The Balance Sheet Future

Pending Home Sales Index Down 6.4%

The National Association of Realtors released their Pending Home Sales Index for January. Let's examine the release:

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in January, fell 7.7 percent to 80.4 from a downwardly revised reading of 87.1 in December, and is 6.4 percent below January 2008 when it was 85.9. The index is at the lowest level since tracking began in 2001, when the index value was set at 100.

The NAR tried hard to pull some good signs out of the data but ending up promoting the tax buyer credit and improved affordability. 

Lawrence Yun, NAR chief economist, said the downturn in the economy also weighed heavily on the data. “Even with many serious potential home buyers on the sidelines waiting for passage of the stimulus bill, job losses and weak consumer confidence were a natural drag on home sales,” he said. “We expect similarly soft home sales in the near term, but buyers are expected to respond to much improved affordability conditions and from the $8,000 first-time buyer tax credit.”

Mr. Yun, has long been a glass half full economist for the NAR.  Are buyers waiting for the stimulus bill passage or for lower, more affordable prices?  

NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said it’s ironic with the weak housing market that affordability conditions have improved dramatically. “Housing affordability is at a record high – the buying power of a typical family has risen significantly,” he said. “With the drop in interest rates, a median-income family can afford a home costing $20,000 more than a year ago for the same monthly mortgage payment. With the strong housing stimulus, we are hopeful inventory will get trimmed and which will help prices stabilize in many areas by the end of this year.”

Is housing affordability really at a record high?  I doubt it.  If affordability was high, home sales would be stabilizing.  A closer look at the NAR's Housing Affordability Index formula in footnote 2 shows some reason's for their affordability optimism.

The calculation assumes a downpayment of 20 percent and a qualifying ratio of 25 percent of gross income for mortgage principle and interest payments.

A 20% downpayment ignores buyers who purchase with less down, a common occurrence during the past five years when mortgage programs with downpayment terms of 10% and lower were widely available.  The qualifying ratio of 25% is low but it excludes other housing costs such as real estate taxes and home owners association dues.

Lower prices and affordability are important but the job market is key .  Consumers concerned about job security are more likely to remain in their current house than move-up to a different home.  Without move-up buyers the housing market's activity will grind lower.

What the NAR is not accepting is that housing sales will increase when prices come down to affordable levels and the consumer has a clearer picture of their future.  Home buyers will ultimately return when they are confident about their employment status and income.

Landlords Have To Take Every Drop

In a further sign of continuing consumer spending declines retailers are closing their stores early to cut costs.  Both Westfield and Simon Property Group announced cutback in hours at several shopping mall properties. 

Westfield to Cut U.S. Mall Hours to Help Retailers

Westfield Group, the world’s biggest shopping-center owner by market value, will cut operating hours at most of its 55 U.S. malls to help retailers trim expenses as the recession deepens.

Most of the malls will open 30 minutes later and close 30 minutes earlier Monday through Friday, and close an hour earlier on Sundays at about half the locations, according to Katy Dickey, a spokeswoman for Sydney-based Westfield. Hours will generally stay the same on Saturdays with the changes to take effect from March 1, Dickey said yesterday by telephone.

Best for these landlords to work with their tenants to help them survive.  Look for more action as retailers continue to struggle with falling traffic and spending.  Those who haven't realized the trouble they are in are getting wake-up calls from their tenants looking for rent reductions.  In their latest earnings release Advanced Auto Parts joins a growing list of companies that are renegotiating their leases with their landlords.

In addition, an unprecedented amount of retail store closings has provided the Company significant opportunities to improve its store portfolio. As a result, the Company intends to aggressively renegotiate rents and relocate or close existing stores to improve profitability.

Ending with a simpler take on the troubles landlords are facing, attorney Dale Willerton provides a great Zig Ziglar quote in a piece in the Financial Post:

As Zig Ziglar once told me, "Cows don't give milk - you've got to take every drop." The same philosophy applies to retail and commercial real estate.
Approximately eight out of 10 retailers we work with will receive a 20% to 40% rent reduction mid-term. For tenants who are two years into a five-year lease and get their rent cut back by this much, it can make the difference between staying in business or closing up shop.

Commercial real estate has long been talked about as the next trouble area for financial institutions and owners.  Most of the REIT stocks are nearing their previous lows - look for that support to be short lived as their upcoming cash flow troubles come to the surface.

Disclosure - short IYR