Five Years Later, Real Estate Hums Along
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It has been five years since the credit crunch that nearly squashed the housing market surfaced, and recovery - while painfully slow - by some definitions is afoot.
As I drive through the streets in the Northeastern city where I live, I can't help but notice the number of 'for sale' signs perched in front of more than just a flurry of residential homes. If anecdotal evidence is any indication, things are looking up. Realtors I know cannot keep their mobile phones unattended for a two-hour meeting without coming back to more than a dozen voice mails.
There hasn't been this pace of activity in the housing market around here in quite some time, and signs suggest the sleeping dragon that has plagued realtors, mortgage lenders and homeowners alike for the past five years has begun to wake.
Hovnanian Enterprises' (NYSE: HOV), whose stock has shed more than 80% over the past five-year period, recent decision to direct millions of dollars into one of the most depressed regional housing markets certainly exhibits some confidence about recovery.
The developer is investing some $31.5 million across nearly 500 housing lots in Phoenix, AZ, according to a Bloomberg report. According to Mark Weber, president of the company's Arizona division cited in the article, the homebuilder has "been aggressively pursuing finished lot and platted lot opportunities in the Phoenix market." Hovnanian's recent partnership with GSO Capital Partners, a division of The Blackstone Group, in which the parties reached a land banking arrangement for $125 million, should help the housing company achieve its goals.
Indeed, JPMorgan analyst Michael Rehaut expects housing stocks have room to run, and Barron's recently predicted that 'gains are ahead' for former industry darlings.
Miami, Florida-based Lennar (NYSE: LEN) has issued tenders for hundreds of millions of dollars in senior notes in recent weeks in an attempt to shrink debt. The homebuilder was the beneficiary of a ratings upgrade by Standard & Poor's last month. S&P upgraded its outlook on the homebuilder from 'stable' to 'positive.' Bloomfield Hills, Michigan-based PulteGroup's (NYSE: PHM) chairman, president and CEO, Richard J. Dugas Jr., said in the company's second quarter earnings report last month that "new home demand has found its footing" and that it's "moving along a path toward a gradual recovery." Meanwhile, Los Angeles, California-based KB Home's (NYSE: KBH) stock has climbed some 50% this year despite being mired in controversy in Bradenton, Florida surrounding residents with mold, rot and leaks in their homes. Finally Ryland Group (NYSE: RYL) recently reported a second quarter profit versus a loss in the year ago period amid a 38% spike in revenues.
But an industry recovery is murky. In a segment this Friday morning on CNBC's Squawk Box, two housing experts, Doug Dachille, CEO of First Principles Capital Management, and Barry Habib, vice president and chief market strategist at Residential Finance Corporation (RFC), shared differing perspectives on the state of the real estate market.
With 30-year fixed mortgage rates hovering at about 3.5%, it's no surprise that underwriting volume is more active these days. But the industry wants to see a greater number of first mortgages. Instead, the lion's share of activity that is being performed are refinancings, which in and of itself seems fair enough. But the problem, according to Dachille, is that mortgage lenders keep calling on the very same clients to refinance each time that rates inch lower.
Dachille's argument was that due to the cumbersome nature of the banking industry, which continues to be mired in litigation and complex oversight in light of Dodd Frank, there are simply not enough resources - including manpower or qualified borrowers - for lenders to drum up new business.
As a result, mortgage lenders revert to calling back clients who are the most likely to be approved - those who were approved for refinancings months ago - and doing it again. And the cycle keeps repeating itself, which seems to thwart the actual health of mortgage activity.
In these cases, lenders are looking to past activity to map out the future. But this appears to be the only case where the past has any relevance on the future because there is really no historical context for where the housing market has evolved in recent years.
Worse, the Federal Reserve's proposed economic band aid via a third Quantatative Easing (QE3) would only distort the size of the markets more rather than allow the free markets to run their course, experts say.
In the CNBC segment, Habib pondered why a greater number of homebuyers weren't flooding the market.
Rates indeed are low, and according to Habib will continue to move lower driven by the recent rally in equities and decline in bonds combined with the most recent lackluster jobs results and Europe's woes that continue to persist. What's preventing developers from building and people from "scooping up mortgages," as Habib explained, is fear - a lack of confidence in the economy and job security.
This sentiment is fueling a competitive rental market, but it's taking some of the potential wind out of the sails of residential sales. Nonetheless, Habib says in view of rates it just doesn't make sense to rent in the current market. Nonetheless, of the activity that is occuring in the housing market right now, much of it involves government loans and as much of 70% of the underwriting is dedicated to refinancings.
Five years later the real estate sands have certainly shifted. But the American Dream has long been home ownership and as long as that remains so too does the market's hopes for an uncontested comeback albeit with some painful lessons learned.
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