measures to cool the sector... Tokyo-based property banking and investment firm New City Corp. is close to acquiring a major logistics facility in Shanghai, its first foray into China's real estate sector."
  • China 2007 Zinc Consumption Seen At 30% Of World Total, Up 6.9% - Numis (Forex TV, Jan. 30th): "Zinc, hovering around $3,700/ton recently on the London Metals Exchange, sees 47% of its stocks in China go to the production of rust-proof galvanized steel used in industrial, commercial and residential construction. "Demand is highly dependent on the automotive and construction industries, and has been benefiting from the Chinese growth story... Prices may go even higher this year thanks to strong demand and the potential for more market speculation... Zinc prices are currently well below the $4,600/ton high of December, having fallen in response to US manufacturing data, which triggered a correction in other metals including copper."
  • Real Estate Is Going Global (Black Enterprise, Jan. 29th): "Mutual funds [that] focus on foreign property stocks: Alpine International Real Estate (EGLRX)... Over the past four years, it returned a torrid 35% annualized... Fidelity International Real Estate (FIREX) gained 15% in 2005 and 33% in the first 11 months of '06... Northern Global Real Estate Index (NGREX} tracks the FTSE EPRA/ NAREIT global index of more than 300 stocks, weighted 50% U.S. and Canadian, 30% Asian and 20% European... Cohen & Steers Asia Pacific Realty is currently focusing on companies in Hong Kong, Japan and Australia. It's the only fund dedicated to Asian real estate."
  • Merrill Lynch, Deutsche Bank, Temasek Invest In Hengda Real Estate (MarketWatch, Jan. 28th): "Merrill Lynch & Co. (MER), Deutsche Bank AG (DB) and Singapore's Temasek Holdings (TEMAH.YY) invested US$400 million for an 8% stake in Chinese property developer Hengda Real Estate Group, the state-run Shanghai Securities News reported Monday. Hengda Real Estate may attract another US$500 million in a Hong Kong IPO from overseas investors before its planned overseas initial public offering... HSBC Holdings PLC, Citigroup and UBS AG are also in talks with Hengda Real Estate over a possible strategic investment."

Macro Impact, And Will The Housing Slump Cause A Recession?

  • Vacant Homes on the Market Hit Record 2.1 Million (Seeking Alpha, Jan. 30th): "Census Bureau: The number of vacant homes on the market swelled 34% to 2.1 million at the end of 2006 versus the end of 2005, the fastest increase ever. The vacancy rate for owned units set a record at 2.7%, up from 2.0% a year earlier. That rate has not been above 2% for forty years. The report implies significant excess supply in the housing market... In 2006...the percentage of homes occupied by their owners was flat at 68.9%. Excess supply is likely to lead to an increase in homes available for rent, which should drive rental prices down and reduce core inflation."
  • Owens Corning: Think Pink to Stuff Your Wallet With Green (Todd Sullivan in Seeking Alpha, Jan. 29th): "Owens Corning is the world leader in both commercial and residential construction, BUT only 60% of this segments earnings come from new construction. The rest is from repair and international sales. Insulation is 30% of total revenue... Only 21% of Asphalt roofing sales (28% of total revenue) are from new residential construction. The rest is commercial as residential repair. The repair business should see no slowdown, if you need a new roof... there is no putting it off... Building Materials: (19% of total revenue) OC is N. America's leading supplier of exterior siding and exterior/ interior stone for both residential and commercial construction. Only 55% of this segments business is from new residential building."
  • Bring On The Housing Slump (Los Angeles Times, Jan. 28th): "Working and middle-class families are moving out -- and failing to move in -- because they cannot afford a house here... As perverse as it sounds, what L.A. needs now is a real estate bust. By last year, less than 15% of L.A. families could afford to buy a median-priced home of about $500,000... The big, rapid declines in property values in the early 1990s... [enabled] homeownership for a new generation, many of them immigrants. New owners of delinquent or moribund commercial properties, especially downtown, fueled a spike in business activity, much of it stemming from immigrant and minority entrepreneurship."
  • Interest Rates: Is It Time For A Hike? (CBS News, Jan. 28th): "The Federal Reserve is meeting again this week... some say a rate hike would not be a surprise.. The Federal Reserve is currently faced with an economy that hasn't slowed down, which may force them to raise interest rates... Ray Hennessey, editor of SmartMoney.com: The Federal Reserve has misread the housing market. They've overestimated the impact of the housing slow-down. It wasn't this bubble bursting... And it hasn't been catastrophic." Because the change wasn't as dramatic as the Federal Reserve assumed it would be, the economy is still doing well."
  • Home-Related Goods Sector Feels Housing Market's Pain (Chron.com, Jan. 27th): "Retailers still will feel the [housing slump] impact this year... Shrinking sales growth at U.S. stores that offer home-related goods pulled down the nationwide holiday gain to a smaller-than-expected 4.4%, from 6.1% a year earlier... Building materials, furniture and appliance stores posted sales of $583 billion in 2006, representing a quarter of all U.S. retail sales. Y/o/y sales growth slid to 2.7% in December from a jump of 16% last January... Williams-Sonoma shares dropping 27% in 2006... Sears suffered from a weaker housing market... Retail Forward: 32% of U.S. consumers spent more on home furnishings in 2006, less than the 38% in 2005... America's Research Group: A record 19% of consumers reported putting on hold purchases of $500 or more in December."
  • Sherwin-Williams Paints 31 % Profit In 4Q (Boston.com, Jan. 26th): "Sherwin-Williams reported earnings increased 31 % in Q4 even though the maker and retailer of paint and wall coverings is seeing slowing demand in its new-home market and do-it-yourself businesses... Sherwin-Williams CEO: Paint stores increased profitability by more than 20% while absorbing costs associated with opening 48 stores during Q4 and 117 during the year... Improvements came in spite of slowing in the new-home market and softness in the do-it-yourself business... Sales over the first half of 2006 grew by more than 11 % and then slowed to about half that rate over the last half of the year."

Homebuilders And Housing Stocks

  • Eagle Materials: Take Advantage of the Housing Weakness (Stephen A. Farrington in Seeking Alpha, Jan. 29th): "While we have not yet hit a bottom in the housing market, we may be starting to see the bottom taking shape on the horizon. Eagle Materials (EXP) could be a play off the weakness. I see limited downside with Eagle for a few reasons: [Insider buying]; Dividend protection ($0.70 yielding 1.464% as of the close on 1/25/07);11.82 P/E, and the 0.41 PEG, fall below industry average, suggesting undervaluation; While tied to the homebuilding sector with its wallboard production used for new homes, office construction and remodeling, Eagle also produces cement et al. for the construction sector."

Commercial Real Estate and REITs

  • HEI Plans As Much As $1B in Buys, Builds (Globe St., Jan. 29th): "HEI Hospitality, LLC reports it plans to spend between $500 million and $1 billion to expand its hotel portfolio this year via acquisitions and new development projects... [and] also combining its hotel ownership division with its... subsidiary Merritt Hospitality under a new name: HEI Hotels and Resorts. Ted Darnall, the former president of Starwood Real Estate Group will head HEI's management operations... Gary Mendell, HEI CEO: "We have acquired more than $2 billion in hotel-related real estate in the past four years...We remain committed to investing approximately $500 million to $1 billion a year for the

Tuesday, January 16, 2007

Trend following and Indian cell phone markets

Investment Ideas by Yaser Anwar: The Monday Edition- US, China Japan Relationships - India FDI

# f you'd like to benefit in India, I'd suggest looking into the Cellular Market. With 6.8 million new subscribers a month in November only, India recently surpassed China as the fastest growing cell phone market in the world. India still lags behind China in total subscribers, with a mere 143 million compared with China's 449 million. But that's almost double the 75 million amassed a year ago, and India is closing the gap with rival China fast. India has set a goal of reaching 500 million subscribers by 2010.

# No wonder Vodafone is looking to invest in China (cell phone penetration is 40-50% in cities but is an abysmal 3-4% in villages). When a global telco like Vodafone looks to invest, so should you (prime example of trend following).

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Friday, January 12, 2007

Google threat to Bloomberg --

Paul Kedrosky's Infectious Greed: Free Realtime Quotes from Google etc.

Free Realtime Quotes from Google etc.
News tonight that Google, the NYSE, and the SEC are close to an agreement whereby companies (like Google) will be able to provide free realtime quotes to the rest of us. Final numbers aren't clear yet, but it looks like the deal will be a flat $100,000 a month for a provider to deliver unlimited, free, realtime quotes to the rest of us.

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Dragon Growth

Paul Kedrosky's Infectious Greed: Staggering Data on Growth in Chinese Markets

China's stock market topped $1 trillion for the first time and the yuan rose past the Hong Kong dollar, reflecting an economy that's grown 10-fold since Deng Xiaoping opened the Communist nation to international investment in 1978.

The value of shares on the Shanghai and Shenzhen stock exchanges more than tripled in the past year and reached $1.01 trillion as of yesterday's close, according to data compiled by Bloomberg. The yuan climbed to more than 1 per Hong Kong dollar today for the first time in 13 years.

Economic growth has averaged 9.6 percent in the past five years, driven by record trade surpluses that pushed China's foreign-exchange reserves to $1 trillion. That's prompted U.S. and European pressure for a more flexible yuan and made China's stocks the most expensive relative to earnings in Asia.

... China's economy grew 10.7 percent in the first nine months of last year after overtaking the U.K. and France in 2005 to become the world's fourth largest. The government is scheduled to announce 2006 growth figures on Jan. 25.

... After tripling in size, China's stock market capitalization is equal to 46 percent of the $2.2 trillion economy. The U.S. market is equivalent to 126 percent of its economy, while the ratio for Hong Kong is 649 percent, according to Bloomberg data.

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Sunday, January 07, 2007

Six Mega trends for India

Six mega-trends that define India's future

Six mega-trends that define India's future

T N Ninan | January 06, 2007

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Friday, January 05, 2007

Wednesday, January 03, 2007

Power of Leverage, Very well explained.

The Power of Leverage/Using Other People’s Money

Note also the power of using OPM (Other People's Money) or leverage (aka debt). It increases the IRR on your equity and it allows you to use a limited amount of capital to do more of whatever it is you are planning on doing.

Leverage is usually interpreted (especially by Banks) as increasing risk too but as you will see in the rental home example we are using here, it may be that if you develop five rental units instead of one, your risks (and your Bank’s exposure to you as well) may go down not up despite higher gearing.

Archimedes Clearly Understood the Power of Leverage

If you use your equity to build five units instead of one (i.e., you are putting 5% down on each unit instead of 25% and financing the rest), and if one tenant leaves, you will have a 20% vacancy rate instead of 100%. The free cashflow you are earning from the other four (still occupied) units can assist you in paying the mortgage for the vacant fifth unit.

If the average vacancy rate for each unit over a ten year period is, say, 10%, then the probability that all five units would be vacant at the same time is pretty low (0.1 to the power of five or just .001%). So, as entrepreneurs, we can argue (with our Bank) for more leverage not less.

Obviously, the Bank will say:

1. If you put down more equity, they will be looking at a better debt to equity ratio and that means if asset values tumble, their loans are protected by your equity since in a Bankruptcy or Power of Sale proceeding, the secured creditor gets paid first.

2. If you only have one unit and it becomes vacant, your income from other sources (the cashflow coverage for your loan (in this case, your mortgage payment)) is relatively higher than if you had to cope with all five units suddenly becoming vacant.

This is what I like to call the ‘nuclear bomb scenario’ or what other people call the Banks’ ‘belt and suspenders’ approach to lending. Banks generally only like to lend money to entrepreneurs who don’t need it (i.e., that have enough of their own cash to start a new venture).

From your POV, your cash on cash returns are much higher if you build five units. The spreadsheet shows if you leverage your $37,500 in equity into five rental properties (with 5% down on each unit), you have a cash return of $254,052.85 over five years as compared to $89,291.00 if you can only build one unit (with a down payment of 25%).

Bottom line, you need a sophisticated, motivated lender before you can do highly leveraged deals.

Monday, January 01, 2007

Great read for New Year

Face value | Delhi dreams | Economist.com

Delhi dreams

Dec 19th 2006
From The Economist print edition
Sanjeev Aggarwal believes that venture capital is about to boom in India


“THE propensity for risk-taking in India has gone up a lot,” says Sanjeev Aggarwal. Back in 2000, when he left his safe job at Digital Equipment Corporation (DEC), an American multinational, to launch a start-up, most Indian businesspeople were highly risk-averse, as were their families. “My wife was very worried about me leaving the security of a salary at DEC,” he recalls. Now a growing number of Indians are keen to risk becoming entrepreneurs, which is why Mr Aggarwal recently helped found a venture-capital firm, Helion Venture Partners, to help them succeed—and to enable him to get a piece of the action.

This increased appetite for risk has several causes. As India's economy has

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Happy New Year

Wish you Happy New Year.


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