Smart Real Estate News & Commentary by Chris McLaughlin April 5, 2011
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KB Home’s revenue drops 25%
Homebuilder KB Home saw its revenue plummet 25% and its net loss deepen in the first quarter as the builder faced headwinds from the elimination of a federal homebuyer tax credit and a drop in demand. The Los Angeles-based homebuilder posted a net loss of $114.5 million, or $1.49 per share, for the first quarter ending Feb. 28. That loss is tied directly to pretax charges, inventory impairments, a joint-venture impairment charge of $53.7 million and a loss on a loan guaranty of $22.8 million. Comparatively, the company deepened its first-quarter loss, with KB posting a net loss of $54.7 million, or 71 cents per share, for the same quarter a year earlier. During the same period, the company’s revenue fell 25%, hitting $196.9 million, compared to $264 million in the first quarter of 2010.
“Despite the many headwinds that persist in today’s housing markets, our year-over-year pretax results, excluding non-cash charges and the loss on loan guaranty, improved for the fourth consecutive quarter,” said Jeffrey Mezger, president and chief executive officer. In the first quarter, the homebuilder continued to face a declining housing market with net orders hitting 1,302 homes, down from 1,913 homes a year earlier. The company’s after selling price during the period rose 4% from a year ago to $205,700. A decline in home sales is impacting large builders nationwide. Beazer Homes USA said Monday that it is diversifying its business model. The building firm announced the launch of a new rental division in which the company will acquire quality, distressed real estate and rent the properties out to customers who cannot obtain mortgages. The builder’s program is launching in Phoenix.
Bankruptcy filings fall 6%
The number of filings in the first three months of 2011 dropped to 340,012, down from 363,215 filings recorded in the first quarter of 2010, according to data from the American Bankruptcy Institute and the National Bankruptcy Research Center. “Though bankruptcy filings are still elevated, consumers continue to take steps to reduce debt levels and shore up their finances,” said ABI Executive Director Samuel Gerdano said in a statement. Bottom line: the sharp increase in bankruptcy levels in recent years might be starting to level off, and maybe even decrease. Personal bankruptcy filings had been climbing steadily since 2007, when the U.S. fell into a deep recession that has left millions of Americans unemployed. “[W]e now expect that consumer bankruptcy filings will dip below the 1.5 million filings recorded last year,” Gerdano said. In 2005 Congress amended the Bankruptcy Code, making it harder for Americans to file and sparking a rush to file by October of 2005, when the amendments kicked in. In 2005, bankruptcy filings totaled more than 2 million.
NAR – Americans prefer smart growth communities
According to a recent study, the Community Preference Survey, by the National Association of Realtors (NAR), Americans favor walkable, mixed-use neighborhoods, with 56% of respondents preferring smart growth neighborhoods over neighborhoods that require more driving between home, work and recreation. Walkable communities are defined as those where shops, restaurants, and local businesses are within walking distance from homes. According to the survey, when considering a home purchase, 77% of respondents said they would look for neighborhoods with abundant sidewalks and other pedestrian-friendly features, and 50% would like to see improvements to existing public transportation rather than initiatives to build new roads and developments. The survey also revealed that while space is important to home buyers, many are willing to sacrifice square footage for less driving. Eighty% of those surveyed would prefer to live in a single-family, detached home as long as it didn’t require a longer commute, but nearly three out of five of those surveyed – 59% – would choose a smaller home if it meant a commute time of 20 minutes or less.
The survey also found that community characteristics are very important to most people. When considering a home purchase, 88% of respondents placed more value on the quality of the neighborhood than the size of the home, and 77% of those surveyed want communities with high-quality schools.
GOP budget proposals
Today House Budget Chairman Paul Ryan will release the House GOP’s 2012 budget proposal — the first real indication of how House Republicans want to tackle the country’s long-term budget shortfalls. The House GOP plan would reform the tax code without raising more money than the current system. It would reduce the number of income tax brackets, lower the top rate for individuals and corporations to 25% and eliminate many tax breaks. Ryan’s plan would reduce federal spending to below 20% of the economy, Ryan said. That would be below the 20.7% average over the past 40 years. And it would reduce spending on domestic government agencies to “below 2008 levels,” at which spending would be frozen for five years. Ryan said that goal would be achieved in numerous ways. Among them: reducing agricultural subsidies, shrinking the federal work force and targeting inefficiencies at the Pentagon.
The House GOP proposes to make major structural changes to Medicare and Medicaid. Spending on these two entitlement programs is one of the biggest drivers of the country’s future debt. Starting in 2022, the House GOP resolution would convert Medicare — the health care program for seniors — into a voucher program, or what Ryan calls a “premium-support model.” “The open-ended, blank-check nature of the Medicare subsidy threatens the solvency of this critical program and creates inexcusable levels of waste,” Ryan wrote. “But because government should not force people to reorganize their lives, its reforms will not affect those in or near retirement in any way.”
CNBC’s Olick – home price warrantees and buyer confidence
“There’s no question that consumer confidence, or lack thereof, is the greatest barrier in the way of a full-blown housing recovery. Credit, while tough to get, is historically cheap, home prices have fallen so far as to open the market to many more buyers, and there is ample inventory from which to choose. The trouble is, no one wants to catch a falling sword, and home prices are still falling. So what if you had a guarantee that even if your home lost value, you wouldn’t lose your initial investment? That’s the idea behind EquityLock Financial’s new ‘Home Price Protection.’ It’s not insurance, but a warranty that you buy based on an index of home prices in your local area. Here’s how the company describes it: ‘You purchase an EquityLock Home Price ProtectionTM contract that refers to a local index of housing values. If the index has dropped by the time you sell the house, we pay you the%age of the index drop multiplied by the value of your home at the time you bought the Home Price ProtectionTM contract. The transaction is structured as a contract, and not as an insurance policy; therefore the payment is made if the market index falls, regardless of whether you sell the home for more or less than you paid for it.’
The cost of the warranty is anywhere from 1 1/2 to 3% of the value of the home, depending on your particular market and how volatile it may be. The company is regulated by the DC Risk Finance Bureau to insure against any losses as a business. ‘What we’re generally talking about here is pooled risk,’ explains EquityLock’s CEO TJ Agresti. ‘It’s all the markets combined. Your market in New York or Atlanta may go down, but not all markets will go down at the same time, and this is exactly what we saw in the last correction.’ Agresti believes a product like this can actually save the housing market because it will provide the necessary home buyer confidence that has recently been trashed beyond recognition. ‘People are afraid and they need something to overcome that fear that they are experiencing right now, and home price protection is the solution. If I don’t have to worry about am I going to lose money on my biggest asset and I’ve shifted that risk to somebody else, I’m a lot more willing to go ahead and make that buy,’ argues Agresti. The warranty doesn’t work if your home goes into foreclosure, but it does pay on a short sale, where the bank lets you sell the home for less than the value of the mortgage. That opens up a huge can of worms, because if you do a short sale, the bank is taking your loss; if you get a warranty that then pays you back for the loss, my guess is the banks are going to have a hissy fit. Agresti says that is ‘going to be up to the home owner and their lender.’
I’m not sure how many home buyers or home owners for that matter want to put even more money into housing right now, even as an insurance-like policy. But think of it this way: It’s not insurance, it’s a warranty against a fall in a local index. If you sell your home for more than it was worth when you bought it, despite the fact that your local market index fell, you could actually make money on this warranty. Hmmm….”
McD’s hires 50,000
McDonald’s restaurant chain said it plans to hire as many as 50,000 new U.S. employees — ranging from restaurant crew to managers — on April 19. The move would increase the hamburger company’s U.S. workforce by 7.7% to 700,000, but such hiring is typical in the lead up to the busy summer months. “Our total hires are similar to past years, but the goal of hiring 50,000 people in one day across the U.S. is unique,” McDonald’s spokeswoman Ashlee Yingling told Reuters. The April hiring event is preparation for the busy summer months. “But these are not just seasonal jobs. It’s a mix of permanent and temporary jobs,” Yingling said. She added that McDonald’s hourly employees typically make more than minimum wage, often more than $8 per hour. There are some 14,000 McDonald’s restaurants in the United States. Ninety% of McDonald’s U.S. restaurants are run by franchisees, and pay varies by ownership. McDonald’s said it and its franchisees would be spending an extra $518 million on wages and salaries for the 50,000 new workers it plans to hire. McDonald’s reported that February sales at its U.S. restaurants open at least 13% rose 2.7% compared with a year earlier.
WSJ – regulators and lenders close to a deal
Fourteen U.S. lenders are on the verge of agreements with federal bank regulators to overhaul their handling of foreclosures and treatment of delinquent borrowers in response to allegations of abuses that emerged last fall. Regulators including the Office of the Comptroller of the Currency, Federal Reserve and Office of Thrift Supervision could announce the agreements with the banks and thrifts as early as next week, though a date wasn’t final, according to people familiar with the matter. The regulators are likely to act ahead of state attorneys general, who are also in talks with the banks. Those discussions are moving at a slower pace amid disputes among several state officials. Bank of America Corp., J.P. Morgan Chase & Co., Wells Fargo & Co. and 11 other home-loan servicers have been under investigation by their regulators and state officials over breakdowns in procedures for handling foreclosures and requests for loan assistance. Several have acknowledged using so-called robo-signers who filed documents to foreclose on homeowners without personally verifying their contents. Federal regulators are likely to fine the companies, but those penalties are unlikely to be announced at the same time as the agreements to change bank practices, according to people familiar with the regulators’ plans. Any fines, however, could still be coordinated with the state attorneys general.
The Federal Deposit Insurance Corp. is not issuing any of the orders because it is not the main regulator for any of the bank holding companies in the settlement. But FDIC officials have been participating in the talks in a limited way, arguing in favor of requiring banks to provide consumers with a name and phone number of a bank employee they can contact for help. John Walsh, acting head of the Office of the Comptroller of the Currency, which oversees most of the nation’s biggest banks, told Senate lawmakers in February that the regulators have found “critical deficiencies and shortcomings” in banks’ document procedures, oversight of outside law firms and other areas. The banks, Walsh said, emphasized “timeliness and cost efficiency over quality and accuracy” and fostered an environment “that is not consistent with conducting foreclosure processes in a safe and sound manner.” The forthcoming move by federal regulators highlights the difficulty of reaching an agreement on a “global” settlement with multiple federal and state agencies of the mortgage-servicing abuses.
Last week, federal and state officials met at the Justice Department with several banks, but an agreement appears far away. After the seven-hour meeting, Iowa Attorney General Tom Miller told reporters, “We have a long way to go.” One reason for the delay has been a dispute between state attorneys general about the severity of any penalties. Some attorneys general and federal agencies have pushed to mandate that banks lower loan balances for some troubled homeowners. However, several Republican attorneys general oppose that idea, calling it unrelated to the abuses being investigated.
Now on to our real estate investor news…
What Does it All Mean?
The news isn’t good. Efforts to eliminate Freddie and Fannie, rising inflationary pressures, printing presses running 24/7 and now it seems that states are cutting back on the “safety nets” that are keeping many American households afloat.
Take Michigan for example, rather than the normal 26 weeks of unemployment benefits, workers there will have a mere 20 weeks to find a new job or be left to sink or swim on their own. New York is taking another route; if you want benefits you will be forced to perform labor with janitorial work in the subway system the first proposed plan of action. In fact, more than half of all states have work for benefit programs on the books but to date, very few have ever implemented them. That is expected to change as the cost of providing benefits continues to escalate even while state tax receipts decline.
So, what is the average American supposed to do if they experience a job loss or other major set-back? In some ways this might be a blessing in disguise. Throughout the history of the nation, ingenuity sparked the fire of innovation and creativity. Like the old adage that “necessity is the mother of invention”, when the going got tough – Americans got going. They didn’t wait on others to give them free money, discounted food or sliding scale medical fees; they found a way to feed their own family by providing goods and services that were in demand.
Despite having been demonized in the modern media, real estate investors are one of the prime examples of this same type of entrepreneurial spirit and the results speak for themselves. Beginning with nothing, real estate has made more people wealthy than any other single investment. But can the same hold true in an economy wrecked by debt? According to Marc Faber, yes. He suggests holding real estate as a hedge against coming inflation. Jim Rodgers believes commodities are the way to go – including direct investment in commodity producing real estate. Dmitry Orlov, a Russian emigrant that lived through the fall of the Soviet Union and resulting financial collapse suggests real estate is one protection during times of crisis. FerFal, the survivalist guru from Argentina that survived the financial and social collapse in South America believes the families holding of real estate was one reason they were able to sustain their quality of life.
What does this mean to the average real estate investor? Plain and simple – opportunity. Time and time again throughout history, real estate has generated great wealthy or preserved it during times of economic turmoil. Whether that turmoil is personal in nature or systemic throughout the entire nation and economy, real estate can provide the stability needed to preserve your standard of living in tough times. Find out how average Americans just like you are transforming their financial future without any money out of pocket by tuning into a free webinar.
See you at the top!
Chris McLaughlin
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About the author:
Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.
* As the top Florida foreclosure and pre-
foreclosure expert, he oversees more than
100 short sale & REO closings each month
* Long-time authority on real estate investing
and rapid reselling of distressed homes. Owns
portfolio of nearly 150 high-value, high-profit
properties
* Owner of one of Florida’s largest Real Estate firms,
running 4 different offices, supporting over
420 agents, uniquely positioning him to help
thousands of investors make money in the
biggest market opportunity ever!
* In 2010, Chris’ 4 Central Florida real estate offices
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* Highly sought-after speaker, consultant, and
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KB Home, a large homebuilder, has reported a lower loss for the quarter ended May 31 as compared to the earlier quarter. Analysts say this could be yet another sign of housing sector recovery. The company said new home orders, which totaled 2,910 units in the quarter, were up from the beginning of the year. In addition, the company’s cancellation rate improved. Net loss for the quarter was $78.4 million, or $1.03 a share, compared with a loss of $255.9 million, or $3.30, a year earlier, KB Home said in a statement. Michael Rehaut, an analyst at JP Morgan, said the result was worse than expected, and was “in sharp contrast” to the prior quarter’s order growth. Builders such as KB Home are competing with foreclosed homes up for sale. According to RealtyTrac, foreclosure filings, including default and auction notices as well as property seizures, rose 18% in May from a year earlier. Jeffrey Mezger, chief executive of KB Home, was cautiously optimistic. “Although key economic indicators remain mixed, we are beginning to see signs that some negative housing market trends may be moderating at both the local and national levels,” said Mezger.
Homebuyers are losing interest in McMansions – oversized homes with 3,000 to 5,000 square feet of living space – amid the recession, and are moving towards smaller sized homes. Smaller homes are cheaper to buy, furnish, and maintain, say homebuyers; particularly those buying a home for the first time. “Entry-level buyers are coming out of rentals and coming out of apartments, and they are not looking for 3,000 or 4,000 (square) feet,” said Steve Hilton, chief executive of Meritage Homes. Homebuilders, in order to cater to the change in customer preference, are going along with the trend. The median new-home size, which grew from less than 1,000 square feet in the 1950s to over 2400 square feet in 2004, has been falling in the last couple of years. In 2008, the median home size was 2,200 square feet. The current recession is bringing it down further. According to a survey conducted by the American Institute of Architects (AIA), Americans are increasingly looking at smaller homes and lower ceilings, in part because of energy costs. “Home sizes have been trending down recently,” said AIA chief economist Kermit Baker. “The era of the ‘McMansion’ could well be over.”
The Reuters/University of Michigan Surveys of Consumers are monthly surveys which provide a gauge of consumer anticipation of changes in the economic environment. According to the latest survey results, the Index of Consumer Sentiment (ICS) rose from a reading of 68.7 in May to a 70.8 in June; this equals the reading in February 2008. The Index of Consumer Expectations, which is a sub-index of ICS, moved lower to 69.2 in June from 69.4 in May. “Over the past four months, sentiment has improved moderately, suggesting that consumers’ attitudes about the economy are improving,” said Steven Wood, chief economist at Insight Economics. “However, they remain very cautious. Nevertheless, these data do suggest consumers are no longer shell shocked.” ICS has gained 15.5 points since a low of 55.3 last November. “Such a sizable gain has usually indicated that an end to the economic downturn is on the horizon, as consumers begin to increase their spending on houses, vehicles, and large household durables,” the Reuters/University of Michigan Surveys of Consumers said in a statement.
