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Inside the Housing Market Recovery: An Interview With Andrew Chaban, CEO of Princeton Properties


Exhuming Al Czervik: One of the foremost industry experts in multi-family housing on what investors need to know about the market turnaround, Fannie, Freddie, and the homebuilders.

In January, Andrew attended the annual International Builders Show, which is the Mac Daddy, the largest light construction trade show in the US. I asked him for some takeaways. His first was that overall, single-family credit at the consumer level, and also for the builders, remains "very tight." Banks are giving buyers a very hard time with more documentation than ever. The lenders, in general, are looking for "perfection" with regards to credit history. According to Mr. Chaban, appraisals have also become a big issue. The lenders are also looking for larger downpayments to try to guard against defaults. But therein is a paradox, according to the Chabes. (We were, in Coolio's words, "Rollin' with the Homies" at this point). At the lender level, there's little real understanding that statistically, there's little correlation between the amount of downpayment and the default rate. Take that, Wells Fargo! (NYSE:WFC)

I wanted more at this point, given Andrew's willingness to share his unabashed opinion on Fannie and Freddie as they relate to Princeton. I wanted more granularity on the homebuilders, the big companies, and opinions on where we go from here. Andrew said, "Well…the big boys should be giddy…their markets in places like Florida, Nevada, [and] Arizona were so far down. Again, at the nadir, they spent a ton of time acquiring land and permits, so that at equilibrium, they were primed for recovery; but they have held and waited for the market cycle to turn…well…it's now turning."

He then cautioned, "We were at -50% in some of those markets…okay, well, now we're back +25% (i.e., Arizona) …so that tells me we're only halfway way back to the top. But these depressed markets are an indicator of where people are shopping." As a fundamental business risk, "they bought low and held, and now they're starting to cash in again." I then asked him what inning we're in with the homebuilders. He said, "Let me say this: I believe there are several years of blue skies ahead."

I then pressed for his favorites. For Andrew, it's a coastal perspective; again, he is not an industry analyst with specific stock picks. So here we have to read the tea leaves. Historically, the homebuilders on the far East Coast and the West Coast including the Texas markets have "stood the test of time." Examples of two names that have this type of exposure are Toll Brothers (NYSE:TOL) in the east and DR Horton (NYSE:DHI) in the west. Speaking generally, he said, "Anyone who places themselves in markets that are relatively fixed has the supply/demand curve working for them the fastest." (Random aside: As Minyanville's own Michael Sedacca pointed out earlier this week, PulteGroup (NYSE:PHM) Chairman Richard Dugas exercised and sold 500,000 shares, reducing his stake by 29% to 1,236,569 shares.)


In the words of Gordan Gano of the rock band Violent Femmes, let's "Add it Up." In full disclosure, I want to state that I'm certainly not an analyst by trade, and neither is Andrew Chaban. However, I do feel (and feedback dictates) that providing access to esteemed industry experts can prove to be invaluable; a baseline is just another bullet in the holster as we as investors try to navigate our way through the landscape. Starting with Fannie and Freddie as a baseline, Mr. Chaban conveys his opinion that whether merged or otherwise, a government backstop is needed, and secondary agency distribution capability is needed.

As far as an investment at the equity level -- again, from a purely theoretical perspective -- Andrew would be a buyer. He quite simply states that again, providing the regulator is doing the job, taking away the greed of days past, the business model is necessary, and it works like no other in the context of its intended purpose. It's fair to say that he may be in the minority here. But as I was told my first year at Morgan Stanley, "At least he has an opinion." I mean, even country music icon Toby Keith in "Red Solo Cup" says, "Freddie Mac can kiss my [bleep]!" Additionally, Chaban also has a ton of credibility on the matter.

Secondly, we looked at the housing market and its foremost proxy, the NAHB, where Andrew sits on the Executive Board. As far as the NAHB Index, we're pulling close to even; we're again "on the cusp" of expansion. However, Mr. Chaban feels the homebuilders, given the unprecedented conditions, executed quite well in general. They bought low, held until they saw the whites of the buyers' eyes, and are now really just starting to cash in. Specifically, he prefers (and remember that I pressed him for this opinion) an East /West coastal bias, referencing TOL and DHI respectively from that geographical point of view. As history bears out, supply/demand models there have simply done better over time. Again, he sees "several years of blue skies ahead." Somewhere, Al Czervik is dancing to Kenny Loggins. Anyone know if Wang is still around? Stay thirsty, my friends.
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