TheStreet.com's Jim Cramer says the mortgage problem is in the process of cresting, which is why the stocks have largely bottomed.
We are in the heart of default country, and we knew we would be. This is the toughest moment. You need to go back and look at the calendar to realize the astonishing acceleration in defaults. It's simple: This moment two years ago is when the underwriting standards were the lowest, and this is the moment when the defaults will be the highest because the loans are resetting at high levels and most of the lenders, lenders like Countrywide (NYSE: CFC) (Cramer's Take), are more interested in getting as much out of a borrower as possible before kicking him out than working out the loan.
Think about it.
In the second quarter of 2006, the housing industry was going strong. We were in the 7-million-homes-changing-hands mode, and the vast majority of those homes required little money down, with home equity loans being taken out immediately to pay whatever little interest was being charged. These were the moments of the ultimate no-doc-high-fee loans by New Century Financial, Ameriquest, Resmed (Ditech), American Home Mortgage, Novastar, and of course, Countrywide. This was when the homebuilders' mortgage arms lent the most terribly.
Despite the fact that the challenging housing conditions are still persisting, it looks like that some major housing companies are poised to see the light at the end of tunnel. SmartMoney underlines the fact that there has been some encouraging trend for homebuilders during the past few months.
The National Association points out that, "the housing market has shown no evidence of improvement thus far," and the sentiment index is close to a historical low.
Looking at investing in housing stocks, one analyst at T. Rowe Price, Josh Spencer, makes a two-way analysis. From his point of view, housing stocks have a lot of risk if we are talking about their volatility, but they are not as risky when referring to a long-term time horizon due to their current cheap value.
It has been a tough year for investors. We have been dealing with recession fears, housing market worries, high gasoline prices and a very weak U.S dollar. As much as we would love to say that the worst is behind us, we still could be in for some more rocky times ahead. So its best to try to figure out which stocks would be best to avoid for the time being.
Richard Gibbons wrote up a nice piece over on The Motley Fool that looks at some of the stocks that we would be wise to stay away from at this time. Regardless good or bad times, he is convinced there are always ways to make money, but in order to find the winners, it is also necessary to pull out the losers.
So how can we separate out the winners from the losers?
Gibbons seems to have a simple answer for this. He believes there is really no use in wasting our time trying to separate the winners from the losers as there are so many great cheap stocks that could offer us a chance to make money. Gibbons' advice is to not choose ugly and risky companies that could put our hard earned money at risk. To makes this clear, he uses a baseball analogy, expressing his options for the curve balls instead of the fastballs.
MOST NOTEWORTHY: Yahoo!, Cigna and Aegean Marine were today's noteworthy upgrades:
Citigroup upgraded shares of Yahoo! (NASDAQ: YHOO) to Buy from Hold as they believe Microsoft (NASDAQ: MSFT) is unlikely to walk away from Yahoo! and that there is potential Microsoft could bid $34/share.
Credit Suisse upgraded Cigna (NYSE: CI) to Outperform from Neutral citing the company's favorable business mix.
Stephens upgraded shares of Aegean Marine (NYSE: ANW) to Overweight from Equal Weight on valuation as they see an attractive entry point at current levels.
OTHER UPGRADES:
JMP Securities raised D.R. Horton (NYSE: DHI) to Strong Buy from Outperform and Pulte Homes (NYSE: PHM) to Outperform from Market Perform.
KB Home: The company reported a second quarter loss and sales hit three-year lows. The loss was partly due to land value-related charges that highlighted the continued decay of the U.S. housing market. The company also said it was unable to provide investors with a full-year earnings forecast and couldn't say when they thought conditions would improve.
Lennar: Reported a Q2 loss. The company said market conditions had eroded so much that it's not trying to limit its losses for the year.
Pulte Homes: In response to the "challenging operating environment that continues to exist in the U.S. homebuilding industry," the company announced a restructuring plan designed to reduce costs and improve operating efficiencies in May.
Get the picture? Here's one more:
Ryland Group: Reported a Q1 loss in April and said it wouldn't be able to provide new guidance due to the slump in the housing market.
See a pattern? Homebuilder after homebuilder, it's the same story -- company faces challenging housing market, company loses money, tries to regain profitability. You'd think Citigroup would have noticed.
Aside from the companies themselves, other firms and analysts have said their piece about the sector. March data showed sales of existing homes fell to a four-year low. In April, Census Bureau data showed there were 2.5 million vacant non-seasonal housing units for sale, way over many firms' predictions. Additionally, AG Edwards said on April 30th that "it is not a good time to buy shares yet." Standard & Poor's said in May that they believed over a third of all U.S. homebuilders were "vulnerable to rating downgrades" in the midst of a "three-year downturn."
Home builder Beazer said in a regulatory filing yesterday that it terminated its Chief Accounting Officer for violating the company's ethics policy. Beazer said it fired Michael T. Rand after an internal probe of the company's mortgage origination business. The Atlanta-based company said the action was taken by its board and management after saying Rand violated the company's ethics policy by attempts to destroy documents.
The country's sixth largest home builder is currently under investigation by the FBI and is the subject of several lawsuits. Earlier this year, media reports noted that the company was under federal investigation for alleged mortgage fraud, a charge Beazer has vehemently denied. In May, it announced the SEC was conducting an informal inquiry to determine if the company, or its employees, had violated any securities laws.
Rand's firing is bad news for the Atlanta company, particularly because of the FBI investigation. JP Morgan analyst Michael Rehaut said that Rand's termination "raises red flags regarding the content of the documents in question." It is unclear whether the allegations against Rand will become part of the investigation.
Rand is the second senior official to be fired at Beazer this year. The company dismissed Kenneth Gary, its general counsel, in February for "a pattern of personal conduct" that included violations of company policies. Former CFO James O'Leary resigned from Beazer in March. Shares of the company, whose competitors include D.R. Horton Inc (NYSE: DHI) and Pulte Homes, Inc (NYSE: PHM), fell nearly 8% on yesterday's announcement; shares have fallen more than 40% this year.
Who's responsible for the company's troubles? Rand, the others, or is the company looking for scapegoats?
The slowdown in the housing market has claimed another victim. Specifically, another 2,000 victims.
Pulte Homes (NYSE: PHM) said late yesterday that it plans to trim its work force by 16%, eliminating roughly 2,000 jobs as part of the firm's restructuring plan. The homebuilder say its restructuring efforts will save up to $200 million each year (before taxes). PHM will swallow a pretax charge of $40 million to $50 million due to these layoffs; most of this charge will be absorbed during the second quarter of this year.
In an accompanying news release, the firm's president and chief executive noted that "The homebuilding environment remains difficult, and our current overhead levels are structured for a business that is larger than the market presently allows."
The latest announcement is evidently not the first series of layoffs. In 2006, Pulte employed 12,400 employees, down from 13,400 in the previous year.
Yesterday, Standard & Poor's reported that U.S. home prices dropped 1.4% in the first quarter, marking the first time since 1991 that prices posted a quarterly decline. While many analysts continue to predict a recovery in the housing market, it has so far been a bumpy ride.
The housing market's woes continue today as we get the numbers from last month's homes sales. According to a report from the Commerce Department sales of new homes fell 3.9% during the month of February.
February's disappointing results follow on the heels of January's 15.8% decline which was the largest one month drop in 13 years. With last month's decline the seasonally adjusted annual rate is now coming in at 848,000 which puts us on the slowest sales pace in the last 7 years.
Across the nation the only area that saw growth in new homes sales was the West, which saw sales numbers jump 24.6%, but this was following a devastating month of January which saw the same region decline by 25.8%. The average price of a new home nationwide is now running at $250,000 which is 0.3% below this time last year.
Following today's report home builders have been taking a pretty good hit on Wall Street:
Ryland Group (NYSE: RYL) is currently trading down 1.5% to $45.41 down $0.71.
Centex Corp (NYSE: CTX) is currently trading down 1.6% to $43.13 down $0.70.
KB Home (NYSE: KBH) is currently trading down 1.9% to $45.98 down $0.88.
Pulte Homes (NYSE: PHM) is currently trading down 1.9% to $27.04 down $0.52.
Michael Fowlkes has worked as a stock trader for seven years and spent the last two years working as an analyst for the online investment advisory service Investor's Observer.
The "Totally Informal Economics Roundtable" (TIER) met this week. This esteemed Roundtable achieves a quorum whenever yours truly and his three astute economist friends from graduate school convene to discuss matters economic ... or to celebrate a birthday. This week, the topic was residential housing's long-term prospects.
The TIER summarized the housing sector's current circumstance: the sector appears to be correcting, following a building, buying and (perhaps most importantly) financing boom that led to above-average appreciation rates and an alarming increase in non-traditional mortgage approvals.
The TIER agreed that the residential real estate sector faces a choppy / sluggish next two years, as the number of sub-prime loan defaults -- and the segment's impact -- become more-clear. Real estate officials, Wall Street analysts, economists and other parties also eagerly await data in the months ahead on unsold new / existing homes (inventories), mortgage applications, and borrower repayment performance: these stats will provide a fuller picture of the extent of the housing sector's slowdown and its impact on house values.
According to a new government report today January witnessed a massive 16.6% decline in the sales of new homes in America. The last time we saw a fall of this amount was way back in January 1994 when sales fell by a whopping 23.8%.
Things looked to be getting a little brighter for the housing market yesterday when we were given some positive data on existing home sales which put up better than expected gains last month. During January we saw the biggest rise in two years in existing home sales with a 3.0% rise from December.
Homebuilders have been taking a hit today. DR Horton Inc. (NYSE: DHI) is trading down 1.6%, Toll Brothers Inc. (NYSE: TOL) is down 2.1%, Hovnanian Enterprises Inc. (NYSE: HOV) is currently down 2.4% and Pulte Homes Inc. (NYSE: PHM) has sold off 1.7%.
Bill Miller, the famed Legg Mason fund manager, was on television last week. He said he is long on housing stocks.
In Barron's Up and Down Wall Street column (subscription required), Doug Kass of Seabreeze Partners said he was short housing stocks - no big surprise there. Kass referred to order cancellation as the reasoning for his bearishness.
Typically, publicly traded homebuilders have cancellation rates of 15% of orders. However, that number has jumped considerably. Cancellation rates of publicly traded homebuilders:
These numbers (from the Barron's article) are so bad that the worst might be unfolding right now.
TheFly's advice, Miller tends to be too early and Kass is often too negative when the worst is already priced in the stocks. I'd say, start following these stocks again, expecting a bottom in the spring and early summer.
The most recent rally is mostly from an oversold condition. I'd wait for another correction and see where the industry fundamentals stand.
MOST NOTEWORTHY: Sovereign Bancorp (SOV) and the Homebuilders sector topped the upgrade list today.
Citigroup upgraded Sovereign Bank Inc. (NYSE:SOV) to Hold from Sell with a $25 target, citing expectations for management to announce a larger cost-cutting program in January of 2007.
Bank of America upgraded the Homebuilders sector to Neutral from Cautious after their survey showed traffic improvements in 33 of 39 markets in November relative to October; They do not expect a smooth trend, instead, the firm expects to see choppiness in the market for the next 12-24 months.
In conjunction with the sector upgrade, Bank of America upgraded Standard Pacific (NYSE:SPF) to Buy from Neutral,
and Meritage Homes Corp. (NYSE:MTH), NVR Inc. (NYSE:NVR), Pulte Homes Inc. (NYSE:PHM), The Ryland Group Inc. (NYSE:RYL) and Toll Bros. Inc. (NYSE:TOL) to Neutral from Sell.
OTHER UPGRADES:
Sanofi-Aventis (NYSE:SNY) was upgraded to Overweight from Neutral at HSBC.
SAP AG (NYSE:SAP) was added to Merrill Lynch's Europe 1 list.
TheStreet.com's Jim Cramer says the mortgage problem is in the process of cresting, which is why the stocks have largely bottomed. 
Despite the fact that the challenging housing conditions are still persisting, it looks like that some major housing companies are poised to see the light at the end of tunnel. SmartMoney 
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February's disappointing results follow on the heels of January's 15.8% decline which was the largest one month drop in 13 years. With last month's decline the seasonally adjusted annual rate is now coming in at 848,000 which puts us on the slowest sales pace in the last 7 years.
Just when you think you may have seen the worst of times for home sales we get a news report out today to bring you back to reality. A new report today showed the 
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