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Five Things You Need to Know: Pulte Homes, "The Problem Is Demand"


No, the problem is Pulte Homes.


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:

  • 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.
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