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News: "Pulte Homes Inc. agreed to acquire Centex Corp. Wednesday in a stock-for-stock deal valued at $1.3 billion that will create the nation's largest homebuilding company".
Wednesday, April 8, 2009
Northern Virginia Bits Bucket 4/8/2009
Posted by Harriet at 6:00 AM
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37 comments:
U.S. Mortgage delinquincies increase. Surprised anyone?
This one was the news of the day for me: Pulte to by Centex. This counts as my 'at least one major home builder going under' from Monday. I still expect more, and an outright BK by one is realistic, but M&A does the same thing. Excess competition is soaked up.
Interestingly, I had Pulte ranked as one of the weakest homebuilders. Clearly they're just using their larger size to push themselves into a slightly better position. They say it will be finished third quarter, but I don't expect to have combine company data that means much until 4Q. At that point it will be interesting to compare their status to where they are now.
The second link is a duplicate.
I just looked at the Marketwatch news report on it, but it doesn't have as much detail as whichever one you found.
So, this implies you have a ranked list of builders in peril in mind...
Care to share?
Some of you were discussing Mr. Mortgage, aka Mark Hansen, the other day. I guess he's still out there -- I came across this:
Then I get an email from mortgage guru Mark Hansen of the Field Check Group, who tells me that foreclosures are about to soar in California near-term:
For months prior to March, banks/servicers were on and off of foreclosure moratoria with many on a complete hold awaiting Pres. Obama’s plan to save the housing market and homeowners. We track each foreclosure start through the entire foreclosure process individually and in aggregate - also by originator and servicer - and as soon as the Obama plan was made known, banks/servicer shifted their Notice-of-Default and Notice-of-Trustee Sale machines into overdrive. Foreclosure start (NOD) and Trustee Sale (NTS) notices are going out at levels not seen since mid 2008. Once an NTS goes out, the property is taken to the courthouse and auctioned within 21-45 days.
http://www.cnbc.com/id/30089323
From the same article:
Equifax, a well-respected credit bureau, found that 7% of homeowners with mortgages that were at least 30 days late on their payments in February, that’s up 50% from a year ago. And close to 40% of subprime borrowers are late, up from 23.7% a year ago.
You found him!!!
I signed up for his email list and haven't gotten a thing, guess my spam filter thinks he's a whack-job.
But now, we have his new blog website: Mr Mortgage at Field Check Group
I still don't know if I really think he's credible or just selling something, but yeah! I can read his rants again!
And redefaults after mortgage mods are also getting worse
Just in case that was a surprise to anyone. It has a nice little graph on the delinquency rate of the modified loans by quarter.
Help me out-
Ok, Foreclosures have been released again full steam in Cali.
Does anyone have any statisitics/info about our area closer to home?
Cara,
Ack. My copy/paste-fu fails.
Initial link was from WSJ, but this is Bloomberg. Likely to be accessible longer.
http://www.bloomberg.com/apps/news?pid=20601103&sid=aqhv1iSaaeOk&refer=news
My list of major builders (ranked by perceived strength) high-low:
D.R. Horton
Toll Brothers (as much as I'd like to rank them lower)
Centex (not anymore I guess)
Ryan
Pulte
K Hovnanian
I'm sure there's some personal bias in there, but I tried to factor in exposure to bubble markets, real vs. priced value, cash on hand, and how well they hedged their land purchases.
Hi Xpovos,
Where would you put Lennar (LEN) in that list.
zerodown, thanks for the Mr. M. update.
Cara, I signed up for email updates, haven't heard a peep either.
joelandsonia,
Give me a few to do some research. The whole list is stale and should probably be updated anyway.
just enough info on the homebuilders' financial well-being to be dangerous...
http://biz.yahoo.com/p/630ttmu.html
i've ranked it by return on equity only because the debt to equity column isn't populated with data.
i also ran a screen at morningstar to rank them from worst to best by debt to equity ratio. here are those results:
Beazer Homes USA, Inc. 5.63
Champion Enterprises, Inc. 3.47
Hovnanian Enterprises Inc. 3.05
Centex Corporation 2.36
Pulte Homes, Inc. 1.12
Ryland Group, Inc. 1.09
M/I Homes, Inc. 1.06
Meritage Homes Corporation 1.04
M.D.C. Holdings, Inc. 0.92
Toll Brothers, Inc. 0.47
NVR, Inc. 0.12
this means, for example, that NVR's debt amounts to 12% of its equity at the latest balance sheet date, while Beazer's debt is 563% of equity. this data field wasn't populated for every builder on the morningstar website. this last set of figures is pretty telling, imo.
John F.
hehehe. indeed, just enough to be dangerous. Can I ask a dumb question? What is ROE%?
How reasonable is it for a business to be running at a debt-to-equity ratio of more than 1? I mean, aren't these businesses about cash-flow and sales such that their debt is "backed" by their future revenue stream not their equity? Still, 12% looks incredibly healthy in this environment where revenue stream is completely tanking, but what level is nominally considered unhealthy? And given that that "equity" is likely in land and property, couldn't a high equity be just as much of a liability? Do they have to "mark to market"?
Yup so many questions... Dangerous indeed.
Ok, so I took their public data from quarter and year end 12/31/2008 and ran some hard numbers. Just in terms of assets and cash flow (not accounting for bubble areas and other contributing factors) here's a revised list of homebuilders by perceived financial strength.
#1 NVR (Ryan Homes). This one surprised me. They turned a small profit and that made a huge impact on everythign else. Also their inventory as a percentage of assets is small and their cash as a percentage of assets is high. They're in a good position.
#2 MDC. I pulled their data because they keep showing up as a competitor, but I don't know much about these guys. But they are similarly well positioned. The concern here is that they do so much of their own direct financing.
#3 Toll Brothers. 3+ years of cash reserves if they continue to have loses at the current rate puts them at the strongest cash position of any builder.
#4 KB Homes
#5 Pulte (pre-merger). They're lower on cash (hence the stock merger) and that hurts in a lot of the categories I was looking at, but they're one of the closest to swinging a profit margin selling their inventory.
#6 Lennar. As requested, I've added them. They're actually doing OK, but what kills them is overbuilding. They've got a ton of inventory and most of that will have to be marked down to move.
From here on out, it's a sizeable drop in quality.
#7 Hovnanian. I hate these guys with a passion, so I'm pleased to see they're performance is low as well. They're also an excellent buy-out option because they're one of the smallest, and low on cash. They also can't seem to manage well, as their margin rate is quite low.
#8 Pulte (post-merger). Buying Centex really hurts the fundamentals. But if they can get synergy out of it, this will probably go up--unfortunately that's forward-looking. Based on last quarter's data, this is ugly.
#9 D.R. Horton. This was the biggest surprise. They're huge. Until the merger goes through they are the largest home seller by volume in the U.S., but they're surprisingly low on cash given how terrible their profits have been.
#10 Centex. This is why they got bought. Lowest cash ratio, terrible asset ratios. Pulte has some major mark-downs to do. But that might give them tax advantages, I don't know. Their only saving grace is that they sold a ton of their inventory over the past 12 months--so it could have looked worse.
ROE is return on equity. it's the latest year's profit or (loss) divided by average stockholders' equity for the lastest year. negative ROE means the company is losing money and, as a result, it's equity is shrinking by the amount of the net loss. positive ROE means the company is making money for it's shareholders. an average ROE is probably 8 to 10%. great companies consistently earn ROE's above 15% with little or no debt.
John Fontain,
Since your list is ranked worst to best, it lines up pretty well with mine where we are looking at same companies. We both have NVR, MDC and Toll as 1,2,3... despite significantly different methodology. That's pretty telling.
Homeowners’ Hard Times Are Good for the Foreclosure Business
Welcome to the spring 2009 Reomac conference, which has attracted nearly 3,000 real estate agents and property managers to this lush desert resort. The crowd brimmed with a gusto that is hard to find in this recessionary era. The hotel bar did more business on Saturday night than it did on New Year’s Eve. Small wonder: These are the people cashing in on the boom in foreclosed properties.
zerodown
you neeed to read Paul Jackson's commentary on that NY Times article.
Housing Wire REO hackjob
In its ever-present search to find someone to vilify for the mortgage crisis, the New York Times has found an easy — if unwitting — target in REO agents and brokers at the REOMAC Spring Conference in Palm Desert, Calif. A story that ran Monday in the Times by Eric Lipton paints real estate agents that specialize in selling bank-owned real estate as profiteering from the real estate mess.
...
Let’s at least get a few things straight, before we wade any further into the muck Lipton’s willfully serving up here: the agents that list and sell bank-owned properties make anywhere from 1 to 1.5 percent in commission per property, not the 6 percent commissions you’ll see in traditional retail transactions. (And that’s on a good transaction; sometimes the effective commission is far less after accounting for advances.)
...
this also might go some way towards explaining the shadow inventory...
Cara
I took the shadow inventory article down because I saw it on CR after I posted it. The NY Times artice was from a couple of days ago. I knew it was controversial, but I thought it was interesting anyway.
zerodown,
Aww, that doesn't mean you should delete the link... But yes, CR's point that they're not calculating this in a iron-clad manner is well made.
So as is my bad habit I'll link to CR again...
CR's take on SFGate article on shadow inventory link to SFGate article embedded within of course.
OK since I hinted about this once before and now that my deal has closed, I might as well tell you what I found out about shadow inventory.
I represented a group of buyers - we paid 6 million for a bloc of 126 homes one particular bank was holding as REO. All were in the area, mostly PWC & Loudoun County. Our guys plan to rehab, lease and eventually sell these over the next 10-20 years.
Unfortunately, I never could get a straight answer on how many the bank actually owned (probably in excess of 1,000, but I can say, 90% of them they were holding were just awful - torn to shreds, gutted, vandalized, etc - truly horiffic stuff.
I did gather however, that the homes that were truly worthwhile or just needed some light rehab did make it back onto the MLS. However, with our bloc of homes, they never did make it on MLS. Also, since there was no broker involved, they never appear in MLS sales records.
As such, any analysis on "where these things go" should be based not on MLS records, but on county sales records. Reason being, I know for certain that 126 homes showed up on foreclosure records as REO, but zero of these will ever show up as sales on MLS.
In sum, my perception is there is indeed a substantial amount of hidden inventory out there, (ballpark guess would be 15,000 units areawide) but much of it is so trashy, I dont know if anyone here (outside of investors) would be interested in it.
Well, shadow isn't a very descriptive word for the inventory. I'd say limbo is good for some. They are in linbo because fake names and social security numbers were used to buy them. They have to track down the real people whose names and/or ssn's were used to get the legal release of the title. Some of the better or best deals were bought by insiders..real estate, bank employees and family. I don't believe there is much shadow inventory as there is jammed paper work.
CRT,
Depends on the price and the underlying property and the foundation. Low enough price on a good lot with a solid foundation and I can buy it and spend the next ten years of my life renovating it.
Not a bad deal. But it requires a substantially low price.
CRT said:
I represented a group of buyers - we paid 6 million for a bloc of 126 homes one particular bank was holding as REO. All were in the area, mostly PWC & Loudoun County. Our guys plan to rehab, lease and eventually sell these over the next 10-20 years.
$50K per home seems like a pretty good deal. Maybe we should all do a group buy :)
At $50K/home I think the big issue will be how quickly they can get the homes into the rental stream/resold as carrying costs could end up costing them a substantial amount.
crt, at $48k a piece those must have been some serious dogs.
Yeah - these are real dogs. They probably would sell at 60K - 80K on the open market, but the lower price reflects the bulk discount. My clients plan is to take the roughly 1/2 of them that are in liveable condition and rent them out. Even at $500 a month, that will cover their debt service & give them a little cash to put into rehabbing the others. Once they get them all rehabbed, they should probably make a pretty good return on their money.
Again though the key here was bulk. Anyone interested in less than 50 homes, it doesnt appear that any lender is interested in negotiating.
I think you are overestimating the stability of Ryland Homes. I worked in closing for their Fair Oaks office (as in I sat in the closing table and cut checks) approx 5 years ago and I can tell you that they ONLY did interest only loans. That was your only option. All of the ones I closed were on 5 year arms before they reset and you'd have to start paying principal as well.
I can also tell you that the people buying these homes were banking on their salaries to increase enough to afford them when they reset... and as we all know, that's pretty doubtful. Last, I seriously had to question some of the salaries people were reporting they made. We had one cab driver close on a new luxury home in Lorton for over half a million dollars (interest only), who claimed that he made mid 6 figures a year. Maybe cabbies make that much and I'm just clueless but if so, I'm in the wrong impression.
wrong profession. Sorry about that.
I believe the home was somewhere between 700,000-900,000. I can't really remember seeing as how it was a long time ago. ;-)
So do sales like CRT's show up as 126 new comps since they are in the county records? Or will they be ignored since they weren't on the MLS?
As a prospective buyer I'm all for transparency so that whatever price I end up paying is truly a "fair" price, and the same for in the future when I sell.
Uneducated view here, but not only is he buying a few foreclosures, he's bundling 100+ together for a major discount. It is unlikely that they would show up individually as "comps" because there was no set price per property. At least the way it was described by CRT. Maybe there was, or maybe they just agreed on a purchase price of all 126.
Jeremy: "And leaving at 5:30pm is going to make the worst trip home possible."
Actually for me it's the best time to leave (for quickness of commute) between the 4:00pm and 6:30pm window.
"anything where I don't have to be out the door by 6:20am every morning just to get to work on time."
I'm not a 9-5 employee. Some people on here (I'm sure there are as we have lawyers and other DC type professionals) work much more than 8 hr days. Yes, we generally get paid more than a 8 hr employee does, and no, we don't get OT when we work 12+ hr days.
But when you work in the world of consulting and client service, you are lucky to set your own hours. Usually, the client and the project deadlines dictate them for you. The avg. (for my office) is about 9.5-10 hr days. I am one of the first ones in, but I rarely stay after 5:40pm unless I have to. Others who live closer in (in Arl or inside the District, and commute via metro) get in at 8:30am but work until 6:30/7pm. My work day of 7am-5:40pm has worked well for years. I don't have a set "start" time - I start working when I get here at 7am. I can't complain one bit.
Would I rather make my same salary sitting on my couch and watching TV all day long? Who wouldn't. Am I accustomed to waking up at 5:30am 5 days a week and getting 7 hrs of sleep a night? Yep. That's not a problem for me. But hey, each person is different, which is why there are so many jobs out there. My cup of tea is not yours, and that's fine.
Jeremy - unlikely they would ever show up as comps. For starters, they are foreclosures as T says - plus the bulk sales aspect adds an additional discount which would exclude them from a FMV type valuation.
Note, we did have to separately value each property, but that was in order to determine transfer & recordation tax due in each county & how to pro-rate it between properties. However the chance of any appraiser or realtor being able to figure this out is pretty much slim to none.
That said, my client may sell a handful of them soon - and at that moment, they would indeed be comps. But again - we are talking ultra low end here. If thats not your market, I dont think you will find these comps all that interesting.
T:
I'm sure your schedule works for you, just like it does for all those thousands of people on 66 and 95 early every morning. I was just stating that the younger buyers (like myself) are much less likely to favor such an early schedule - and definitely not the going to bed by 10pm part. I think we all work over 8 hours a day here - although I will admit my 12+ hour days are mostly gone now that I work for a government contractor and not a technology consulting firm.
CRT:
Thanks for the reply. I was mostly just curious about how it works. I'm hoping my comps will be in the ~5-600k range 1-2 years from now depending on the market. Just depends on how close to Tyson's I can find for that amount that both the wife and I can agree on. I was more just curious if the banks liked to do the bulk sales like yours to hide those prices from the general public and prevent them from bringing down the rest of their "shadow inventory" prices. I knew it would have zero impact on my future purchase.
No worries Jeremy - I can say its never the bank's intent to hide the ball as far as these comps go. Im sure they are happy about the fact they wont be comps, but thats just gravy for them. More than anything they are happy these are off their books and they now have $$$ in exchange.
I will say, looking 1-2 years ahead, all the foreclosures (which currently do not affect comps), may work in your favor. For example, a house that now sells for 400K as a foreclosure isnt a comp - even if similar non-foreclosures go for 600K.
However, say 1-2 years from now the 400K buyer wants to sell, and does for 450-500K. At that point it certainly is a comp, and helpful if the rest of the market is still trying to sell at 600K.
This is one of the many reasons I dont think prices will be rising for a long long time. They may quit falling soon, but I dont see any chance they rise before 2011 at the very earliest.
CRT,
Wow, I must say this is the first time I have heard of an investor in the NOVA market actually having half a brain or more! I am truly impressed, he will do well. He followed the ancient Dutch rule of 100x rent; this makes him an investor not a speculator. He should see comfortable returns in the years to come.
-Kingmer
Great. Just great.
Our new HUD Secretary thinks people who committed fraud (signing liar/NINJA loans) are not responsible for their actions:
Romano: Aren't you asking the taxpayers to subsidize some of these homeowners who made bad decisions?
Donovan: We've taken a set of actions within the administration that have driven interest rates to the lowest level they've been since we started keeping numbers in 1971. . . . That benefits anyone who's got a mortgage and is refinancing, who's looking to buy a home today. . . . There are people who . . . might have not understood the mortgage that they were taking out because they were taken advantage of. . . . There are people who made mistakes, but I certainly wouldn't say that it's their fault."
They were taken advantage of? Apparently, he sees people who committed fraud as victims.
His answer is totally non-responsive to the reporter's question.
But Obama's HUD Secretary is consistent with Obama's little minions who believe they are not responsible for their mortgage payments.
But hey, this brilliant HUD Secretary also says California, Arizona and Florida may have already hit bottom:
Romano: Has the market bottomed out?
Donovan: I think that it really depends on the place. . . . There are definitely signs that in the places that have been hardest hit, we may have hit bottom already [such as] California, Arizona, Florida. I think it's fair to say that there are markets that are still declining at this point.
more positive news on NVR:
Housing Wire: NVR sees profits exist in Q1 2009This certainly appears to be one builder that's not going under. Which given that they're based in Reston, VA is a good thing for our local economy.
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