I am retired and take educated guesses on all things financial.

January 09, 2007

January 10, 2007:The State of Real Estate

I was impressed with Credit Suisse First Boston's freshly minted report on the nation's real estate markets. I will attempt to summarize their data, which has been meticulously gathered. CSFB is a gold plate research firm.

According to CSFB, their December survey score was modestly improved, but remained with a grade of D (A-F scale). Builders appear to have become more realistic regarding price cuts necessary to move product, and have cut spec home construction to the bone.

Casual and speculative buyers are reportedly no longer in the market to any large degree. Serious buyers know they have lots of leverage to bargain on price. Warm weather may have helped with the modest improvement.

57% of the home markets tracked (fifty-one major metro markets) remain unchanged, 30% were a bit better and 14% worse. This is with many incentives offered by the builders to buy now. The question is: Will homebuyers continue to shop for a new home when incentives go away in the spring, or will builders be forced to utilize incentives even more at that time? This could turn out to be an auto industry rebate type debacle for homebuilders.

Regarding homebuilding markets, no market scored an A grade (very healthy and positive bias for builders).

Some B grade markets (healthy and positive bias) included Salt Lake City, San Antonio, Charlotte and Austin.

Some C grade markets (moderate and stable bias) included Philadelphia, Raleigh-Durham. Albuquerque and Chicago,

Some D grade markets ( competitive and negative bias) included many areas of the survey.Cities such as Orlando, Los Angeles, Washington DC, Las Vegas, Atlanta, Metro New Jersey and San Francisco fell into this grouping.

Some F grade markets (very competitive and negative bias) included about 30% of the survey: Tucson, Cleveland, Columbus, San Diego, Fort Meyers, Indianapolis, Denver, Tampa and Miami fell here.

Significantly, the D and F grade cities were not only experiencing extreme pricing pressure, but also a deteriorating buyer quality and excess resale inventory.This is a profoundly negative piece of data.

Questions posed to the industry:

How do new orders compare to last year?
Up 20%
Flat 24%
Down 56%

How does net pricing in December compare to November?
Up 2%
Down 30%
Flat 68%

How do gross margins in December compare to November?
Up 6%
Down 39%
Flat 55%

Not all news was bad, but the flavor I believe is accurately presented above.This continues to be a lousy market (unless you are a first time home buyer with nothing to sell,then it is wonderful).

We may have reached a bottom in the homebuilding market, but one really cannot be confident that such is the case until the traditionally strong buyer months beginning in late March are tabulated.

Buying homebuilders now is speculation. And I do not see an ETF as being appropriate for this sector at present.

If you must,look at the PowerShares Dynamic Building and Construction portfolio ETF (PKB) and the iShares US Home Construction Index (ITB).Or, look for the foreclosures, homes for sale over six months or nasty divorces to purchase homes on the cheap to become a landlord.

If you would like to lurk in the international real estate realm, examine streetTRACKS International Real Estate ETF (RWX). It is my rather uninformed view that international real estate in this ETF is fully priced and more. I have not examined RWX fully, and my view is based upon others' commentary.

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