A man is not a whole and complete man unless he owns a home and the ground it stands on." Those words came not from Bill Clinton on the launch of National Homeownership Day in 1995 or George Bush when he pledged his commitment to "an ownership society". They came, instead, from Walt Whitman and might reflect how long the idea of owning a home has been around in this country and how deeply it is woven into the fabric of our society.
Given the events of the last few years it is safe to say that fabric is threadbare in spots and completely ripped apart in others.
At 8:30 this morning we get the numbers for Housing Starts and Building Permits; tomorrow, MBA Mortgage Applications; Thursday, Mortgage Delinquencies and Friday, Existing Home Sales. A week of focus on house and home.
Although Walt expressed his views on real estate before the first census included data on homeownership it was not that widely shared as from 1900 – 1940 less than 50% of all Americans owned the home they lived in and the number of owners actually decreased during that time period.
Today that number stands at about 2/3rds and is a result of, among other things, a little noticed change to the tax code in 1913 allowing for the deduction of home mortgage interest payments. From there Herbert Hoover signed the Federal Home Loan Bank Act in 1932 to stem the 95% slide in housing starts that occurred from 1928 to 1933.
Not to be bested, FDR created the Home Owner’s Loan Corporation to provide low interest loans to help out foreclosed home owners during his vaunted "hundred days" and then in 1934 he created the Federal Housing Administration which set standards for home construction and instituted the 30-year mortgage.
1938 saw the creation of the now infamous Federal National Mortgage Association (Fannie Mae) and in 1944 Uncle Sam made loans easier to get for returning Veterans. By 1950, 55% of the people in this country owned their own home and by 1970 that number swelled to 63%.
In 1976 the seeds of disaster were planted as the Community Reinvestment Act pressured banks to make loans to underserved neighborhoods and Fannie Mae began to underwrite loans to home buyers considered too risky for conventional loans. Enter the sub-prime mortgage!
Fast forward to today and we have comments from Bob Toll of Toll Brothers (NYSE: ) speaking after a recent earnings announcement. "Fence sitters are looking for reasons to jump in on the side of buying; price is no longer the overwhelmingly dominating factor." He went on to say "the mood has changed" crediting "a better feeling" about the economy and job prospects.
I am not sure last Friday’s Confidence numbers from the University of Michigan support Mr. Toll’s comments completely but then he has a vested interest in the optimist’s side of the story.
Bob does not appear to be alone on the sunny side of the street as Ken Campbell, CEO of Standard Pacific Corp. (NYSE: ) was quoted as saying "to me, it seems like we may have found a bottom and signs are pretty good."
Today’s number will show how right or wrong these gentlemen are. A look at how the CDS and equity market is behaving in these names might be worthwhile ahead of the numbers.
TOL was trading at its CDS/equity high/low on March 6th of this year with the former at 210bps and the latter at $14.28. From there the CDS bottomed at 102bps on May 7th just two days after the stock traded at its then high for the year of $21.00. It was sideways to slightly higher for the CDS and the opposite for the stock until July 13th when the stock tested its March lows closing at $15.57 and the CDS formed a double top at around 160bps.
From there it was off to the races as the CDS dropped to 90bps on August 12th and the stock hit its high for the year of $23.42. The CDS has since turned higher closing at 110bps and the stock closed at $21.26 last night.
The story for SPF is similar but not the same as the CDS peaked and the stock hit its nadir on that fateful day in March 2172bps/$0.67. The CDS moved more steadily lower in SPF’s case reaching 670bps on 8/4 with the stock hitting its high for the year $3.84 on 8/10. Last nights closing levels were 755bps and $3.73.
In a week filled with housing related numbers we will certainly see if Bob and Ken’s optimistic view of their world is justified.
Enjoy the week.
Jim Delaney
