Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Posts Tagged ‘U.S. real estate market’

Why You Need to Think Long-term with Chinese Real Estate Stocks

By for Profit Confidential

Why You Need to Think Long-term with Chinese Real Estate StocksWhile the U.S. real estate market is showing some encouraging signs, there continue to be concerns towards a possible real estate crash in Mainland China. The Chinese government has been trying to corral the price increases in housing with some success.

My feeling is that the short-term risk is high, but there is excellent long-term growth in China’s real estate sector. (I also like China’s retail sector; read “Luxury Retailers Loving China.”) You need to be patient and be aware of the risk.

There are over 300 million middle-class consumers in China, and as a group, they are hungry for a lifestyle similar to ours. Real estate is a key goal for the Chinese.

Standard & Poor’s analysts believe the real estate market in China is stabilizing, with buyers returning and home prices continuing to decline.

And in an ironic twist, at a time when California’s real estate market is struggling, the California Public Employees’ Retirement System (CalPERS), a state pension fund, announced it would be investing about $530 million in two new China real estate funds managed by ARA Asset Management, which is positive longer-term. (Source: “California State Employees Bet On China Real Estate,” Forbes, September 24, 2012.)

To play China’s real estate market, you can take the more conservative approach and buy the Guggenheim China Real Estate (NYSE/TAO) exchange-traded fund (ETF) with a year-to-date return of 25.5% as of August 30. The fund holds mainly large value-oriented Chinese real state stocks.

Guggenheim China Real Estate Chart

Chart courtesy of www.StockCharts.com

But to take a more speculative and potentially higher-return opportunity, an emerging small-cap Chinese real estate company that I … Read More

The Domino Effect That Will End this Stock Market Rally

By for Profit Confidential

commodity pricesReaders of Profit Confidential have made their voices heard on the topic of rapid inflation. In our recent survey, over 2,000 of our readers said they believe we are experiencing rapid inflation closer to 10%, while the official government Consumer Price Index (CPI) states that inflation is at 2.9%.

On these pages, I have been detailing the input cost (Cost of Goods) for manufacturers—higher commodity prices—from many parts of the world. In the next month, the first-quarter earnings reports start coming out and major U.S. companies will give us a good idea of how 2012 will shape up in terms of economic growth and rapid inflation.

But some companies have already started crying the blues…

On its conference call this week, Sears Holdings Corporation (NASDAQ/SHLD) cited a significant increase in commodity costs, particularly cotton, as one of the reasons for its margin decline.

Many restaurant chains across the nation have been discussing their biggest struggle: raising prices for food on their menus…weighing high commodity prices—like the rise in the price of beef—against the fragile economic recovery.

Beef prices have climbed 30% over the last two years, and many restaurant chains do not believe the rise in commodity prices—rapid inflation—will subside anytime soon. Some are getting creative; ensuring they serve their steaks with the bone, so customers feel as though they are getting more meat on their plates for that higher price.

ConAgra Foods, Inc. (NYSE/CAG), a global food maker of such products as “Chef Boyardee” and “Banquet” frozen meals, just released its fourth-quarter numbers, which slightly exceeded expectations—but the company lowered its expectations for the current quarter and sees … Read More

How Underwater Homeowners Are
Swapping Their Deeds to Leases

By for Profit Confidential

A few months ago, I wrote about the U.S. real estate market changing from a “buyers’ market” to a “renters’ market.” This is evidenced by the fact that home prices, on average, have fallen by 32% since 2006, while rents have risen 20%, on average, since that time (source: Wall Street Journal).

Not only were potential new home buyers afraid to enter the U.S. real estate market after the collapse that occurred in 2007, opting to rent instead, but I also commented on the fact that private-equity and hedge-fund money was finding its way into the U.S. real estate market.

The latter bought home foreclosures, contacted the families living in those homes, and attempted to sign a rental agreement with them. In this unusual U.S. real estate market, it presents a win-win situation, as the hedge-fund and/or private equity firm makes money on its investment, while the owner gets to keep his/her home, albeit as a renter.

It has been shown that home foreclosures in the U.S. real estate market, if the property is left vacant, can further drag down the property values in the neighborhood.

At the time, I mentioned that Fannie Mae and Freddie Mac were possibly going to begin a pilot program to convert homeowners to renters, as a way to stem the oncoming home foreclosure onslaught that will visit the U.S. real estate market this year.

The Federal Reserve Bank of New York expects at least 1.8 million home foreclosures in the U.S. real estate market in 2012.

Instead, Bank of America Corporation (NYSE/BAC) announced that it is launching a pilot program that will allow … Read More

The Land Debt Built

By for Profit Confidential

U.S. real estate marketAlong with municipalities struggling in this country, I’ve been warning readers about another potential debt catastrophe. Student debt in America has crossed the $1.0-trillion mark.

Student loan debt is now larger than the country’s total credit-card debt (source: Consumer Bankers Association). So much for encouraging consumer spending.

The Federal Reserve Bank of New York recently reported that roughly 27% of student loans were more than 30 days past due. Don’t expect that 27% to increase consumer spending. (Also see: U.S. Student Loan Crisis Developing.)

The reason for this distress in paying student debt is the weak economy that is not producing enough quality jobs with good salaries, placing great strains on consumer spending. The Bureau of Labor Statistics estimates that the current unemployment rate for those aged 20-24 is close to 14%, while the unemployment rate for those aged 25-34 is 8.7%.

While the Bureau of Labor Statistics estimates the unemployment rate among these age groups, it doesn’t capture the underemployed—workers taking lower paying jobs or part-time work or work that doesn’t reflect their skill set—accurately, but just last month, the Pew Research Center released its latest study on the situation.

It finds that the unemployment rate among the young is double the national average, placing more strain on consumer spending. It also finds that, although all age groups were hit hard during this latest recession that began in 2007, those aged 18-24 were hit the hardest, as evidenced by the unemployment rate. This certainly affects consumer spending.

Those who are lucky enough to get jobs are likely to experience pay that is 10%-15% lower than those with … Read More

Warning: Corporate Debt-to-Cash Reaches Record High

By for Profit Confidential

corporate profitsThere has been a lot of talk about all the cash U.S. corporations have accumulated since the credit crisis hit in 2008—about $2.0 trillion stashed in corporate America’s bank accounts.

From the White House to the average American, encouraging businesses to spend the cash they have accumulated due to strong corporate profits would translate into jobs being created, which would obviously help turn this economy around.

However, corporations have been hesitant to spend their corporate profits because of visibility: they simply don’t see where the demand for their product/service is going to come from in the future.

 Corporations, just like consumers, remain cautious and have opted to spend their corporate profits on share buybacks and dividends instead.

 Non-financial corporations—companies outside the financial industry—are sitting on $2.0 to $3.0 trillion in cash according to various reports. JPMorgan has compiled corporate profit numbers for non-financial corporations in the S&P 500, noting that, as of the end of 2011, these companies are sitting on just under $2.0 trillion in cash.

These are staggering numbers, and it is no wonder everyone is attempting to find a way to get these corporate profits into the economy, so that this economic turnaround can really get moving.

But what people are not looking at is how much corporate debt is sitting on the balance sheet of these same corporations. According to the Federal Reserve, non-financial corporations are, as of the third quarter of 2011, carrying corporate debt to the tune of just over $7.6 trillion (see chart).

As you can see from the chart, corporate debt has been in a steady climb since 1978 and, even after … Read More

Think U.S. Housing Is in Trouble? Commercial Real
Estate’s Starting to Fall Apart, Too

By for Profit Confidential

Everyone wants to know where the bottom is for the U.S. real estate market. And I’ve argued that the U.S. economy cannot get out of its hole or grow until the U.S. real estate market heals and home prices start rising.

Inside the U.S. real estate market, however, there is the office market and retail space segment. They really reflect the health of the American business.

 The Fitch Rating Agency has created an index that tracks delinquencies in mortgage-backed securities of the office and retail U.S. real estate markets. For January of 2012, delinquencies have hit a fresh high in both these areas of commercial mortgage-backed securities.

Worse, in office and retail spaces/complexes worth at least $100 million, there were four delinquencies in December 2008, but that number jumped to 25 in January of 2012! The number of large properties falling behind on their payments is steadily rising, presenting a very disturbing trend for commercial mortgage-backed securities.

For an office or retail property to be considered delinquent (behind on its payments), payments had to not have been made for at least 60 days. For the office U.S. real estate market, the December 2011 Fitch Delinquency Index came in at 6.84%, but January’s number stands at a record 7.30%. Concerning the retail U.S. real estate market segment, the delinquency index was at 6.89% in December 2011, but it jumped in January to 7.21%.

 Typically, many office and retail office leases and loans are done on five-year contracts.  Therefore, the contracts initiated in 2007, right before the crisis hit, are going to come due now in 2012 for the U.S. real … Read More

Our Annual Forecast: How Much
Home Prices Will Fall This Year

By for Profit Confidential

For the past four years I’ve been singing the same tune…

The U.S. economy cannot recover unless the U.S. housing market recovers. As a past “real estate man,” (in my life), I’ve never seen an economic recovery unaccompanied by a real estate market recovery.

There was a lot of speculation going into 2011 that it would be a year for the U.S. housing market to find a bottom. Well, the U.S. housing market hit a “bottom” last year, but not one to build upon.

U.S. new home sales fell 2.2% in December, which closed out 2011 with 302,000 new homes during the year, down from 323,000 new home sales in 2010 (Source: U.S. Commerce Department). In terms of number of units sold, this makes 2011 the worst year on record for new home sales—since 1963. So much for a U.S. housing market recovery.

Even though mortgages are at historically low interest rates, the low rates are not translating into new home sales. Sure, fear of further price declines in the U.S. housing market is discouraging people from buying new homes and directing consumers to rent instead, which I’ve been talking about.

And although fear of further home price declines may play a role, I’m more inclined to believe that the stagnant jobs market and weak economy are resulting in the greatest fear: uncertainty. This is what is really driving more people to rent homes instead of buying homes.

There are those still forecasting a rebound in 2012 for the U.S. housing market, but as I’ve been talking about in PROFIT CONFIDENTIAL, government estimates for foreclosures are still high at … Read More

Exactly Where We Are in This
Secular Bear Market

By for Profit Confidential

In a secular bear market, which is where I firmly believe we are today, there are three phases:

A phase I bear market (often referred to as the first down-leg) brings stock prices crashing down. From its high of 14,164 in October 2007, the Dow Jones Industrial Average crashed to 6,440 by March 2009—a 55% drop. This phase of the secular bear market is behind us.

A phase II bear market (often referred to as the “rebound,” “bounce” or “sucker’s rally”) started in March of 2009. The Dow Jones Industrial Average has risen 89% since March 9, 2009. The bear market has been doing an excellent job during this current phase of luring investors back into the stock market. Phase II bear markets give investors the false impression that the economy has turned the corner, that stocks are a safe bet again. This phase of the secular bear market is still upon us.

Given that 2012 is a Presidential election year in the U.S., given that the government and the Fed have fought the natural forces of the bear market tooth and nail, the bear market rally, the “bounce” in this secular bear market, has been long.

Phase III of the secular bear market is when stock prices come crashing down again, bringing stock prices down to the point at which the phase I bear market started or lower—in this case, 6,440 on the Dow Jones Industrial Average, about 50% below where the stock market sits today.

Yes, I’m sure many of my readers are sitting there, reading this, and saying, “Michael, this can’t happen. Our economy would crash … Read More

What’s Really Driving the Housing Market

By for Profit Confidential

There are two key variables that continue to hamper the country’s economic renewal—the housing market and jobs growth. Unfortunately, while both are showing some encouraging signs, I feel it will still be several years before we see sustained strength in both. Without jobs or the confidence of getting a job, you cannot expect people to buy houses.

The housing market is clearly better than it was when the subprime mortgage fiasco led to a downfall in theU.S.economy and sent the unemployment rate spiraling higher. Yet we continue to see home prices decline across the top 20 metropolitan cities in America.

In November, housing starts came in at seasonally adjusted annual rate of 685,000 units, according to the Commerce Department. The reading was the highest since April 2010, but still well below the monthly one million plus housing starts that make up what is considered a healthy housing market.

Building permits of 681,000 in November were also ahead of estimates; but again the number is far below what is widely deemed to be a healthy housing market.

What the readings offer is some hope of better readings to come, albeit as I said, we also need to see a concurrent strengthening in job creation to drive a strong housing market. With strong jobs growth, consumers become more confident in buying homes and big-ticket items. Unfortunately, this has yet to happen and I feel it will not be until at least 2012 and 2013 before the situation in the housing market improves.

A strong housing market is critical for the retail sector as homeowners will tend to buy new furnishings, including many … Read More

May be the American Consumer
Isn’t Wrong This Time

By for Profit Confidential

Is this an alarming picture? The government has thrown trillions of dollars at saving the economy. Bernanke’s Fed has pulled rabbit after rabbit out of the hat to jump start the economy, keeping interest rates artificially low and significantly increasing the money supply.

Dividend Paying Stocks for Income and
the Real Estate Market for Capital Gains

By for Profit Confidential

I hate to say it, but there is a really strong case to be made for avoiding the stock market almost entirely in terms of an investment strategy. I’m a big believer in owning select, higher dividend paying stocks, but if you consider the stock market’s returns over the last decade, the track record is terrible.

Home Sweet Home? Not for the U.S. Housing Market

By for Profit Confidential

If you have been waiting for a resurgence in home prices, don’t hold your breath. George Leong takes a look at the Case-Shiller 20-city Index results and what the near future holds for the real estate market. If you live in Atlanta, San Francisco, or Tampa, the recent news was clearly not what you wanted to hear, but then you probably already know the dire situation in your housing market.

The key Case-Shiller 20-city Index showed these three metropolitan areas experienced the largest decline in home prices in September. Also consider that 17 of the 20 cities in the index witnessed price erosion in the housing market. The index fell 3.6%. The housing markets in Atlanta, Las Vegas, and Phoenix are sitting at their lowest levels since the beginning of the subprime mortgage mess four years ago.

If you have been waiting for a resurgence in home prices, don’t hold your breath. I have long been negative on the housing market despite some intermittent improvements. Yes, some will point out that the index had reported a slight increase in home prices in at least half of the cities for five straight months to September. That’s great, but prices continued to be under pressure and the increases will be tiny and not deserving of any screaming optimism.

The weak September reading supports my view that the feeble housing market will continue to be a drag on economic renewal.

A strong housing market is critical for the retail sector, as home buyers will tend to get new furnishings, including many big-ticket items. This is not happening; home prices continue to decline, dragged down by continued high foreclosures and short sales, where homes are dumped below the mortgage value. The S&P report showed that homes sold under these distressed circumstances are selling at 20% below the actual value of the … Read More

Slowing Chinese Real Estate Prices a Big Risk to America

By for Profit Confidential

Falling Chinese real estate prices are becoming a big concern…and the after-effect could reach America.

Sixty-six million people live in Beijing, Shanghai, Guangzhou and Shenzhen and these four big cities are seeing the price of homes softening. Chinese real estate prices could fall as much as 20% to 30% next year in these cities, according to a story in Beijing Business Today.

As you may recall, the Chinese government, fearing speculation in the Chinese real estate market, raised home down payment requirements and mortgage rates in April to cool the housing market. These steps may have gone too far, cooling the Chinese real estate market too quickly.

As China’s economy has grown so fast, as the country has become a big world-buyer of materials related to home building, materials companies have looked at exports to China as an offset to the pathetic American new home construction market.

The big fear is that a hard landing for the Chinese real estate market could mean a hard landing for the Chinese economy, the economic ramifications of which could be felt worldwide.

According to the Bureau of Economic Research, the gross domestic product (GDP) of the U.S. was about $14.7 trillion in 2010—that’s a 46% increase in our GDP since 2001. The GDP of China was $5.9 trillion in 2010—a 353% increase in China’s $1.3-trillion GDP of 2001.

Now here’s where it gets really interesting…

Back in 2001, the economy of the U.S. was 7.8 times bigger than China’s economy if we look at the GDP of both countries that year. Last year, the U.S. economy was only 1.7 times bigger than China’s … Read More

Understanding the European Crisis:
Greece Is Not the Problem

By for Profit Confidential

Greece’s gross domestic product (GDP) in 2010 was only $304.87 billion. The proposed Greek “bailout” by the European Union includes about $180 billion in cash and a 50% cut in Greece’s debt. This is equal to more than one year’s GDP for Greece. It’s a huge bailout. It’s free money. The Greeks would be silly not to take it…that’s why, at the end of the day, they’ll grab it with both hands.

Why We Can’t Have a Sustained
Economic Recovery

By for Profit Confidential

Things are looking up for the economy again. Unfortunately, things are not always as they seem. The U.S. Commerce Department said that the U.S. economy grew at 2.5% in the third quarter—the fastest pace in a year. Moody’s Investor Services last week raised the corporate ratings of both Ford Motor Company (NYSE/F) and General Motors Company (NYSE/GM), an indication that the car companies are doing better as well. All of a sudden, people are feeling good about the U.S. economy again.

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