Real estate

Top 848. Oct 29, 2005 11:41 AM

» Normxxx - Re: Homebuilding Stocks: Major Trend Change

In response to Homebuilding Stocks: Major Trend Change posted by Kirk:

Hmmm... I wonder if homebulders will participate in rebuilding the Gulf Coast? Who else is better equiped?

Funny you should have to ask:

Halliburton! They already have several large, no-bid contracts.

[September 08, 2005] Halliburton Lands Katrina Contracts, Stock Rises to One-Year High.

"Halliburton's stock hit a fifty-two-week high, presumably because Dick Cheney's former colleagues may reap the benefits of this tragedy securing government contracts to rebuild the Gulf Coast"

"The Navy has hired Houston-based Halliburton Co. to restore electric power, repair roofs and remove debris at three naval facilities in Mississippi damaged by Hurricane Katrina.

Halliburton subsidiary KBR will also perform damage assessments at other naval installations in New Orleans as soon as it is safe to do so. KBR was assigned the work under a "construction capabilities" contract awarded in 2004 after a 'competitive bidding' process."
See Houston Chronicles: Auditors investigate Katrina contracts

"As of June 2005: "Halliburton has received roughly 52 percent of the $25.4 billion that the Pentagon has paid out to so far to 77 private contractors in Iraq."

Halliburton has been charged in Congressional hearings to have.....
--- overcharged or presented questionable bills for close to $1.5 billion, almost four times the previous amount disclosed.
--- lost 12 giant pre-fabricated bases worth over $75 million destined for the troops. The bases could have housed as many as 6,600 soldiers.
--- billed $152,000 to provide a movie library for 2,500 soldiers
--- billed inconsistently across the board. Video cassette players, for example, were said to cost $300.00 in some instances, and $1000 in others.

According to Wikipedia, "Cheney resigned as CEO of Halliburton on July 25, 2000, and put all of his corporate shares into a blind trust, except 433,333 stock options worth about $8 million transferred to a charitable trust. As part of his deferred compensation agreements with Halliburton contractually arranged prior to Cheney becoming Vice President, Cheney's public financial disclosure sheets filed with the U.S. Office of Government Ethics showed he received $162,392 in 2002 and $205,298 in 2001.... Cheney's net worth, estimated to be between $30 million and $100 million, is largely derived from his post at Halliburton."

Also from the Iraq team (no wonder the White House wasn't open to foreign bids), Bechtel, Fluor, and many other 'good contributors.' .

White House uses practices criticized in Iraq rebuilding for hurricane-related jobs.

by Yochi J. Dreazen, The Wall Street Journal | 12 September 2005

"The first large-scale contracts related to Hurricane Katrina, as in Iraq, were awarded without competitive bidding, and using so-called cost-plus provisions that guarantee contractors a certain profit regardless of how much they spend.

"In Iraq, several audits found that contracting problems were exacerbated by overworked and inexperienced government procurement officers

[Normxxx Here: And, I might add, underpaid. You had $80K p.a. POs up against $1 - 2 million p.a. contract lawyers specializing in government contract law. ]

"who weren't up to the difficult work they were entrusted to carry out.

"In Iraq, audits have uncovered evidence that hundreds of millions of dollars were misspent by some contractors willing to stretch or break rules, while government officials were unwilling or unable to prevent abuses. Government reports have detailed systemic management failings, lax or nonexistent oversight and alleged fraud and embezzlement by officials charged with administering the rebuilding, as well as questionable activities by the contractors they employed. For example, audits have found evidence of procurement officers paying contractors twice for the same work and spending tens of millions of dollars with little to no documentation.

"Already, at least seven contracts have been awarded for the post-Katrina effort. The Army Corps of Engineers late last week announced a $100 million deal with Shaw Group Inc. of Baton Rouge, La., for relief operations including the pumping of flood water out of New Orleans. Halliburton Co.'s Kellogg, Brown & Root unit, also prominent in the Iraq reconstruction effort, is doing repair work at three U.S. Navy facilities in Mississippi as part of an existing Pentagon contract.

"FEMA, meanwhile, has announced four major contracts with firms charged with providing emergency housing relief in storm-battered areas of Louisiana, Alabama and Mississippi. The $100 million contracts with Bechtel, Fluor, Shaw Group and Denver-based CH2M Hill Cos. were awarded after what FEMA described as 'limited competition.'

"FEMA has been given primary responsibility for spending the more than $50 billion in aid approved by lawmakers last week, which means it will be the lead contracting agency for months to come. That gives it a responsibility well beyond its normal role in past disasters. The agency has never before been asked to disburse money at the level that it will for Katrina. Of the $305 billion spent on federal-government procurement in fiscal year 2003, FEMA accounted for $87 million. The agency already has spent many times that in the Katrina aftermath.

"A provision in the latest Katrina relief bill temporarily raised the spending limit on government credit cards used for Katrina-related purchases to $250,000 from $15,000 per transaction, to allow officials to buy needed supplies more quickly than if they went through normal procurement channels.

"Numerous audits have found that the government lacks adequate controls to prevent misuse of such cards. In 2000, for instance, a probe by the General Accounting Office, now the Government Accountability Office, found that government credit cards in two California Navy units had been used for more than $660,000 in fraudulent or questionable purchases of personal goods ranging from jewelry to pizza. The report by Congress's investigative arm found that government employees bought numerous objects of "questionable government need" like $2,500 flat-panel computer monitors."

-- posted by Normxxx

Top 849. Oct 30, 2005 1:32 PM

» Jas_Jain - Local Real Estate: Speculations Shifts From Homes to Lots and Ma

October 30, 2005

Local Real Estate: Speculations Shifts From Homes to Lots and Making of a Genius

As of yesterday, in our little Californica town we have 31 weeks of supply of homes on the market not counting those being sold by big Hopebuilders. Six months or so ago the supply was more like 10-11 weeks. For all practical purposes the Housing Bubble here has burst after the home prices rose 100% over a period of 27-30 months. These days, price reductions and withdrawals of listings are as common as sale of a home. One source of the bursting of the bubble is a large supply of new tract homes being built by large Hopebuilders, including KB Homes.

Sensing the bursting of the bubble in home prices the retail speculators have switched to speculation in lots. According to informed sources the prices for lots that are within two miles of populated areas have gone up 100% in 4-6 months, 150% in 9-12 months and 300-500% in 15-24 months. Some the latest buyers are from Silly.con Valley, according to my realtor, as they see land prices here as bargains. When land is plentiful, as you will soon see, bargains are not hard to have!

One of the speculators in lots is a self-described genius whom I have had the pleasure of making acquaintance. “Genius is rising prices,” as Prof. Galbraith has noted, has never been more true than in the case of our resident genius (RG). One consequence of being a genius is that our RG was not able to keep any job. As a result, approximately three years ago he decided to build a home for himself and his wife in our little town so that he and his wife don’t have to live in a dingy little townhouse in L.A. area. That was his full-time job for two years. While building the home our RG noticed that the price of the dingy townhouse that they owned had gone up a lot and he estimated that the price of the new home he was building had gone up even more. A genius was confirmed.

A year ago our RG decided to turn into a full-time real estate speculator. He borrowed money on his dingy townhouse and bought a lot in our town with the intention of building a castle, after he has finished the home, and sell it at a huge profit to some sucker from La La Land, or Silly.con Valley. Six months ago the home was finished enough to move in and our RG put his dingy townhouse for sale and sold it very quickly at the asking price. Now, our RG came into some more money and what better place to put one’s money than to buy more lots, which can only go up in price as predicated by the Limited-Supply-of-Land Theory. Our RG bought two more lots from the money that was burning hole.

Yesterday, our RG took me for a tour of the three lots that he owned, one of which he has decided to sell on my advice. Two of the lots are in areas that are only 1-2% built and one is in an area that seems 10-20% built. And most of the homes built in these areas have been built over the past three years during the current boom. What I am trying to say is that there is land enough to build homes for several more housing booms without the change in the zoning laws (one home per 2+ acres in these areas, I think, as all the lots were approximately 2.5 acres). These lots are not very far from the schools and shopping.

BTW, he is already eying a commercial lot even if he has to borrow money because the demand for many services can only go up as more homes are built. The mere presence of our RG is proof positive that our little town is a very desirable place to live. Hence, what could be better investment than land for people, for animals, and for businesses? The rise in number of empty homes is no deterrence for our RG. If you build, they will come! What could be more American belief than that?

The only genius in our RG that I have noticed in that he married a woman who has a high paying job (she commutes more than 100 miles each way two days a week and works at home the rest of the time) and who is very good at keeping the job. I wonder if the marriage will survive the bust in real estate that seems certain, as all their savings are in real estate and our RG would have not much to do after the bust.

Jas

-- posted by Jas_Jain

Top 850. Oct 31, 2005 5:03 PM

» Happy_2 - Re: .Las Vegas: $1.2B for Flop House?

In response to .Las Vegas: $1.2B for Flop House? posted by Kirk:
A far cry from 1973-1978 when the lot at 111 California St. in San Francisco went begging for $250,000. Today there is a huge high rise there.

I think the best deal I ever saw was a high rise condominium project on Ellis near Van Ness. A developer had built about 100 2 bedroom units
and went broke before he could sell them. The S&L lender took them back and held an auction to get rid of the property. Ten bidders were present.

The final price was $10,000,000. The construction cost had been 26,000,000. This was about 1995. Today the project is worth at least 80 Million dollars. I tried to line up investors but couldn't raise 10 million at that time.

-- posted by Happy_2

Top 851. Nov 2, 2005 5:57 PM

» Q_out - Mortgage Applications Slow

.
The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending October 28. The seasonally-adjusted Purchase Index decreased by 6.2 percent to 437.6 from 466.4 the previous week.
<img src="http://jrrr.net/images/MBApurchase.GIF">

<img src="/files/mysites/qout/bhoestarts.gif" width=53 height=34 align="left">
Q_out

-- posted by Q_out

Top 852. Nov 2, 2005 6:03 PM

» Normxxx - SCARY STUFF

SCARY STUFF

By Eric J. Fry | 1 November 2005

"I'm not a person that believes in the bubble so much," says Donald Trump, the billionaire TV star. "I have seen real estate go up and down, but it always seems to go up more than it goes down. I really think it is a good time to purchase."

Treasury Secretary John Snow agrees: "I think the bubble is a gross misnomer," the former railroad man opines. "The idea that we're going to see a collapse in the housing market seems to me improbable."

The National Association of Realtors, we suspect, would also deny the presence of a housing bubble, as would the Mortgage Bankers Association and the United Brotherhood of Carpenter's and the American Society of Interior Designers and every other entity that holds a large vested interest in the housing market's well being.

We are not sure we believe in the housing bubble either, but neither are we sure we don't. At a minimum, we believe in the housing market's vulnerability. We also believe that bad things happen to leveraged speculators...and the housing market has become a vast national repository of leveraged speculation, masquerading behind the innocent façade of "home-buying."

For example, a family that commits 40% of it's annual income to satisfying an interest-only mortgage, financed with no money down, is not buying a house...It is speculating. And as all seasoned financial market participants know very well, leverage creates surprises...usually bad surprises. It accentuates price action in both directions. On the way up, the leveraged speculator rarely neglects to credit his genius. But on the way down, he rails against his bad luck. Hence, if/as/when the housing market turns south, we might all be surprised by the staggering number of geniuses who encounter bad luck...and we might also be surprised by the ferocity of the price declines, as the leveraged speculators rush to "de-lever."

Consider a few of the alarming facts that Merrill Lynch analyst David Rosenberg has identified:

Housing affordability nationwide has dropped to a 13-year low, while the household debt-service ratio has soared to a record high.

Over one-third of all homeowners devote more than 30% of their incomes to monthly mortgage payments. Twelve percent of homeowners devote over half of their incomes.

Sub-prime borrowers accounted for 28% of all new mortgage lending in the past six months, vs. 5% five years ago.

In the first half of 2005, two-thirds of homebuyers financed more than 80% of their purchase, according to SMR Research.

17% of homeowners have a loan-to-value ratio (LTV) of 95% or more, versus only 3% one decade ago. (That means that 17% own less than 5% of their home's value free, and clear).

About 42% of first-time buyers made NO down-payment on their home purchases in 2004.

Each one of these facts is frightening, but taken together, they are absolutely terrifying. At least they ought to terrify every investor who possesses a faint knowledge of financial market history and a 5th grade command of mathematics. Frothy asset markets ALWAYS "correct" at some point; such is the immutable law of the financial universe. And when the inevitable correction arrives, leveraged speculators ALWAYS fare very poorly...That's where the 5th grade math comes in.

For example, the 42% of recent buyers who put no money down when buying their homes have accumulated no equity whatsoever. Since zero minus anything is a negative number, these folks would not be sitting pretty if prices began to slip a bit.

If these same borderline home "buyers" have been availing themselves of interest-only loans to squeeze into their dream homes, they would possess no protection whatsoever against ANY kind of adverse twist of fate.

"If their adjustable-rate mortgages were adjusting upward," observes James Grant, editor of Grant's Interest Rate Observer, "as the value of their assets were ratcheting downward, some mortgagors might chose to walk away, the holy bonds of home-ownership notwithstanding. If so, Countrywide [Financial], the nation's top adjustable-rate lender, would stand to receive its share of the unwanted keys." And so would many other lenders. It is not hard to imagine, under such a scenario, that home prices might not recover quickly.

Since we know that 17% of the nation's homeowners own less than 5% of their home's value, and since we also know that 42% of first-time buyers made no down-payment on their home purchases in 2004, we can confidently deduce that speculation is INCREASING, even as home prices are also increasing. And the history of markets informs us that asset markets become ever more treacherous as the number of leveraged participants increases. That's because leveraged participants possess no capacity to withstand adverse trends. They become forced sellers into a falling market, which pressures prices even more, which forces more speculators to sell into a falling market...and before you know it, many financially frail home-owners begin to wish they'd never moved out of Mom and Dad's guest house.

The "Halloween-edition" chart below (enthusiastically provided by our graphic arts department— Cheers to Andrew Ascosi for this one) illustrates that home prices DO sometimes fall, even in California. Between 1991 and 1996, California home prices fell by about 12% in nominal terms. That decline doesn't seem like much in retrospect, especially since prices recovered and soared anew. But a decline of similar magnitude today would feel like the end of the world to California's highly leveraged homeowners.

Never before have so many home buyers been so vulnerable to so slight a dip in homes prices. Nearly 20% of ALL American home-owners would see their home equity wiped out entirely by a mere 5% decline in home prices.

Thus, if home prices were to slip even a little, the price declines could pick up momentum quickly. One fifth of the nation's housing stock could begin looking for buyers all at the same time. Now THAT would be scary.

We are not predicting such a doomsday scenario, merely pointing out that leverage increases the odds of catastrophic outcomes. The housing market's excesses may or may not constitute a bubble, but they do clearly constitute a risk.

The American penchant to undersave and overspend has contributed mightily to the housing boom. But this very same habit will speed the housing market's demise, once the trend turns. Therefore, as Jim Grant concludes, "There are worse investment rules of thumb than to stand clear of bubble-like markets."

______________

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

Top 853. Nov 2, 2005 6:41 PM

» Q_out - Re: SCARY STUFF

In response to SCARY STUFF posted by Normxxx:

"I'm not a person that believes in the bubble so much," says Donald Trump, the billionaire TV star.

The Donald is certainly profiting from the bubbleheads. He earned $1.5 million giving a one-hour speech in New York on Sunday, October 23rd. This week in Chicago he'll take a pay cut and only earn $1 million for his one hour speech. The speech is at a conference hosted by The Learning Annex titled, "How to Succeed in Real Estate."

Nearly 20% of ALL American home-owners would see their home equity wiped out entirely by a mere 5% decline in home prices.

That's a rather optimistic statement. Because closing costs are close to 5%, one out of six homeowners already have no home equity. If they needed to sell today, all the proceeds from the sale would go to pay the mortgage and closing costs.

<img src="/files/mysites/qout/bhoestarts.gif" width=53 height=34 align="left">
Q_out

-- posted by Q_out

Top 854. Nov 2, 2005 9:02 PM

» Happy_2 - The Donald

In response to Re: SCARY STUFF posted by Q_out:

I heard on the news that the Donald originally wanted 18.5 Million per episode from NBC for the Appretice. His reasoning was something like, " the six cast members of Friends got 1.25 Million per episode each, and his show is twice as good as theirs, thus 18.5 Million was reasonable. NBC gave him 1.1 Million per episode.

-- posted by Happy_2

Top 855. Nov 3, 2005 7:21 AM

» axolotl - Re: .Las Vegas: $1.2B for Flop House?

I actually searched Google maps for this property out of curiosity. The satellite maps are excellent for Vegas, but I would need the exact address to find this "lot".

-- posted by axolotl

Top 856. Nov 3, 2005 3:06 PM

» Normxxx - For Experienced Investors Only!

For Experienced Investors Only!

The world’s biggest money manager, Bill Gross, says a housing bust followed by a weakening economy is “almost inevitable.”

After devouring a 71-page Federal Reserve study on housing booms and busts in 18 developed countries over the last 35 years, Bill Gross proclaimed: “Make no mistake about it, the froth in the U.S. housing market is about to lose its effervescence; the bubble is about to become less bubbly. If real housing prices decline in the U.S. in 2006 or 2007, a recession is nearly inevitable.” Bill isn’t wrong very often. (People don’t entrust you to manage a half-trillion dollars unless you’re like Bill— substantially right for decades.) Bill’s calling this “almost inevitable.”

I think that real estate stocks are a great leading indicator for the real estate market. These stocks trade more quickly and more easily than actual property, so we can see a falling market immediately. The recent and steep fall in real estate stocks is ominous. If you’ve got speculative real estate, or you’re overextended with second and third properties that you only own because you think they’ll be worth more someday, let me be blunt: You’re doing the wrong thing. Reduce your leverage (to 1:1, if possible). Cut back on your stocks, too. As for what to do with that cash, hold it for a few months (in very ST or ST instruments)— no joke. You should be able to earn a very safe 4%, and even more, as the Fed continues hiking interest rates.

As the LT (and maybe IT) prospects for both stocks and real estate are very bad now, a guaranteed, no-risk positive return is not the end of the world. (Just think, you would have Warren Buffet for company, among others.) Unlike your broker or your neighbor, it’s not my job to tell you that everything is okay, and that you’re doing the right thing. Quite the opposite; as you are likely to hear what the mob is thinking about 90% of the time.

Your broker has a vested interested in keeping your money with him so he can keep earning fees. On the other hand, having reached Critical Mass, I am primarily concerned about not losing it. And, one primary way, is to avoid extreme volatility (which is why I subscribe to Sy H's STS). But everyone note: the first law of financial success is not losing it, and the second is, cut your losses short!

Being smart about risk is not the same as gambling!

Back in late 2001, there was nothing wrong with Simon Property when I bought it.

It was just supercheap... The dividend yield was 8.0%— extremely attractive. And the stock was only priced at a Price-to-AFFO (Adjusted Funds from Operation) ratio of about 8x— that’s supercheap! I bought, and I made about 50% on my money (though I sold early— I could have made 100%!) Today in 2005, there’s nothing wrong with Simon Property once again... it’s just super-expensive... Simon’s dividend yield is now only 4%, and it’s Price-to-AFFO ratio is over 20x. As I said, super expensive. The story with Simon is basically the exact same story for the entire REIT market. They were a great deal in 2001. They were expensive early last year, and they’re super-expensive now...

As a group, REITs were paying dividends in excess of 7.5% in 2001. When you compare that to the ten-year Treasury bond paying 4.5%, REITs were a great deal. When you looked at the other competitive asset classes (stocks, bonds, and cash), nothing compared to real estate.

Now, instead of paying nearly 8% as they did in 2001, REITs as a group are only paying around 4.5%— the same as Treasury bonds. REITs used to be a competitive asset class, but they’re not anymore. Bonds pay over 4%. And cash pays nearly 4%. In short, the prices of REITs need to fall a lot more before they’re attractive once again.

Let’s take a look.

Are real estate stocks expensive? Yes! Real estate stocks are trading at about 20 times analysts estimates for cash flow for next year (to be specific, it’s actually adjusted funds from operations, not cash flow, as AFFO is the most useful income yardstick for REITs). For reference, anything above 12.5x is expensive. 20x is a record. And the previous valuation high before now was in 1997-1998... It was 14x. (After which, they crashed in 1999!)

Are interest rates in the way for real estate? Yes! Back in 2001, REITs were incredibly attractive versus the alternatives— you couldn't get close to a guaranteed 8% anywhere except in REITs. Those days are over. REITs now pay 4.5%— hardly better than sticking your money in the bank, yet with a lot more downside risk now.

Is the REIT market acting badly? Yes! REITs have been hammered in recent weeks. They’ve been down roughly 15% since the beginning of August. They’ve just signaled a change in trend. The trend is now down in REITs, so this is the safest time to make a counter-move.

A couple of more points to ponder:

Yield Gap. A relatively constant spread between the average REIT dividend yield and the 10-year Treasury has been maintained. Currently, REIT dividend yields are virtually the same as the 10-year Treasury yield. If the 10-year Treasury yield moves up, there is no cushion.

Yield Curve. With short-term interest rates expected to rise by 50 - 100 bps over the next 12 months and the long-end not moving much, the yield curve will invert. Over the past 15 years, when there have been instances of only a flattening yield curve (as currently), REITs have underperformed the S&P 500 by about 15 percent on an annualized basis.

Betting against real estate investors in general is a no-brainer. And betting against REITs, which will no doubt fall much farther than the average property price, and on which I can close my position out immediately when the time comes, is the best way. But how to invest so I can easily buy in my retirement account? It’s simple. I can buy the Short Real Estate Profund (SRPIX).

This fund’s goal is to return the inverse of the Dow Jones U.S. Real Estate Index (usual index symbol: DJUSRE). It’s a new fund, but it’s achieved its objective so far. My plan is to be in this trade about 2 years and then get out. (I may get out earlier if we pick off a quick 20%-40%.) The largest (inverse) holding in this fund is actually (a short on) Simon Property. As I said earlier, there’s nothing wrong with Simon. It’s just overpriced right now. It’ll correct, and I’ll put some cash in my pocket as it does. Now is finally the time to make the bet. Real estate stocks started reaching record levels of overvaluation in 2004. But it was much too risky to bet against the strong trend back then, as everyone still wanted to be in real estate. Now, finally, the trend has broken. REITs (as measured by the Dow Jones U.S. Real Estate Index) have given a sell signal.

So now I’ve got 1) expensive real estate, 2) that’s loved, and 3) in a downtrend. It’s exactly what I want to see. I'll buy the Short Real Estate Profund (SRPIX) with up to 4% of my investable assets. I’ll sell in two years, maybe sooner.

Two notes— First: The Profunds website (http://www.profunds.com) lists a minimum investment of $15,000— but that's only if you open an account with them (it is their account minimum). You can place a much smaller order through your own brokerage firm— maybe as small as $1,000. Second: If you can’t buy this fund for some reason (if you’re not a U.S. citizen, for example), there is a way to emulate this trade... I could sell short shares of iShares Dow Jones U.S. Real Estate Index Fund (symbol IYR). The performance should be almost exactly the same. Simon Property is the largest holding in this... It makes up 6% of this index fund. If you want to sell short the U.S. real estate market and the Profund is not right for you, this is the way.

This is also a great way just to hedge any RE holdings.

______________

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

-- posted by Normxxx