Five Things You Need to Know: Pulte Homes, "The Problem Is Demand"
Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Pulte Homes: "The Problem Is Demand"; No, the Problem is Pulte Homes
This morning both Toll Brothers (TOL) and Pulte Homes (PHM) are presenting at the JP Morgan (JPM) Basics and Industrials Conference.
We heard from Toll's Bob Toll yesterday on bended knee looking for Congress to stimulate housing demand, and this morning Pulte Homes joined in. Nothing really new there - the homebuilders are asking Congress for a $15,000 tax credit similar to the $2,000 tax credit offered to kickstart housing 35 years ago during the Ford Administration (they'll likely get half of that amount) - however, there were some interesting comments related to pricing that are worth sharing.
Richard Dugas, PHM CEO, said he believes it is a mistake to believe the new housing market can correct without the resale market also correcting. This is an important point of distinction. New homes are now selling at a 10% to 15% discount to resale in most areas of the country. Historically, that ratio has been reversed.
"We clearly need resale pricing to correct, and correct dramatically,' Dugas said. He cited the most recent data from the S&P/Case-Shiller index showing a 14% decline in prices year-over-year, by far the largest on record, but noted that even that kind of decline is not enough.
"We view that [price decline] as a good thing," Dugas said, "and frankly we think resale pricing needs to continue to move down, because existing buyers are telling us they would like to buy our homes, but need to sell their existing homes, but they've obviously got
to get realistic about price before they have a chance to sell those homes."
This view - that prices still need to come down significantly - makes some sense, especially if your business is selling new homes, but there are other issues at work. Foremost is the problem facing both Fannie Mae (FNM) and Freddie Mac (FRE) if Dugas gets his wish for dramatically lower home prices. We believe both companies are underestimating coming price declines.
Fannie recently relaxed downpayment rules so borrowers approved by Fannie Mae's automated underwriting program will now be able to borrow up to 97% of the value of their homes. At the current pace of decline using the Case-Shiller composite, it would take just four months to be underwater on your mortgage with a 3% down payment.
Meanwhile, the real issue facing homebuilders is the psychological impact of housing price deflation. "Of [the issues facing housing], I think by far the biggest issue is buyer confidence and the lack of the ability for the buyer to make a decision to get in housing, because they are fearful of price declines," Dugas said. That's why he's looking to Congress to help. "The whole idea here folks would be to put a floor under pricing and get people back in the market," Dugas said.
If Dugas and Toll get their way, we taxpayers will essentially become home price guarantors as existing homeowners are forced to reprice their homes downward while only they (the homebuilders) get to share in the profits. The rationalization for this disjointed and incongruous view of risk and reward is that housing is a "key linchpin" of the U.S. economy. Well, so was the cotton industry in 1790. Some things need to change.
2. AMEX: More Credit Tightening
At the Keefe, Bruyette & Woods Second Annual Diversified Financial Services Conference this morning, Ken Chenault, Chairman and CEO of American Express (AXP) laid out some of the trends the company is seeing in their credit numbers.
"We saw the first signs of significant weakness in our credit numbers at the end of last year and this trend has continued in 2008," Chenault said. "Our net write-off rate in the first quarter increased by 90 basis points versus the fourth quarter of 2007."
This is in-line with comments the company made during their last quarterly forecast. But what is interesting is how the company is also tightening credit. "Even as we have grown our lending of the last few years, we have not loosened our underwriting standards," Chenault noted. "Over the last four years the average fico score for applicants at the time of acquisition has gotten better not worse. And as you would expect in this current year we will become even more selective in our acquisition activities."
Dan Henry, AXP CFO, noted that while in 2006 and 2007, the proportion of credit line increases were greater than those that were decreased, in the recent six-months or so that's turned around as we have actually seen more reductions than increases."
3. Speaking of Credit...
Interesting piece in the Financial Times this morning focusing on accounting changes that may force U.S. banks to take, literally, thousands of billions of dollars back onto their balance sheets.
Citing a report from Citigroup (C) the FT said a planned tightening of the rules regarding off-balance sheet vehicles would force banks to reconsider arrangements and could result in up to $5,000bn of assets coming back on to the books.
Now why would this accounting change even be considered? Mr. Practical, writing on the Buzz and Banter this morning said the impetus is likely coming from "the other side of the system," the side that actually has savings and wants to protect the value of those savings.
4. Socionomics of Avian Flu
Tyson Foods (TSN) was down about 7% yesterday after the company said a flock of chickens in Arkansas tested positive for a "mild strain" of avian flu.
The company disposed of 15,000 infected chickens. The real news, however, is that this story has hardly made news or registered in the mainstream media. It's not that it necessarily should, but that two years ago, it would have been front page news.
Social mood is perception, which is everything. Meanwhile, if you're not convinced the avian flu bug poses no threat to humans? Take a look at our Guide to Avian Flu.
5. Minyanville Guide to Avian Flu
Avian influenza, or "bird flu", is a contagious disease of animals caused by viruses that normally infect only birds but there is mounting evidence that Avian Flu has a unique capacity to jump the species barrier and cause severe disease, with high mortality, in humans. To help you prepare for the possibility of an Avian Flu outbreak in humans, Minyanville has prepared the following guidelines:
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Wash your hands frequently, and also be sure and wash them after drying them because what if the towel you used has Avian Flu on it?
- If at all possible, stay home from work, especially if your work involves giving people Avian Flu.
- Viruses, including Avian Flu, can be transferred through sexual contact. Avoid unprotected sexual contact with birds that have Avian Flu. Don't be a statistic. It is not enough that a bird "looks clean."
- Children and the elderly are most at risk for contracting Avian Flu. Surround yourself with children and old people. They will act as a shield of sorts to absorb Avian Flu germs.
- Step up your oral hygiene regimen. Keep your mouth fresh with Lysol instead of Binaca; Liquid Plumber instead of Listerine.
- Don't share drinking glasses with friends and colleagues; use direct mouth-to-mouth transfer instead.
- Fashion a homemade biohazard suit out of rubber gloves, plastic trash bags and duct tape. Do it! Do it now!
- Use disinfectant cleaners on counters, sinks, doorknobs, telephones and any other surfaces that may be contaminated. Take your time and do a good job. When you are finished with those, start on the basement.
- If you happen to contract Avian Flu while cleaning, stop! Because then you are no longer cleaning, you are spreading.
- Avoid Evian water. While there’s no scientific evidence that Evian is made with 100% real Avian Flu, you’re still only one vowel away from certain death.
- Infectious diseases such as Avian Flu are frequently transmitted via coughs and sneezes. If you sense a sneeze or cough is about to occur, quickly cover that person's mouth, nose and ears with duct tape.
- To prepare for life after the Avian Flu pandemic, practice walking around like an infected human zombie and terrorizing the last remaining uninfected villagers.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved.
Wear an Obama button instead of a flag in your lapel and you may be able to zombie-walk safely.
Oh, some home-building still makes sense: Arizona or Nevada, for retirees; Northern Virginia for the Federal workforce. But that's about it. I think the real estate developer of the future will find it necessary to develop other specialities besides the single-family home.
Things change.
Citing a report from Citigroup (C) the FT said a planned tightening of the rules regarding off-balance sheet vehicles would force banks to reconsider arrangements and could result in up to $5,000 bn of assets coming back on to the books
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$5.000.000. 000.000.00 (I think!). Or 5 trillion. I have another bucket of decimals and zero's if needed. I'am hording them from President Bush and Cheney.
Worldcom and Enron had to put off sheet balances back on the books and they went tits up.
Where the Hell is Cheney these days? I have not seen him anywhere for months. He must be in Iraq passing out more zeros and decimals with the high end numerical numbers. Pumping up Haliburton so they both have a place to retire to. Bush and Cheney being so conservative and all. Rah Rah the Reds.
I ' am not that old but I do remember when spending few million dollars was scrutinized by conservatives, now it's swept under the carpet like it is chump change. We are in the billions and trillions league now. Zero's and decimals are free.
As for house pricing. They have to drop another 25 to 30 % to be afordable. The sooner the price gets down there the sooner the inventory will get cleaned up. Banks are stalling so they can get people into high priced homes that can better afford to wait it out for recovery or take a loss at owners expense and not the banks. Getting prices down quick will take millions of existing homes off the market as the rush to sell and lock in excessive price increases will fade. We needed a 30% decline overall to adjust for affordability. We need another 10% down to adjust for what is now a lousy home market on top of being way over priced.
Banks need to face the facts and reality.
JPM
PS
Microsoft said some words were to long! LOL
Thats why I had to space the five billion. Thats got to tell us something. LOL
JPM
And anyone not wearing two flag lapel pins should be checked out for terror leanings.
In Robert Toll's case, the folks that buy his houses are also millionaires. There's not a just-plain-folks in sight in his business model. But all us thousandaires need to pay more taxes so the millionaires can feel comfortable buying his McMansions.
Corruption stinks on ice.
sent shivers through me with images of the ratings companies and their current control
well, the model's out there for him to emulate...banks, car companies, etc
seems like scale of economy already scaling the economy :-)
Done and done! And I used duct tape to keep them from wandering off.
Infected birds and poultry can everywhere contaminate the drinking water. All humans have very intensive contact to drinking water. Spread of avian flu by drinking water can explain small clusters in households too. Proving viruses in water is difficult because of dilution. If you find no viruses you can not be sure that there are not any. On the other hand in water viruses remain viable for a long time. Water has to be tested for influenza viruses by cell culture and in particular by the more sensitive molecular biology method PCR.
There is a widespread link between avian flu and water, e.g. in Egypt to the Nile delta or Indonesia to residential districts of less prosperous humans with backyard flocks and without central water supply as in Vietnam.
Transmission of avian flu by direct contact to infected poultry is an unproved assumption from the WHO. There is no evidence that influenza primarily is transmitted by saliva droplets.
Avian flu infections may increase in consequence to increase of virus circulation. In hot climates/the tropics flood-related influenza is typical after extreme weather and floods. Virulence of influenza viruses depends on temperature and time. Special in cases of local water supplies with âyoungâ and fresh H5N1 contaminated water from low local wells, cisterns, tanks, rain barrels, ponds, rivers or rice paddies this pathway can explain small clusters in households. At 24°C e.g. in the tropics the virulence of influenza viruses in water amount to 2 days. In temperate climates for âolderâ water from central water supplies cold water is decisive to virulence of viruses. At 7°C the virulence of influenza viruses in water amount to 14 days.
Human to human and contact transmission of influenza occur - but are overvalued immense. In the course of influenza epidemics in Germany, recognized clusters are rare, accounting for just 9 percent of cases e.g. in the 2005 season. In temperate climates the lethal H5N1 virus will be transferred to humans via cold drinking water, as with the birds in February and March 2006, strong seasonal at the time when drinking water has its temperature minimum.
The performance to eliminate viruses from the drinking water processing plants regularly does not meet the requirements of the WHO and the USA/USEPA. Conventional disinfection procedures are poor, because microorganisms in the water are not in suspension, but embedded in particles. Even ground water used for drinking water is not free from viruses.
Ducks and rice [paddies = flooded by water] major factors in bird flu outbreaks, says UN agency
Ducks and rice fields may be a critical factor in spreading H5N1
26 March 2008 â Ducks, rice [fields, paddies = flooded by water! Farmers on work drink the water from rice paddies!] and people â and not chickens â have emerged as the most significant factors in the spread of avian influenza in Thailand and Viet Nam, according to a study carried out by a group of experts from the United Nations Food and Agriculture Organization (FAO) and associated research centres.
âMapping H5N1 highly pathogenic avian influenza risk in Southeast Asia: ducks, rice and peopleâ also finds that these factors are probably behind persistent outbreaks in other countries such as Cambodia and Laos.
The study, which examined a series of waves of H5N1 highly pathogenic avian influenza in Thailand and Viet Nam between early 2004 and late 2005, was initiated and coordinated by FAO senior veterinary officer Jan Slingenbergh and just published in the latest issue of the Proceedings of the National Academy of Sciences of the United States.
Through the use of satellite mapping, researchers looked at a number of different factors, including the numbers of ducks, geese and chickens, human population size, rice cultivation and geography, and found a strong link between duck grazing patterns and rice cropping intensity.
In Thailand, for example, the proportion of young ducks in flocks was found to peak in September-October; these rapidly growing young ducks can therefore benefit from the peak of the rice harvest in November-December [at the beginning of the cold: Thailand, Viet Nam, Cambodia, Laos are situated â different from Indonesia â in the northern hemisphere].
âThese peaks in congregation of ducks indicate periods in which there is an increase in the chances for virus release and exposure, and rice paddies often become a temporary habitat for wild bird species,â the agency said in a news release.
âWe now know much better where and when to expect H5N1 flare-ups, and this helps to target prevention and control,â said Mr. Slingenbergh. âIn addition, with virus persistence becoming increasingly confined to areas with intensive rice-duck agriculture in eastern and south-eastern Asia, evolution of the H5N1 virus may become easier to predict.â
He said the findings can help better target control efforts and replace indiscriminate mass vaccination.
FAO estimates that approximately 90 per cent of the world's more than 1 billion domestic ducks are in Asia, with about 75 per cent of that in China and Viet Nam. Thailand has about 11 million ducks.
Dipl.-Ing. Wilfried Soddemann - Epidemiologist - Free Science Journalist soddemann-aachen@t-online.de
There is a Dark Side.
And It holds the universe together.
