January 14, 2015

Incentives And Price Reductions On Speculative Homes

A report from Investors Business Daily. “KB Home shares saw a huge reversal on the stock market Tuesday — and led a decline in the homebuilding industry group — after its CEO warned about a long-term trend that could negatively impact earnings. During KB Home’s earnings conference call, CEO Jeffrey Mezger warned that the homebuilding profit margin drop it saw last quarter is the start of a longer-term trend that it anticipates. ‘We had an increased use of incentives and price reductions on (speculative) homes in the quarter,’ Mezger said.”

From Bloomberg. “KB Home’s results are ‘certainly disappointing — especially the commentary on forward margins,’ Megan McGrath, an analyst with MKM Holdings LLC in Stamford, Connecticut, said in a telephone interview. ‘It sounds like the higher incentives we started to hear about in the middle of 2014 perhaps got worse, at least for KBH, as the fourth quarter wore on.’ Inland California was ‘quite a bit softer’ and KB Home ‘pulled out of a couple of land transactions’ in the Houston area in the fiscal fourth quarter, Mezger said on today’s call. The Texas region has been hurt by the decline in oil prices.”

The Wall Street Journal. “Texas has long served as a key driver of new-home sales. But falling oil prices could put the brakes on home buying in the state. That’s bad news for many of the nation’s large, publicly traded home builders, some of which count on Texas for upward of 30% of their annual sales, according to Barclays. Texas accounted for 23% of KB Home’s revenue last year and 35% of its communities under construction. Sheryl Palmer, CEO of Taylor Morrison Home Corp., which Deutsche Bank Securities estimates has 38% of its portfolio in Texas, said the oil-price swoon ‘inevitably’ will result in layoffs in Texas this year.”

“It is difficult to overstate Texas’s importance to home builders. According to RBC Capital Markets, Texas accounted for 25% of D.R. Horton Inc. ’s completed home sales last year, 23% at Lennar Corp. and 21% at PulteGroup Inc. Smaller public builders, including LGI Homes Inc. (53%), have large portions of their portfolios in Texas, according to Deutsche Bank Securities. Texas accounted for 16% of U.S. building permits for single-family homes in the first 11 months of last year, according to J.P. Morgan Chase & Co. The state placed three metro areas in the top 10 nationally for residential-construction permits in that period, with Houston the runaway leader at 57,210, Dallas third at 36,342, and Austin eighth at 18,952, Commerce Department data show.”

“Wondering how far the drop in oil prices threatens to ripple across credit markets? Take a look at the nascent market for bonds backed by U.S. rental homes. Of the properties that were packaged into $531 million of such securities issued by Starwood Waypoint Residential Trust last month, 28 percent of them are located in one of the 10 U.S. metropolitan areas with the most jobs from oil and gas exploration, according to JPMorgan Chase & Co. analysts. Three deals from American Homes 4 Rent have at least 15 percent of their collateral concentrated in oil-producing regions.”

“Lower collateral values and weaker renters may hurt some of the $7.1 billion of rental-property bonds sold since a market for the debt was started in 2013. The danger to mortgage bonds may also extend to a type of risk-sharing securities that Fannie Mae and Freddie Mac started selling in 2013. The debt has a ‘great deal of exposure’ to oil-producing economies, the analysts said. Those deals are typically tied to loan pools with percentages of homes from the regions in the ‘high single digits,’ according to the report.”

From Builder Online. “Here are some of the more interesting articles that I pulled from the past couple of weeks and some thoughts on them: After 50 Years of New Homes: Prices Rise, Sales Fall (Donna Howell: Investors Business Daily, December 24, 2014). The bottom line to this article is that new home sales (an annualized 438,000 in November) are 20 percent below where they were 50 years ago (with a much larger current population to house and a population living longer and needing housing longer, too). However, the median new home price (currently $280,000) is slightly under 15 times higher than it was in 1964 ($19,300). That was a good headline grabber, but it got me running to Google to find out what the median income was in 1964 (it was $6080) and what it is currently ($53,981). The ratio of median new home price to median income back in 1964 was 3.17. It is now 5.18.”

“Holy Beaver Cleaver, Batman! No wonder the current new home sales number has an anchor. To have the same kind of rough proportion, new housing prices would have to have a median of about $171,000, or a drop of almost 40% from where they are now. Since I don’t see improvement costs or impact fees dropping much, the conclusion is that land prices for new homes have to be considerably lower, most likely. Some of that land sitting on builder and developer books might be overvalued to achieve the velocities that people are projecting.”

The New York Times. “CitySpire, a skyscraping 72-story tower in Midtown, is one of the least occupied buildings in Manhattan, with more than 60 percent of its residential floors made up of investment properties and pieds-à-terre, according to data from the New York City Independent Budget Office. In Manhattan, the number of nonprimary residences is slightly higher than the citywide average, 29 percent, and in some neighborhoods favored by investors, such as Midtown, the share of nonprimary residences ranged as high as 44 percent.”

“‘Twenty-four percent of co-op and condo apartments citywide are not the primary residence of their owners,’ said George V. Sweeting, the deputy director of the budget office. ‘Not all of these units are pieds-à-terre; many are likely owned by investors or original sponsors renting out the units.’”

The New York Observer. “Just before the holidays, a handful of unusual business proposals made their way to the desk of Marlen Kruzhkov, an attorney at New York’s Gusrae Kaplan: Russian buyers were looking to flip closed real estate contracts. The half dozen offers were all apartments in Miami and the surrounding area, ranging from $5 to $12 million, initially purchased before the December collapse of the ruble. The buyers who approached the attorney and his clients had placed sizable down payments on the apartments but following Russia’s increased economic woes, no longer felt they had the liquid assets to carry on with the transaction.”

“‘They were offering to sell the contract at a loss, willing to take a fifty percent loss on a down payment as not to take a hundred percent loss. Due to the exchange rate, they did not have the liquidity to finish the transaction,’ Mr. Kruzhkov told the Observer. Second and in some cases third homes of this kind stopped being a priority for Russian buyers. ‘An apartment in Miami, even the most glorious beachfront apartment, is not a priority right now.’”

“Troubles with Russian buyers have also found their way to the New York real estate market, materializing in a slightly different way as buyers look to escape contracts during the negotiation process. Several wealthy Russian buyers canceled deals based on Russia’s increasingly strained relationship with the western world. ‘I have had Russian clients who were about to purchase properties in New York change their minds within days of Russian occupying Ukraine,’ attorney Petro Zinkovetsky told the Observer. One of the buyers was purchasing a $10 million home; another was looking to spend over $17 million. Mr. Zinkovetsky promptly canceled both deals.”

“A client of Mr. Zinkovetsky’s has owned a New York apartment for two years but spent only five collective weeks in the space. Last month, he decided it was time to rent it in an effort to level out the increasingly burdensome maintenance costs. ‘[Russian buyers] view United States real estate as a ’safe deposit box’ that occasionally comes with a good view. Their objective is to move money out of their home country and safeguard their assets by placing them in the U.S. real estate… [But] at this point, it becomes expensive to maintain a ’safe deposit box.’”

From Chicago Now. “Ann Lurie owns two of Chicago’s most expensive homes - a mansion and a co-op - and has been trying to sell them for close to 2 years now, without success. Yesterday the price was cut on both of these homes. The mansion at 1547 N Dearborn was originally listed in May 2013 for $18.75 MM. Since then it has gone through 3 price cuts: $15 MM on April 11, 2014. $13.75 MM on July 7, 2014. Yesterday it was further reduced to $11 MM and reactivated as a new listing.”

“And there was a realtor switch just before the second price cut because obviously it was the first realtor’s fault that it wasn’t selling.”

“The condo at 189 E Lake Shore, unit 1W was originally listed at $6 MM in January 2013 but the listing was yanked by May of that same year. Then it was reactivated in July 2014 with a new realtor for $6 MM. Yesterday the price was cut to $5.25 MM and a new listing activated.”

“I would love to be privy to a realtor’s conversation with a homeowner when suggesting price reductions like this because don’t you know that realtors get listings in the first place by extolling the virtues of their high end marketing system - the implication (or outright claim) being that only they can get a higher price.”

Bits Bucket for January 14, 2015

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