You may have noticed that my most recent Real Homes of Genius examples have shifted from inner city $500,000 homes to struggling high priced “prime” areas like Beverly Hills and Culver City. The reason is that this housing correction is impacting properties in every corner of California. In 2005 and 2006, it was […]
Related Posts:
■Real Homes of Genius: Today we Salute you Brea. A Home that Shows Each Phase of the California Housing Bubble.
■Real Homes of Genius: Today we Salute you Pacoima. Zillow says $457,000 but Listed at $225,000?
■Real Homes of Genius: Today we Salute you Stanton.
■Real Homes of Genius: $438,000 for 816 square feet in Pico Rivera! Another Example of Manic SoCal Housing!
■Real Homes of Genius: South Gate home at $397,000 – Reduced from $475,000.

You may have noticed that my most recent Real Homes of Genius examples have shifted from inner city $500,000 homes to struggling high priced “prime” areas like Beverly Hills and Culver City. The reason is that this housing correction is impacting properties in every corner of California. In 2005 and 2006, it was not uncommon to put a hand over your eyes, plunk your index finger on one of the 88 cities in Los Angeles County, and you could rest assured that area had 20+% year over year gains. It didn’t matter. It reminded me of the investment firm ad pre-tech bust where a chimp is throwing darts at a stock page and outperforms the market. Yes, it was literally that easy to make money in this speculative fervor.

The evolution of the housing decline is now engulfing the entire region. The California Association of Realtors came out with their monthly report stating that California is now down a whopping 35% on a year over year basis:

Single-family Detached Home

May 2007: $594,530

May 2008: $384,840

Nominal Decline: $209,690

How is this not a crash? Even if there is debate that the nation as a whole may or may not be in a recession California is definitely in one. With an unemployment rate of 6.8% and a heavy dependence on housing to boost our economy, we are going to face a serious challenge these upcoming years. That is without even looking at the $300 billion in Option ARM mortgages just itching to recast during the 2^nd half of the year. There are reports highlighting the increase in sales for California which is true for two reasons:

First - A large number of current sales are distressed properties that are priced at a heavy discount.

Second - We are seeing the typical spring and summer selling season trends which aren’t as strong as other years.

So those are important caveats. And it is also hard to assume how many homes that are REOs are making it fully into the MLS data. Clearly there is a discrepancy when MLS data shows a decline in inventory while the amount of REOs is sky rocketing. Let us look at the current data and see if we can put our finger on the pulse of the market:

Total Southern California Inventory: 140,842 (MLS data)

Total Sales for SoCal in May of 2008: 16,917

Total months of inventory: 8.3 months

California Distress Information for May 2008

Notice of Defaults: 41,965

REOs: 20,237

NTS: 9,728

So here’s the raw data. The overall inventory numbers have been steadily falling since September of 2007 yet the sales numbers haven’t increased fast enough to compensate for the increase in distress market action. In fact, given that the foreclosure process takes months and the notice of default is only one of many stages, you can expect a flood of REOs and foreclosures hitting the market in the next few months just in synergy with the onslaught of option ARM mortgage.

You may say that the NOD number is over stated and people will bring this current. Think again:

“(DQ News) 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 means 68 percent (at least from the last report in April) will not become current and go through the entire foreclosure process. The market conditions have only worsened since April and I can assure you that people in option ARMs will default at these levels or even higher just given the toxicity of the mortgages. Let us take a look at the chart once again:

Not a pretty picture for California. Now let us look at a home in Brea that documents the history of the great California housing bubble. Today we Salute you Brea with our Real Homes of Genius award.

Housing Archeologist - Digging Up the Past

Brea is a city in Orange County California that is also extremely close to Los Angeles County. Once started as a crude oil hub ironically, the city has become a nice place for families to search for starter homes. Young professionals usually find this city a good place to start. Many in Southern California have been to the Brea Mall. The cities population of 39,560 makes it one of the more moderate sized cities in Southern California.

Given the nature of the current housing explosion, Brea is not immune to the damage of the housing market. Let us look at the current data on this area:

May 2008

Brea 92821 Median Price: $447,500 (down 22.8% from $579,663 last year)

Brea 92823 Median Price: $517,000 (down 29.4% from $732,295 last year)

Now for people outside of the area these price drops must be stunning. After all, the price drop for 92823 is a stunning $215,295 in one year; a price in itself that is higher than the median priced home in the United States! But given California as a whole is down 35%, this is actually very common. Areas once thought prime are no longer in that category. In fact, many of these areas are the main culprits of the option ARM bonanza.

Many of the inner city loans have already imploded and these were largely due to the sub-prime loans. After all, how is someone making $14,000 going to get a $720,000 mortgage without fudging the math. But these so-called prime areas have people with decent to good credit with okay incomes but no way in the world could they afford a $732,295 starter home. That price correction above folks is the market correcting a massive bubble. That sub-prime talk is hogwash and a Trojan horse to cover the real mess of nationwide speculation from rich to poor.  Main Street and Wall Street both participated in this bonanza.

For the large part as much as people want to believe Californians all make $250,000 a year, this is absolutely wrong. I remember in 2006 I kept getting these commentators on a monthly basis say “see, prices went up because they are simply reflecting higher wages and demand.” Which I would quickly say, “no, prices are going up because of speculation and rampant crappy loans. Incomes are not going up.” This massive correction is simply a reflection of that reality and those commentators have gone the way of the zero down mortgages. Even a cursory look at national income statistics would tell you this:

*Source: Wikipedia, Census Bureau

Only 5% of all U.S. households take in more than $166,200 a year. For that $732,295 price tag buyers in that area would need to be making $250,000+ to afford a comfortable fixed mortgage. So what are the stats for the Brea area?

Brea Average Household Income: $80,480

A tad bit short from $250,000 don’t you think? So this above place documents the entire mania that went on in California. This home is a 3 bedroom 1 bath short sale at 1,100+ square feet. The current sale price is $420,000 and is located in the 92821. What is the sale history on this place?

12/02/2005: $575,000

04/04/2002: $300,000

08/31/2000: $242,000

Now take a look at the peak for the 92821 area code above. Now look at the current median price. Notice something? Banks and lenders are basically trying to follow a declining market and lowering prices with median ranges. Of course, this is as idiotic as paying an inflated price on a home simply because 3 local comps justified a higher price. All that meant is 3 people drank the Kool-Aid and jumped in the market. Now we are seeing the reverse occurring. Let us do a quick market analysis. First, a similar home in this area with 3 bedrooms would rent for $2,100 a month.

Rent: $2,100

PITI: $2,958 (with 5% down and a 6.5% fixed mortgage)

Given you’ll be able to write-off much of the interest, this deal is getting closer to a more logical price range. In reality, the actual solid range would be $275,000 to $350,000 given the current market conditions. At that point, it really is up to you whether you should jump into the market given your life circumstances. Yet to run into the market right now is simply cashing in your chips too early. Look at how the price doubled in 5 years. This makes no sense. Let us be generous and say that the $242,000 price in 2000 was a good starting point. At the rate of inflation after 8 years the price should be $357,000, well within our range.

However you slice things, right now is not the time to buy. We’re getting there but jumping in right now would not be the most practical thing to do.

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Related Posts:
■Real Homes of Genius: Today we Salute you Brea. A Home that Shows Each Phase of the California Housing Bubble.
■Real Homes of Genius: Today we Salute you Pacoima. Zillow says $457,000 but Listed at $225,000?
■Real Homes of Genius: Today we Salute you Stanton.
■Real Homes of Genius: $438,000 for 816 square feet in Pico Rivera! Another Example of Manic SoCal Housing!
■Real Homes of Genius: South Gate home at $397,000 – Reduced from $475,000.

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Filed under: Google (GOOG), Options

Google (NYSE: GOOG) closed at $534.74 Tuesday.

GOOG is scheduled to report Q2 EPS on July 17.

Jefferies says: “Reiterating Buy and $600 target on healthy domestic search growth.

GOOG July option implied volatility of 46 is above its 26-week average of 37 according to Track Data, suggesting large price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

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Filed under: Deals

In a way, Africa is a new frontier for mobile services. The continent is seeing growth from the commodities boom. Plus, there is certainly a need to build up the infrastructure.

No doubt, Vodafone Group plc (NYSE: VOD) sees the opportunity. In fact, this week the company plunked down $900 million for a 70% stake in Ghana Telecom (the remaining 30% will be held by the government).

Actually, Ghana Telecom is the main player in the market, with 99% of the fixed-line segment. There is also a 90% control of the broadband category.

Continue reading Vodafone: a $900 million cash call for Ghana Telecom

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And I can’t rationalize it, quite.  Bank of America completed its controversial purchase of failed mortgage lender Countrywide.  The final purchase price came in at about $2.5 billion, down from the estimated $4 billion at the time of the announcement.  Questions about pending lawsuits, worthless home equity lines and exploding option ARMs all seemed to be answered to the satisfaction of BofA’s leadership to complete the purchase.

From the New York Times:

It’s official: Bank of America has acquired Countrywide Financial, marking the completion of an audacious rescue of one of the most troubled lenders in the United States. The deal will expand Bank of America’s reach in the mortgage business — but, in the current environment of rising defaults and delinquencies among American homeowners, the expansion obviously comes with serious risks.

Countrywide was among the largest lenders in California and Florida, two states hit especially hard by the housing downturn. Both states have sued Countrywide alleging it engaged in unfair and deceptive lending practices. What’s more, Countrywide has a big portfolio of home equity lines of credit, which some fear will be hit with a rash of defaults as borrowers run short of cash.

Some analysts had urged Bank of America to abandon the deal. And judging from the swings in Countrywide’s stock in the six months since the deal was announced, the markets have been questioning Bank of America’s commitment to buying it.

And yet Kenneth Lewis, Bank of America’s chief executive, pictured above, has been resolute that the purchase would go through.

Why didn’t Bank of America learn anything from Wachovia?

Why would Bank of America want all of those worthless Option ARMs?  Wachovia’s recent precedent-setting announcement that it’s waiving pre-pay fees on all Option ARMs implicitly confirms that those loans are a massive liability to the future of the bank.  And while Golden West/World Savings was a major originator of the exploding loans, there was none bigger than Countrywide.

Can Bank of America afford the loan loss reserves that will be needed to insure the risk of this acquired portfolio?  Will risk become too expensive moving forward?  Will it threaten the solvency of BofA?  Will they need to dilute shares, raise equity and cut dividends in the short-term to make it through the continued deterioration of the Countrywide-originated loans?

Bank of America is assuming that losses from Option ARMs, lawsuits and worthless HELOC’s will be far less than the long-term profiability of the combined unit.  That’s a big assumption and a tough one to make in a terrible economy.

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Source [blownmortgage]

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Filed under: Other issues, Bad news, Products and services, Management, Rants and raves, Stocks to Sell, Rite Aid Corp (RAD)

Last year, actually 18 months ago now, James Cramer had enough faith in the Rite Aid Corp (NYSE: RAD) to include it in his 2007 picks. At that time the stock was trading $5.49 per share. It closed yesterday at $1.56 and is trading further down today.

When I say RAD is wrong, wrong, wrong, I mean it literally. There is a store located a few blocks from my office that I shop at perhaps once a month. Yesterday I bought a few things and was amazed at how bad their accounting was.

My primary mission was to acquire some toothpaste, but there are always a few tempting sale items. When I was checking out I discovered that the sports drink for sale at “5 for a $5 dollars” was a mistake and the sign in the store display should have been taken down because the offer had expired. Another item I purchased was marked down from $3.99 to $1.99, great deal! . . . but they told me that the sale price was placed on the wrong shelf for that product and what I wanted was not on sale.

Continue reading Rite Aid (RAD) is wrong, wrong, wrong!

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Filed under: Google (GOOG), Options

Google (NYSE: GOOG) closed at $534.74 Tuesday.

GOOG is scheduled to report Q2 EPS on July 17.

Jefferies says: “Reiterating Buy and $600 target on healthy domestic search growth.

GOOG July option implied volatility of 46 is above its 26-week average of 37 according to Track Data, suggesting large price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

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Small banks may be exposed to nearly $300 billion in bad construction loans granted to local builders and developers according to a new report by the Wall Street Journal.  The report estimates that more than 150 local banks could fail under the weight of the defaults.

Construction loans are dicey propositions in the crashing housing market as builders who bet on repaying loans with sold properties may be unable to repay the debt obligations on the existing projects.  Some projects are probably already abandoned and others will sell for pennies on the dollar leaving developers insolvent.

Further, because banks often allow developers to hold off on interest payments during construction the true ability of the developer to repay is often not known until it is too late.

More on the small bank crisis from Market Watch:

Small banks have some $280 billion of outstanding construction loans and analysts have predicted that as many as 150 smaller banks could fail in coming years after betting heavily on construction loans, The Wall Street Journal reported.

The practice of allowing real estate developers to delay paying construction-loan interest has raised alarms with regulators concerned that smaller banks are masking potential problem loans, the paper said.

Increasingly popular during the building boom of the last decade, many of these loans allowed banks to calculate the interest that would be paid on the loan overall and then set aside that amount in “interest reserves,” essentially allowing the banks to pay themselves until the property becomes profitable or the loan is paid off.

The loan can then be marked as a performing loan even if the project if it is financing is failing, a practice that concerns regulators, the report said.

But the tanking housing market means many of these projects may not be built — or even financed — leaving banks, and their investors, holding the bag.

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Source [blownmortgage]

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Filed under: Bad news, Microsoft (MSFT), General Electric (GE), Coca-Cola (KO), Walt Disney (DIS)

For those of you who own blue-chip stocks, this is an eye-opening prediction. An article at CNBC.com talks about the possibility of Dow 10,000. Dow 10,000!

I repeated that in case you didn’t get it the first time. It sounds pretty scary to me, and it should sound pretty scary to a lot of you out there. I’d have to presume that most investors don’t use the stock market primarily as a substitute casino for the times when Las Vegas is out of reach. Many of you out there must own a Disney (NYSE: DIS) or a Coca-Cola (NYSE: KO), maybe a General Electric (NYSE: GE) or a Microsoft (NASDAQ: MSFT), something generally considered core and safe for the long-term. I happen to own the first three. Anyone who does is in for some huge volatility if Dow 10,000 comes along.

Actually, whether it comes along or not, volatility is here to stay. And here’s the thing about the Dow 10,000 prediction: it isn’t so farfetched on a mathematical basis. When you first read that number, you say to yourself “No way, that would be like a depression!” But because the numbers are getting higher, the actual point moves aren’t as dramatic as they may seem on the surface. If we hit 10,000, that would represent a decline of approximately 29% from the high reached back in October 2007. As I write this, the Dow is about 20% off the high. Is another 9% feasible?

Continue reading Come on — Dow 10,000? Really?

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Headquartered in Bentonville, Arkansas, world capital of Wal-Mart, America’s Car-Mart Incorporated (NASDAQ: CRMT) has taken a page from master marketer Sam Walton.

America’s Car-Mart will make it possible for just about anyone with weak or limited credit history to purchase a basic, reliable used car. No money for the down payment? No problem. America’s Car-Mart will accept anything of value, including furniture, electronics and even livestock, as part of the down payment. This approach seems to be working. At a time when Car-Max (NYSE: KMX) posted a 55% drop in earnings, America’s Car-Mart posted 4Q 2008 revenue gain of 29% to $76.5 million. Gross margins are up, past due accounts are down (surprising in a tight rural economy), net income is way up, and the company’s debt level is down. Retail sales by unit volume increased 25% despite the fact the company closed three underperforming dealerships in the quarter. The average retail sales price increased 7% and the company has worked hard to improve the quality of the used vehicles in its inventory.

These good numbers are not just a fluke for 4Q 2008. FY 2008 revenues are up 14% to $275 million. Net income totaled $15 million or $1.26 per diluted share. The company has invested in software to track loan delinquencies and has developed its own proprietary credit scoring method to serve its non-traditional client base. Investors are happy with the news. They bid the stock up more than 5% to close at $18.86, closing in on the stock’s 52 week high.

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