Wednesday, January 26, 2011
Monday, January 24, 2011
The recent numbers released by RealtyTrac1 are startling. The fact that 1 million homes were foreclosed upon in 2010 is clearly quite troubling. However, I believe that the full impact of the supply glut of foreclosed houses on the market is still yet to come. The reason is that there is a huge “shadow inventory” of homes that are either in the foreclosure pipeline or are now held on the banks’ balance sheets. As discussed in an article2 from CNNMoney.com, Standard and Poor’s estimates the shadow inventory by adding the number of houses whose borrowers are 90 days or more delinquent on their payments to those that are in foreclosure or are now owned by the banks. How many houses fit this description? Well, according to S&P, there are 1.7 million homes in this category, an inventory so large that based on the current rate of home sales, it apparently could take up to 44 months to work off.
Ok then; housing prices won’t rise for a few years until the excess supply is absorbed. So what? Actually, my concern is that these numbers only represent a fraction of the total foreclosures that will occur during this painful housing cycle. Specifically, the trouble lies in the number of homeowners who are underwater on their mortgages. Simply, if a person’s outstanding mortgage balance is nominally higher than the current value of the associated house, that person is deemed to be underwater or have negative equity in his or her home. Recently, there has been a back and forth between Zillow, a firm that tries to estimate the number of homes that have negative equity, and the so-called Numbers Guy, Paul Bialik, of the Wall Street Journal. As many people are undoubtebly aware, it is not uncommon to hear a talking head on venerable stations such as CNBC assert that one in four US homeowners is underwater. In fact, Zillow.com estimates3 that the appropriate figure was 23.2% at the end of Q3 2010. However, the article in the WSJ4 makes some valid points that suggest that such disturbing estimates may be a tad high. In response, the people at Zillow acknowledge the fallibility of their estimates but claim is that the true number is closer to 23% than it is to 15%, as Mr. Bialik suggests.
So, what does seemingly harmless argument have to do with future housing prices? Well, the important thing to consider is not necessarily the total number of homeowners who are underwater but instead by how much the balance of an individual mortgage exceeds the value of the property. For example, if a person owns a house worth $90K and has an outstanding balance of $100K, chances are the person will hesitate before exercising his put option on the house. But, what if housing prices see another large leg down? According to the most recent Case-Shiller housing data from October 20105, national housing prices have already started to double dip. Thus, given an already weak housing market, my worry is that when the shadow inventory of homes eventually comes onto the market (even if it occurs at a snail’s pace), prices will see even more weakness. Then, the fact that there are already so many homes with negative equity suggests that people will find themselves even further underwater in the near future.
What if a number of borrowers are currently at a tipping point from which a renewed decline in home prices will cause a cascade of strategic defaults? Going back to the hypothetical borrower discussed above; if the house price falls by another 10% and he is now $19K underwater, is that enough to push him over the edge? If it is, then the foreclosure pipeline will continue to increase and there will be a structural overhang that limits home price stabilization for years to come. If you were wondering why some professional investors are still so bearish on the housing market, you now know why.
Sunday, January 16, 2011
Thursday, January 13, 2011
Commentary: Likely candidates are in tech, financials, consumer
By Lance Helfert
SANTA BARBARA, Calif. (MarketWatch) — Economic forces have come into play, making a wave of mergers and acquisitions a very real possibility in the near future.
First, with corporate bond yields near historical lows, companies have the ability to raise cheap debt to help facilitate deals. Second, as reported in a recent Wall Street Journal article, non-financial firms were sitting on $1.93 trillion of cash and other liquid assets as of the end of September. Many large firms have amassed war chests that can be used to supplement organic growth with acquisitions.
Furthermore, many private-equity funds are holding large sums of cash that were raised prior to the Great Recession, and this money is starting to burn a hole in their pockets.
Specifically, Yahoo Search could still be an interesting asset for Microsoft as it tries to compete with Google. Additionally, the company’s large investments in Alibaba of China and Yahoo Japan offer a potential acquirer a way to tap growth of Internet advertising revenues in Asia. These two stakes are carried on the balance sheet at about $3.78 billion, but the market value of the Yahoo Japan investment alone is around $6.6 billion at the current stock price.
Despite these positive factors, Yahoo seems to be trading at a very reasonable valuation. The company has an enterprise value of about $19.4 billion. But if $636 million in long-term marketable securities and a conservative $9 billion estimate for the value of the Asian investments are subtracted out, the enterprise value falls to $9.76 billion. Given that the company has generated about $1.399 billion in EBITDA over the last 12 months, the stock is trading at less than 7 times EBITDA.
Live Nation Entertainment Inc. is the largest entertainment company in the world, connecting millions of fans to thousands of events all over the globe. Early this year, the company merged with Ticketmaster, which is the largest live-event ticketing firm in the world. The combined entity now has a dominant position in the North American concert-ticket market.