Monday, June 12, 2006

39% of Housing Extremely Overvalued

A new report from Global Insight/National City (pdf) finds that a growing percentage of U.S. housing markets are "extremely overvalued" and are at risk of falling prices.

Summary:
  • Overvaluation became more pervasive during the first quarter of 2006.
  • Seventy-one metro areas, accounting for 39 percent of all single family housing value, were deemed to be extremely over-valued at that time. That represents an increase from 64 markets, and 36 percent of all single family market value, during the fourth quarter.
  • As recently as the first quarter of 2004, overvaluation was insignificant. At that time only 3 metro areas, accounting for just 1 percent of all single family house value, were deemed to be extremely overvalued.
  • The coastal states of California and Florida continue to show the highest concentration of overvalued markets, accounting for 17 of the top 20.
  • Quarter-to-Quarter price appreciation is slowing in most metro areas, and is nearly flat in San Diego and Boston.
  • Property price appreciation remains strongest among the most over-valued metro areas, and visa-versa (sic). Between the fourth quarter of 2005 and the first quarter of 2006, the correlation between valuation and appreciation was +0.36, suggesting that house prices are diverging, not converging, with respect to normal valuations.

Tuesday, June 06, 2006

EVP at PIMCO Thinks Housing Bubble Will Burst

Mark Kiesel over at PIMCO makes a good case for the housing bubble. He's putting his money where his mouth is: he sold his house and is now renting. Here's a summary:

With rising mortgage rates, housing is becoming increasingly less affordable



Exotic mortgages, designed to keep monthly payments low, have caused many people to buy more house than they can afford:

"Developments in the mortgage market have also increased the presence of marginal buyers in the housing market. This industry has transformed its product offerings in an effort to keep the initial monthly payments on new mortgages as low as possible. The growth in interest only (IO), negative-amortizing (Neg-Am), limited documentation and forty-year fixed rate mortgages attests to the industry’s use of “creative financing” to keep the game going. For example, IO and Neg-Am loans represented 1% of total mortgage organizations five years ago but have climbed to 22% as of 20052. Banks have been able to maintain easy lending standards, despite higher short-term interest rates, by securitizing mortgage loans and transferring the risk to foreign buyers."


What's more, house prices have grown faster than people's income:




Meanwhile, home inventories are booming:
"Housing inventories are becoming a problem. Presently there are almost 4 million homes available for sale nationwide, including 3.383 million existing and 565,000 new homes. Current inventories are at record levels, having risen 27% and 37% year-over-year for new and existing homes, respectively (chart 3). Given declining affordability and rising inventories, we expect to see homes for sale remain on the market longer and asking prices come down. The housing market should quickly transition from a sellers’ market to a buyers’ market."





He continues:

"In summary, the main forces driving housing price appreciation in the past are now softening. Declining affordability, resulting from rising prices and interest rates, has become a significant headwind facing new buyers. Despite the persistence of creative mortgage financing, prices have now risen to a point where demand is slowing. Federal regulators are beginning to crack down on risky lending practices. Speculators are shifting from buyers to sellers. Mortgage application growth is slowing. Finally, and most importantly, the supply and demand imbalance in the housing market is turning sharply for the worse as inventories soar."


And finally, the consequences for the economy overall:

"Housing is a leading indicator of the overall direction of the economy. As housing slows, economic growth will surely follow. As such, we should expect to see tighter terms on credit extension, less liquid markets and a pick-up in the overall corporate default rate over time with a slowdown in the pace of economic growth. An eventual rise in the default rate, combined with higher near-term volatility, should lead to a more challenging market environment for credit. Watch the “for sale” signs – in both the housing and corporate bond market – my sense is more of both are coming as the market transitions from a mode of risk taking to that of risk aversion."

Monday, June 05, 2006

Shortfall At Exxon: All those profits -- but underfunded pensions

I was amazed to read that Exxon has underfunded pensions (via BusinessWeek):

"The fact is, Exxon could be topping off its tank for employees but isn't. It's declining to put more money away for a rainy day while the sun is shining on the oil industry. And it isn't apologizing, either. 'We basically chose not to,' says Gardner. 'That's not an investment we want to put more into at this point. Our financial strength provides excellent security for any pension.' We'll see."

The Gathering Pensions Storm

The Gathering Pensions Storm: "The problem for financial markets is twofold: First, the underfunding in corporate and other pension funds will cause individual firms great hardship, making those with high legacy costs uncompetitive. Second, the underfunding at the state and federal government levels will cause tax hikes, which will alter regional and international competitiveness. We currently estimate that U.S. corporate pensions are underfunded by about $140 billion. Add the cost of other postemployment benefits and the deficit doubles. State pensions are underfunded by $284 billion.

Disturbing as those numbers are, the federal underfunding situation dwarfs the state and private ones. Social Security has a $4.6 trillion shortfall (based on present discounted value of the next 75 years), and the federal civilian and military employee programs are underfunded by $4.5 trillion."

Thursday, June 01, 2006

Who Should Pay for the Corporate Pension Shortfall?

Robert Reich, a former secretary of labor, argues that the corporations that created pension plans are responsible for funding them. President Bush agrees with him:

"The President wants a law that forces companies to fully fund their pension obligations to their employees. He’s right."
How big is the shortfall, you ask? And shouldn't the PBGC ensure underfunded pensions are safe? More than 450 billion dollars. Oh, and the PBGC is short on cash, too:

"Corporate pension plans don’t have nearly enough money to pay what the companies have promised their workers. We’re talking big money here -- a shortfall of over $450 billion. And if companies can’t pay up, you know who’s left holding the bag? Not only 44 million Americans who won’t get the monthly pension payments they were promised. You and I and every other taxpayer will also be on the hook.

You see, there’s a government agency called the Pension Benefit Guarantee Corporation that’s supposed to insure most of these promises. But the PBGC itself is already deep in the red, to the tune of almost $30 billion."

Some lobbyists don't agree with the president:

"Lobbyists for big companies argue they shouldn’t be required to fully fund their pension promises. They say that such a requirement will discourage them from setting up pension plans in the first place. That’s like saying drivers shouldn’t be required to stop at stop lights because that might discourage them from driving. If companies aren’t funding their pension promises, they shouldn’t be making pension promises to begin with.

The lobbyists also argue that forcing companies with low credit ratings to pay up faster -- as is only logical, since their underfunded plans are at greater risk -- will push these companies into bankruptcy. But no one is talking about placing new obligations on them. They already owe their retirees this money. Why should retirees be treated differently from the company’s creditors and suppliers, who get paid what they’re owed?"

Let's all hope tax payers won't be the one bailing out underfunded corporate pensions.

The Pension Pinch [American Prospect, June 1, 2006]

Wednesday, May 31, 2006

More on insider selling at Toll Brothers Inc.

In an earlier entry, I wrote about insider selling at Toll Brothers (TOL), a luxury home builder. As I write this, Toll Brothers (TOL) trades at $28.26, down from a 52 week high of $58.67. Over the course of a year, insiders at TOL have sold more than 4.4 million shares, at prices ranging from around $36 to roughly $58. Most of those were sold by the actual Toll brothers, Bruce and Robert.

Meanwhile, as late at 16 March, 2006, Robert Toll, chairman and chief executive at Toll Brothers Inc still sees growth in the housing market.

"Last time I saw 6 percent was 1966, except for the last couple of years," Robert Toll, the company's chairman and chief executive, said Wednesday in an interview with The Associated Press. "If rates go to 7.5 percent, we'll take it. We can still do a whole lot of business."

I wonder if he really believes his own words...

The housing bubble and insider trading

Today I was looking at reports for companies where insiders have recently bought shares with their own money. I'm not talking excercising options, I'm talking buying shares on the market. When insiders buy shares in their company with their own money, that says something about their future outlook and confidence in the business. Take a look at what Michael Dell bought last week. Almost 3,000,000 shares! Also, folks at Chesapeake Energy Corp. have been doing some buying recently. All good indications for those companies, don't you think?

Then I began to wonder what insiders at companies that benefitted from the housing bubble have been up to. Take a look at the insider trading at Toll Brothers. Some selling in January of this year (60,000 shares). Some more selling in September last year, to the tune of 620,000 shares. But July 2005 is when the Toll brothers, Bruce and Robert more than 2 million shares combined! What about Home Depot? Again, brisk selling activity in March 2006, and June and September of 2005. Then there's Washington Mutual, a company that does a lot of mortgage business.

What was going on around July last year that triggered these sales? Does the insider selling in the last few months mean that folks that made money on the housing bubble see the tide turning? Do you know of any other companies that raked in fat profits during the booming housing market whose insiders have been unloading shares?

Your House as a Retirement Nest Egg?

I've heard people say "Saving? I don't need to do that, my house will always appreciate and when I'm retired, I'll live off of the house." First of all, this assumes they'll sell the house to turn the extra value into cash. But what if the house values decline for the next 10 or 15 years?

Can it happen? Well, it happened in Japan.
"Japan provides a nasty warning of what can happen when bubbles burst. Japanese property prices have dropped for 13 consecutive years, by a total of 35% from their peak in 1991 (see chart). Yet the 36% rise in real house prices in Japan in the seven years to 1991 was actually less than the increase over the past seven years in all but one of the eight countries listed above where prices appear overvalued."















The global housing market: Flimsy Foundations. [Economist, Dec. 2004]


Many indicators are now pointing to a slowdown in what has been an incredible housing market. You see more for sale signs along the streets. Houses are on the market longer. Inventories are growing. Prices are being reduced more than once, rather than being bid up over the original asking price. Even the mainstream media has picked up on it.

A lot can be said about whether we are in a housing bubble and if and when it's going to burst. The bottom line is that it's rarely a good idea to put all your eggs into one, well, nest. Diversify. Maybe house prices will always go up and maybe they won't. When it comes to retirement, save money, invest wisely and diversify.

Sunday, May 28, 2006

The Value of the S&P 500: What About the Small Print?

Pensions are part of an organization's obligations. As such, for an investor, it's important to understand whether the company he invests in can meet its obligations. The trouble with pension liabilities is that current accounting rules allow companies to hide them in the fine print. Fool.com explains in this article, Stocks with Shocking Debt:

"Unfortunately, filings don't tell the whole story. There's a whole slew of debt that companies don't have to report on the financial statements under generally accepted accounting principles (GAAP). What kinds of debt do companies keep hidden? Pensions and operating leases, to name two. And pensions in particular are quickly becoming a dangerous red flag."

The executive director of the Pension Benefit Guarantee Corportation (PBGC, see earlier post) estimated the total underfunding of pension obligations at a whopping $400 billion at the end of 2002.

If exchange traded companies are forced to change the way they account for these liabilities and other post retirement liabilities, this could have have a drastic impact on their cash positions (What About All that Cash? Via The Big Picture:)

"While it is true that companies have tremendous cash positions currently, if under-funded pension plans and healthcare liabilities are moved from the footnotes of the financial statement to the balance sheet, said cash evaporates. For example, the FASB (Financial Accounting Standards Board) is proposing to move the status of pension and OPEB (post-retirement employee benefit) plans out of the footnotes onto the balance sheet. If done, the notional "hit" to shareholders' equity for the S&P 500 is more than $250 billion."


Tags: , ,

A Pension Crisis in the Making?

Many people rely, at least in part, on a pension for income after retirement. What is a pension? A pension is an arrangement in which an employee receives income after retirement from an employer (for example an organization, a government agency or a labor union). The funds to pay for this income are typically acumulated during the employee's working years and are managed in a pension plan.

Some people, including members of congress, now fear a pension crisis. During the last decade, several large corporations have gone bankrupt. When companies go belly up and after the dust settles, the money these organizations accumulated in pension plans typically isn't enough to pay for the benefits that employees were promised. In other words, these pension plans are underfunded.

To provide a level of insurance, the US government in 1974 established the Pension Benefit Guaranty Corporation (or PBGC). To protect underfunded pension plans, the PBGC receives insurance premiums from the people that manage the plans. In the last few years, the PBGC has had to take control of pension plan of well known companies such as Bethlehem Steel, United Airlines, Enron, and many others. According to the PBGC web site, the agency currently protects the the pensions of 44.1 million American workers and retirees.

But what if the PBGC is underfunded? What if the agency that's supposed to protect pension plans doesn't have enough money to do so? We'll examine this issue and other issues around pensions and retirement in future posts to this blog.

Tags: ,