Los Angeles County has witnessed every facet of the housing bubble. From historically lower priced areas such as Compton having homes sell at $500,000 to higher priced areas like Beverly Hills seeing homes sell in the multi-millions. We also were at the vanguard of interest only, option ARM, and other exotic mortgages […]
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■Southern California Housing Numbers Exposed: The Bottom Falls out of the Housing Market, Again.
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Los Angeles County has witnessed every facet of the housing bubble. From historically lower priced areas such as Compton having homes sell at $500,000 to higher priced areas like Beverly Hills seeing homes sell in the multi-millions. We also were at the vanguard of interest only, option ARM, and other exotic mortgages that made there way into every corner of the nation that are now dragging the economy into the gutter. There are very few people that now doubt that what we had in this decade was a housing bubble.

In looking at Los Angeles County with 10,000,000 people living here, we get an excellent representation of the housing mania. We have cities such as Lynwood, Paramount, South Gate, and El Monte that witnessed astronomical price jumps while the local family income remained stagnant and didn’t come close to keeping up with housing appreciation. We also have areas such as Santa Monica, Beverly Hills, Rancho Palos Verdes, and Brentwood that also saw amazing jumps in prices and even those with higher incomes had to stretch their dollars for these homes. Every market niche went up with little discrimination to the quality of the home, local area incomes, or any practical economic fundamentals.

Now that prices are quickly correcting and are trying to find a bottom based on fundamentals, the reality is such that the market has a very long way to go before we hit a bottom. The purpose of this article is simply to arrive at an educated figure of how many Los Angeles County homeowners are now underwater with their mortgage. We know simply by the massive price decreases and the rising tide in foreclosures that many homeowners now find themselves in the precarious situation of having a larger mortgage than the market price of their home. But how many people exactly? This of course is a difficult number but we’ll try to look at multiple indicators to arrive at an educated number.

Case-Shiller Los Angeles

As we showed in a previous article highlighting the drop in Los Angeles home prices, prices in Los Angeles County have now reached levels that were seen in June of 2004. According to the Case-Shiller report which came out earlier in the week, Los Angeles now has a number of 207.11 which is nearly the price reached in June of 2004 (206.3). The base year of the index is January of 2000, which starts at 100. So even at today’s price, Los Angeles has still doubled in slightly over 8 years.

Amazingly, now that prices are quickly aligning with fundamentals even data from other sources is coinciding with the above. For example, according to DataQuick the median price of a home in Los Angeles County in April of 2008 was $435,000. If we look at the price in June of 2004, the median price of a Los Angeles County home was $414,000. So for the purpose of this article we are going to use the following data points:

June 2004 start date: Assuming data from Case-Shiller

June 2004 start date: DataQuick Los Angeles County Sales

The way we’ll construct our model will include sales from June 2004 to present. We’ll then assume the following:

2004 Sales: 50% of homes sold during this time are underwater

2005 Sales: 60% of homes sold during this time are underwater

2006 Sales: 75% of homes sold during this time are underwater

2007 Sales: 55% of homes sold during this time are underwater

2008 Sales: 25% of homes sold during this time are underwater

A couple of points regarding the assumptions above. If we look at the median price alone, we can say that all homes sold at median market value in 2005, 2006, and 2007 are underwater. What we are assuming is people with down payments that have a cushion, those that underpaid market value and have some room, and those in areas that are still holding strong. Also, we are giving a higher percentage to 2005 and 2006 simply because of the sheer amount of sales during these years. Even though Los Angeles County did not hit a median price peak until May of 2007 of $550,000, sales had already fallen drastically.

Let us now look at the data:

Total Sales Per Year:

2004: 121,695

2005: 119,050

2006: 100,206

2007: 74,772

2008: 16,145 (*data up until April of 2008)

Total Homes sold in Los Angeles County Since June of 2004: 431,868

So that gives us a raw number of sales. If we are to apply our formula from above, then we can assume the following:

Homes Underwater Purchased in:

2004: 60,847

2005: 71,430

2006: 75,154

2007: 41,124

2008: 4,036

Total homes underwater in Los Angeles County: 256,617

From this number, we’ll also have to cut it down and eliminate 20% simply because of homes being resold. That is, one household buying a home, selling it, and buying another in that same timeframe. As we are constantly told by the realtors out there, the “typical” family will only stay in their home for 7 years. So that will still give us 205,294 homes that are underwater.

Now keep in mind that we are being conservative here. First, this model is assuming that price drops will not continue. What if the Case-Shiller Index decreases further which all signs are pointing to? What if prices go back to 2003 or 2002 levels? Even with these conservative measures, we can assume that over 200,000 current Los Angeles County homeowners that bought since June of 2004 are underwater. The next issue is that many homes in distress are now going into foreclosure. The number is startling:

Notice of Defaults for Los Angeles County:

First Quarter 2008: 20,339

First Quarter 2007: 8,843

In one year, notice of defaults have gone sky high for Los Angeles County. Yet the more disturbing trend is how many of these notice of defaults are going into foreclosure. What this tells us is being underwater is a key factor in people losing their home:

“(DataQuick April 2008) Of the homeowners in default, an estimated 32 percent emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe. A year ago it was about 52 percent. The increased portion of homes lost to foreclosure reflects the slow real estate market, as well as the number of homes bought during the height of the market with multiple-loan financing, which makes ‘work-outs’ difficult.”

That number is startling. What that tells us is 68 percent of these notice of defaults will become foreclosures. Just for a frame of reference, let us look at some California numbers:

California Notice of Defaults and Trustee Deeds

Q2 2006: 20,752 NODS / 1,936 Recorded Trustee Deeds = Raito of 9.3%

Q2 2007: 53,943 NODS / 17,408 Recorded Trustee Deeds = Ratio of 32.2%

Q4 2007: 81,550 NODS / 31,676 Recorded Trustee Deeds = Ratio of 38.8%

Q1 2008: 113,676 NODS / 47,171 Recorded Trustee Deeds = Ratio of 41.1%

These numbers do not bode well. In a matter of two years, we saw statewide only 9.3% of notice of defaults going into foreclosure jump up to the current rate where nearly 68% of the current notice of defaults will go into foreclosure. Interestingly enough, that 113,676 NODs being sent out is quickly approaching that 200,000 underwater estimate that we arrived at.

This is a very rough estimation of course since it is nearly impossible to get a hard number of the actual homes underwater in Los Angeles County. But given the rise in NODs and foreclosures, we have a lot more homes that will flood the market soon:

The only thing that can stop this tsunami is for the housing market to go into bubble mode again but that isn’t likely. What are your thoughts about this? How many people do you think are underwater on their mortgage?

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Related Posts:
■Living Large on $25,000 a Year in Southern California.
■Double Bubble: California Compared to the United States. Vacancy Rates up Homeownership Down.
■Southern California Housing Numbers Exposed: The Bottom Falls out of the Housing Market, Again.
■The Genesis of the Credit Bubble: Advertising, Deception, and $163 Billion in Subprime California Loans Resetting in 1 Year.
■Are you a Debt Slave?

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Filed under: Products and services, Launches, Consumer experience, Competitive strategy, Google (GOOG), Microsoft (MSFT), Yahoo! (YHOO), eBay (EBAY), Marketing and advertising

Microsoft Corp. (NASDAQ: MSFT) shares dropped 1.77%. OK, you can say it was just as much as the Nasdaq dropped, or you can also say that no one was really impressed with the software giant’s new cashback on search service.

It is no secret Microsoft is trying to boost its internet division and gain search market share. After so often being accused of being a monopoly, I guess it’s hard for it to see Google Inc. (NASDAQ: GOOG) now being accused of the same in the lucrative business of internet search. Well, Microsoft tried to acquire Yahoo! Inc. (NASDAQ: YHOO), No. 2 in search (although it is also losing market share to Google) but we all know that didn’t work out all that well… at least not yet. I get the feeling we haven’t heard the last on that subject yet.

To address its search insufficiencies, Microsoft Wednesday rolled out Live Search Cashback, a new service that pays consumers who buy selected items from participating retailers found through Microsoft’s Live Search engine. Only a portion of the purchase price, of course, between 2-30% will be paid — via check, direct deposit to a bank account or eBay Inc. (NASDAQ: EBAY)’s PayPal. So naturally, those wishing to use the service will need to sign up and provide Big Brother with even more personal information.

No one can tell me this doesn’t smack of desperation. Is Microsoft really serious in thinking this could actually make a dent in its search business? The cash rebate might attract some people, but that doesn’t mean they’re going to change their search habits. If anything, they might still search on Google, then go to the Live engine and find what they want there. The rest of time, I bet, Live will not be in use! Of course, the higher the cashback, the more people it will attract, but doesn’t that sound a little backward? How much can Microsoft spend on that? And couldn’t Google at any time counter with a similar offer should it choose to?

I’m sorry, but this just doesn’t sound like it would change anything in the reality of search today.

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Filed under: Newsletters, Stocks to Buy

In his Half-Priced Stocks newsletter, value investor Nathan Slaughter recently assessed stocks based on the general investment philosophy of Benjamin Graham, the noted value investor under whom Warren Buffett studied.

One issue that stands out in his view is Cabela’s (NYSE: CAB), one of the world’s largest specialty retailers of hunting and fishing gear, camping equipment, and outdoor apparel.

“The cornerstone to Graham’s success and his enduring legacy to value investors was his ‘margin of safety’ concept. Specifically, he would take a hard look at dividend yields, price-to-book ratios, and other key metrics.

“Cabela’s originated as a direct marketer and once primarily sold its products via catalog, but has since augmented that distribution channel with e-commerce operations and a growing chain of nearly 30 stores spread throughout 19 states.

Continue reading Cabela’s (CAB): ‘Sporting gains’ from Ben Graham-style buy

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Bloomberg reports that Countrywide’s President Dave Sambol won’t stay after the merger goes through.  Some head has to roll for the disastrous lending practices that have built up at Countrywide over the years.  I guess that’s what you get for “protecting the house.”

Bloomberg on Sambol’s exit at Countrywide:

Countrywide Financial Corp. President David Sambol, who became a target for critics of the mortgage company’s loan practices and executive pay, will leave after Bank of America Corp.’s takeover instead of running the combined home lending operations as originally planned.

Barbara Desoer, Bank of America’s chief technology and operations officer, will lead consumer real estate operations and Sambol is retiring, according to a statement today from the Charlotte, North Carolina-based bank. Desoer, 55, will report to Chief Executive Officer Kenneth Lewis.

Sambol and Countrywide Chief Executive Officer Angelo Mozilo have been under fire since Bank of America agreed in January to buy Countrywide for about $4 billion. Lax lending by their company, the biggest U.S. home lender, has been blamed for contributing to record U.S. foreclosures, and critics including U.S. Senator Charles Schumer had asked Bank of America to reconsider the decision to put Sambol in charge.

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Home Owners Associations are feeling the effects of the housing bust as foreclosures and delinquent association payments put the squeeze on budgets.  Homeowners feeling the squeeze of increased mortgage payments have stopped paying their association dues.  In addition banks that are holding REO property in neighborhoods with association dues are notorious for lack of payment, causing the associations charged with keeping up public areas of housing developments to cut back on services.

HOA’s are a familiar sight in newer developments and are responsible for everything from maintaining the common area lawns, to the pools, parks and other amenities of master-planned living.  Now, with revenues dwindling the HOA’s are faced with the unpleasant reality of having to raise the dues of the paying homeowners while cutting back services just to stay solvent.

The USA today covers the plight of a typical HOA in Arizona:

AVONDALE, Ariz. — A modest housing tract, set amid pecan trees here in suburban Phoenix, faces big problems: About 40% of its homeowners aren’t paying their association fees, leaving neighbors with higher assessments and reduced services.

“We’re looking at a very deep hole,” says Kent Miller, president of the Los Arbolitos Homeowners Association in Avondale. “I don’t know how we’re going to get out of it. We’ve put liens on all the (delinquent) properties, but it doesn’t do any good.”

It’s a scenario being repeated across the country. Delinquent fees at condo and homeowner associations have become an outgrowth of the mortgage crisis. Housing cooperatives, in a squeeze because of unpaid fees from struggling homeowners, are scraping to pay for landscaping, maintenance, pools, recreation centers and other amenities.

“It’s happening all over,” says Frank Rathbun, a spokesman for the Virginia-based Community Associations Institute. “It’s a national problem.”

The institute estimates there are 300,000 homeowner and condominium cooperatives nationwide, representing one in every five Americans. Assessments, which resemble self-imposed community taxes, total about $40 billion a year.

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Filed under: Major movement, Newsletters, Commodities, Housing, Federal Reserve, Recession

“The markets seemed on the verge of a major sea change,” says economist David Smith. In his Cyclical Investing Quarterly, he offers a fascinating review of his concerns for the risks that lie ahead.

“Recent economic data provides considerable foundation for Main Street fears and little support for Wall Street hopes.

“Two of the economy’s mainstays, housing and autos, continue to tank and consumers are being squeezed between falling real incomes and rising cost of living - notably in energy and food, the two components eliminated from the ‘core’ inflation indices by those who claim inflation is ‘under control.’

“The consequences of these economic stresses can be seen in falling consumer confidence, weak consumer spending, rising bankruptcies among retailers and defaults among un-creditworthy borrowers.

“The knock-on effects include a global crisis in the financial sector, a pullback in U.S. business spending,
mounting layoffs and an uptrend in unemployment, all of which, in my view, pretty much puts the nail in the coffin of the Goldilocks scenario.

“This view is seconded by chief executive officers in the financial-services industry, who placed the likelihood of a recession at 88%, with one in three putting the odds at 100%.

Continue reading Economist warns, ‘There is no free lunch’

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Filed under: Insiders, Walt Disney (DIS), Media World

A recent article at Barron’s Online about media and theme-park operator Disney (NYSE: DIS) seems to imply that now might not be the best time to purchase shares of the Mouse. Chief Financial Officer Tom Staggs and General Counsel Alan Braverman each reported selling over 100,000 Disney shares not long ago. According to the article, this was the first sale for both in over two years.

Shareholders should certainly take note of this event. And potential investors should really take note. On the surface, the sales appear to portend a negative track for the stock. Plus, it reminds me of a call made by some analysts at Citigroup a little while ago. They devised an options trade based on the belief that the stock wouldn’t be much above $37 per share come October. After all, no matter how well Disney seems to be doing in this rough economy, it might eventually get derailed by it. Now that I see some insiders lightening their stock loads, I can’t help but begin to wonder.

So, what am I doing in terms of my Disney position? Nothing, to be honest. I’m in it for the long term (as of now, anyway). However, I probably won’t initiate any new buys right now, because I think it’s entirely possible that the stock could be heading lower during the summer trading sessions. If you’ve been looking at Disney but haven’t bought yet, you better do some more due diligence before pulling the trigger. With gas prices pretty steep around the country, and with movie content having a bit of a problem right now — see my thoughts on Disney’s Prince Caspian — Disney could, as many articles have suggested, be facing some difficult quarters. Simply put, the insider transactions don’t do a lot in terms of inspiring confidence.

Disclosure: I own shares of Disney; positions can change at any time.

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Filed under: Earnings reports, Google (GOOG), Campbell Soup (CPB), Limited Brands (LTD), salesforce.com inc (CRM)

If you were paying close attention to this column last week, you would have sidestepped some of the pain and misery investors in many of the stocks discussed have suffered lately. Of late, we have seen the general direction of the markets turn positive, even in the face of news to the contrary.

Perhaps it is because investors have an appetite for stocks, since there seems to be few investment alternatives. Real estate is off limits and the yield on bonds and other fixed-income investments is pathetically low.

The theme for the week ahead is SMOOTH SAILING. In this week’s column, we delve into some stocks that will be announcing earnings, and that may benefit from the changing tide of investor sentiment. To be sure, there will be several areas of choppiness as we continue to be bombarded by the stormy realities of a turbulent economy.

Monday, May 19

The chart for Campbell Soup (NYSE: CPB) looks M’m M’m good. Sporting a smooth line with nary a ripple over the past 12 months, management has done a great job at keeping both company earnings and share price up, even in the face of significant food inflation. While shares have been condensing during the past few months, recently they have been rising with a series of higher highs and higher lows. Be on the outlook for earnings of 44 cents per share on revenue expectations of $1.89 billion. Now that I think of it. That’s a lot of soup wrapped in tin-plated steel — one of many materials that has seen its price almost double in the past six months.

Excel Maritime Carriers (NYSE: EXM) is part of the shipping industry that has been cruisin’. Shares are up from a September 2006 low of $8 to a recent level of $52. After floating down violently during the first quarter of 2008, shares have made a turnaround, as there are high expectations for the dry-shippers. It is curious how a company with such a massive fleet of ships maintains such extreme profitability with oil prices above $120. Monday will set the course as earnings are estimated to be $1.79 per share for the quarter, up from 61 cents in the year-ago period. This is on revenues of only $61 million for a company that now has a market cap of $1.1 billion. If shares do not meet or beat, watch out below!!

While we are out at sea with the shippers, the big daddy DryShips (NASDAQ: DRYS) will be coming in with its quarterly numbers after the close. Expectations are running high, and First Call is estimating $4.05 per share, which is a 400% increase from the same period a year ago. The shares have a classical chart formation of a double-bottom with a break above the mid-term resistance. This bullish pattern has had all the makings of a solid run but may hit overhead resistance at this level. (Sorry I can’t go into more depth on chart pattern recognition here, but if you’re interested in learning more, you could read Chapter 3 of my book, The Disciplined Investor: Essential Strategies for Success.)

Tuesday, May 20

On the sundeck, silicon wafers are drawing in the sun’s energy and converting it to a more usable form by products made by China Sunergy (NASDAQ: CSUN). Analysts do not predict that the company will be profitable this quarter, but that does not seem to matter these days as shares are being bid up 50% from a recent consolidation point of $8. Look for an announcement showing a loss of 5 cents per share on $73 million of revenue.

After coming back from a long cruise, many people have thought of going back to living in a factory-built, modular home but did not know where to go for that special touch. Good news, as Palm Harbor Homes (NASDAQ: PHHM) might actually have the answer. Yet, shares have been watered down of late as the housing market has been difficult on all components within the sector. Yes, even the luxury modular home companies. Interestingly, analysts are seeing a loss approaching 34 cents per share on $123 million of revenues.

Wednesday, May 21

When the economy enters a time of recession, shoppers look for bargains. BJ’s Wholesale Club (NYSE: BJ) may have just the right bait to bring in the fish as they have 177 warehouse shopping stores in 15 states with a total of 8.8 million members. Sales have been consistent and earnings growth has been strong. With little debt and a chart that is showing a strong base, this could be a winner during this wave of the economic cycle. Watch the earnings release for clues as to the near-term direction. First Call is showing a 27 cents EPS for the period on huge revenue of $2.26 billion.

Ever since Google (NASDAQ: GOOG) announced a partnership with Salesforce.com (NYSE: CRM), the tide has been rising for shares. Making new highs on a regular basis, Salesforce has one of the best online contact management solutions available for companies of any size. In the ultimate battle for the desktop over the webtop, Salesforce is a force to reckon with. The company has quarterly earnings expectations of 7 cents, which is sevenfold higher than last year, and revenue that is expected to grow to $235 million for the period. I suppose that is what happens when a company has no competition and a great product.

There will be plenty of other announcements today in the retail sector that will be watched carefully for further clues on the consumer and the general economy. Take note of the following as there has been a good deal of negative sentiment towards this sector:

• Dillards (NYSE: DDS) $0.21 EPS on $1.71 billion of revenue
• Hot Topic (NASDAQ: HOTT) -$0.04 EPS on $159 million of revenue
• Limited Brands (NYSE: LTD) $0.08 EPS on $1.90 billion of revenue
• Charming Shoppes (NASDAQ: CHRS) -$0.06 EPS on $725 million of revenue
• Ross Stores (NASDAQ: ROSS) $0.58 EPS on $1.55 billion of revenue
• Saks (NYSE: SKS) $0.16 EPS on $840 million of revenue

Thursday, May 22

The day is loaded with more retail announcements. The ones to watch include:

• AnnTaylor (NYSE: ANN) $0.46 EPS on $593 million of revenue
• Bon-Ton (NASDAQ: BONT) -$2.25 on $715 million of revenue
• Stein Mart (NASDAQ: SMRT) -$0.04 EPS on $366 million of revenue
• Aeropostale (NYSE: ARO) $0.25 EPS on $327 million of revenue
• Gap Inc. (NYSE: GPS) $0.31 EPS on $3.43 billion of revenue
• Pacific Sunwear (NASDAQ: PSUN) -$0.10 EPS on $265 million of revenue
• Zumiez (NASDAQ: ZUMZ) $0.03 EPS on $78 million of revenue

Also look for the earnings from poultry producer Sanderson Farms (NASDAQ: SAFM). The company has been doing well, even into rising corn and feed prices. Estimates are for a loss of 7 cents on $435 million of revenue. Investors may get chicken if they see that the margins have been watered down this quarter. Even so, the balance sheet is strong and the outlook is stable.

Disclosure: Horowitz & Company clients may hold positions in some of the stocks mentioned as of the publish date.

Andrew Horowitz is a money manager and author of The Disciplined Investor: Essential Strategies for Success.

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Filed under: Earnings reports, Analyst upgrades and downgrades, Johnson and Johnson (JNJ), Boston Scientific (BSX), Technical Analysis, Stocks to Buy

Medtronic (NYSE: MDT) is a medical technology company, specializing in a variety of implantable biomedical devices. Leading products include pacemakers, stents, catheters, glucose monitoring systems and insulin pumps. The firm’s Cardiac Surgery segment offers products for the repair and replacement of heart valves, surgical accessories, and surgical ablation products. A Physio-Control unit provides external defibrillation and emergency response systems. Medtronic sells its products to hospitals, clinics, third party healthcare providers and governmental healthcare programs. Boston Scientific (NYSE: BSX) and Johnson & Johnson (NYSE: JNJ) are major competitors.

Investors were pleased last week, when Medtronic announced fiscal Q4 EPS of 78 cents and revenues of $3.86 billion. Analysts had been expecting 72 cents and $3.72 billion. Management also guided FY09 EPS to $2.94-$3.02 ($2.96 consensus) and FY09 revenues to $15-$15.5 billion ($15.14 consensus). UBS subsequently reiterated its “buy” rating on the shares.

Continue reading Medtronic (MDT): Shares define bullish flag

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