Housing Stocks Reverse Course After Big Gains
By RAJIV VYAS
The runup in Orange County stocks tied to residential real estate has taken a sharp turn as investors begin to fear that the boom in refinancing and new home sales could be slowing.
Stocks of title insurers, mortgage lenders and homebuilders have tumbled this month after posting some of the best showings among local stocks this year.
The drops in housing-related stocks since June 24,when the latest decline in the national indexes began,have been sharper than the declines in the S & P; 500 or the Dow Jones Industrial Average.
Even with a bounce from last week’s one-day rally, shares of Irvine-based subprime lender New Century Financial Inc. last week were off 30% from their June 28 peak. The stocks of homebuilder Standard Pacific Corp. of Irvine and title insurers First American Corp. of Santa Ana and Irvine’s Fidelity National Financial Inc. have taken similar paths with drops ranging from 18% to 25% since late June.
Analysts and executives said they were puzzled by the declines.
Parker Kennedy, First American’s president, said that he had “no idea” why his company’s stock price had taken a sharp plunge, worse than that of the overall market.
First American is the second largest U.S. title insurer after Fidelity National. Both companies have been doing brisk business with surging new home sales and a wave of refinancing spurred by low interest rates and rising home values. First American’s title insurance operation continues to do record business, Kennedy said.
Last month, the median price of an OC home hit $359,000, up 3.8% from May’s record high and up nearly 20% from a year earlier. June home sales were up 9% to 4,792.
Analysts and economists said the stock drop probably signals fear among investors about a slowdown in the real estate and the refinancing boom.
Companies tied to real estate “are supposed to be the guiding light and comfort” in a shaky economy, said G.U. Krueger, vice president of market research at Irvine-based residential development investor Institutional Housing Partners Inc.
“It is difficult to gauge a trend from three weeks,” said Brian Nottage, director of macroeconomics at West Chester, Pa.-based Economy.com Inc. “If there is any logic, it looks like investors are getting worried that there is a bubble.”
New Century Financial has seen the sharpest drop among OC real estate companies. After rising some 150% in the first six months of the year, New Century shares fell from 33 on June 24 to around 25 late last week. The company counted a market value of about $600 million at recent check.
Celia Chen, senior economist at Economy.com, said investors could be getting worried about the credit worthiness of subprime borrowers with the slow economy and relatively high unemployment.
Subprime lenders “are probably walking a tight rope,” she said.
In June, The Findley Reports Newsletter, a banking industry publication, reported that the Federal Deposit Insurance Corp. recently noted that subprime lenders underestimated losses on their loans last year.
“There are concerns about problems at subprime lending that could spill into mortgages,” said Otis Bradley, director of research at New York-based brokerage Gilford Securities Inc., which has an office in Irvine.
In the late-1990s, Irvine-based Consumer Portfolio Services Inc., a subprime auto lender, faced problems with the quality of its loans. Loans securitized by Consumer Portfolio and sold in the market had a higher than average amount of bad loans. As a result, the company was unable to resell loans for years.
Bradley, who has been covering New Century since early 2001, said most of these fears regarding credit issues at New Century are unjustified.
“None of those questions came up when the stock was 35” in late June, he said.
Bradley said he still is bullish on New Century and said he would be surprised if the company’s stock is not trading in the high 30s in the next few weeks.
“Call me in three weeks and then we can talk,” he said.
It could be another matter for title insurers. Most of their business is related to refinancing. With interest rates leveling off, the refinancing boom could slow, analysts said.
According to Mortgage Bankers Associa-tion of America, U.S. mortgage originations hit a peak of $680 billion in the fourth quarter. Refinancing accounted for $476 billion, or 70% of the fourth quarter’s total.
The association projects loan originations for the second quarter could come in at $523 billion and slide to $259 billion by the first quarter of 2003. Refinancing is likely to be 55% of new loans in the second quarter and only 25% in the first quarter.
Homebuilders Standard Pacific and Newport Beach-based William Lyon Homes Inc. also have seen their shares drop by about 25% in the past four weeks, after seeing steady rises since January.
“We are beginning to see a little bit of slowing” in the housing market, Krueger said. “But it’s not everywhere. It is spotty. OC is still pretty OK. We are hitting new peaks, but we have to be a little bit wary of affordability.”
Only about 20% of the people living in OC can afford to buy a house at today’s prices, Krueger said.
“We are getting into dangerous territory (and) we are more exposed to interest rate shocks,” he said.
Another possibility: the recent downturn in real estate stocks is an aberration.
One take is that real estate stocks fell because they were the only ones from which investors could take profits, analyst Bradley said.
“This is what happens at the tail end of a bear market,” he said. “They sell stocks because there is nowhere else to go.”
