Money and Investing Thoughts

This excerpt from a response to the Sacramento Bee real estate blog gives me doubts concerning the “accuracy” of the median price data of the current crop of existing home sales. If you are a regular reader here you know I have been tracking the Sacramento area real estate market for several months. If not, use my real estate category for background. The Sacramento market has been surging in home sales for the last 4 months with year-over-year and month-over-month gains for each of those months. The sales gains have been on the back of bank owned properties, making up to close to 70% of the existing home sales. During this same time frame the median sales price has continued lower at 4% to 5% per month and now sits about 30% lower than a year earlier. The opinion stated below leads me to believe the “real” price decrease is much less than the published data.

“I am purchasing bank repos, adding up to $20,000 in repairs and selling the homes for a 10-20% gain in just a few months.

With all the bank repos on the market it is lowering the “average” sales price. If you have a nice home with all new appliances, granite countertops and new carpet,paint, interior doors, garage door, updated windows, central heat and ac then it will sell 40% above a similar bank owned property. People need to realize the bank owned properties are rarely livable and need much work, you cant compare that to your own home. I have data to prove it.

Mike Roth

Realtor, General Contractor

El Dorado Hills

My reasoning on true values goes something like this: Repo sales have gone from almost nothing to 2/3 of the market. If the value of a cared for home is 40% higher than a comparable bank sale then most of the median price  decrease (.40 x .66 = 25%) is due to the increasing numbers of foreclosures being sold. Add the fact that there is almost no activity in the jumbo mortgage price range to pull the median up and I believe that an owner occupied home with everything current and cared for is probably worth the same amount it was a year ago.

If my rough analysis is correct, home prices have bottomed and there is definitely money to be made in purchasing and rehabbing foreclosures. Existing homeowners should sit tight and wait for the bank owned property to work its way through the system. The further good news this week that year over year sales increased in both Southern California and the San Francisco Bay area in July for the first time since 2005 give further evidence that the California real estate market is at or near the bottom. Another plus (unless you are a home-builder) is that California home-builders will build the lowest number of new homes in 2008 and 2009 in 50 years, further moving the supply/demand equation in the favor of ownership. SF link here.

Sacramento Bee — Home Front real estate blog.

Each week I provide a review of the previous week’s performance of the WilderHill New Energy Global Innovation Index, symbol NEX. This information is provided by New Energy Finance. The NEX consists of about 90 stocks from 20 countries in seven sectors and is the bogey for the PowerShares Global Clean Energy Fund (PBD: 9.73 +0.259 +2.73%). These results are for the week ending on Friday.

NEX finished the week down 1.5%, bracketed by the NASDAQ, off 0.9% and the S&P 500, losing 2.0%. The renewable energy world tracked by the NEX had a pretty wide spread in sector performance. Solar energy was top dog, gaining 4.2%, led by Chinese solar PV manufacturer, LDK Solar. At the other end of the sector race was wind energy, losing 5.2%. The windies were led downward by Chinese wind turbine manufacturer Goldwind.

The market’s have been tough recently on the renewable energy space. Falling energy (carbon based) prices seem to be holding the sector down even as the market rallies. The international nature of NEX is also definitely a factor when comparing performance to the U.S. stock markets.

Here are the winners and losers from the NEX for the week:

NEX top gainers since 12 Aug 2008
LDK Solar LDK + 26.3%
International Rectifier IRF + 17.3%
Sunpower SPWR + 16.9%
Evergreen Solar ESLR + 12.8%
Suntech Power Holdings STP + 11.2%

NEX top losers since 12 Aug 2008
Comverge COMV – 33.1%
Schmack Biogas SB1 - 18.7%
Canadian Hydro Developers KHD - 15.8%
Xingjiang Goldwind Science & Technology 2202 - 12.6%
Aventine Renewable Energy Holdings AVR

Top Stories – Home sales up again across Sacramento region – sacbee.com.

Existing home sales in the Sacramento region increased in July for the 4th straight month and posted a 4th straight year over year increase. Existing home sales in July were 5% higher that June 2008 66% higher than July 2007. Homes sales have taken off since the spring, driven by falling prices of the large amount of foreclosed properties hitting the market. In some areas of Sacramento foreclosed properties make up to 80% of the sales.

As bankers cut prices to move the inventory, the median price continues to fall. Sacramento County, as the heart of repo-land, had the median price fall 4.5% from June to $210,000. Several of the more affluent counties around Sac County showed slight price increases for the month. Overall median prices are down about 30% from a year earlier. I have come across some interesting anecdotal data on the effect of foreclosures on median prices which I will write about later.

Inventory of homes for sale continues to fall, with 10,954 available for sale vs. 11,121 in June. Note: I am using the TrendGraphix numbers to maintain consistency between my monthly posts. The SacBee article quotes 11,644 for sale, “…the lowest since February 2007.” TrendGraphix also notes 23% of the homes for sale are bank repos. Numbers vary between reports due to the number of counties the report counts as part of the region. No matter how the inventory is counted, at the current sales rate it is a 3 month supply and foreclosures are being bought as fast as they come on the market.

It appears many buyers believe the housing market is nearing the bottom are are very willing to buy distressed real estate. I am now waiting for some of the repo inventory to dry up and pricing to firm and increase. I will write soon on how much I believe that foreclosure sales are depressing the median prices.

Finally, Southern California, a much bigger and more important market, had it’s first year-over-year sales increase in July since September of 2005. Barry Ritholtz often remarks that there is not a recovery until the year-over-year numbers show gains. Let us see if this trend continues and spreads and Barry acknowledges it.

One of my favorite blogging reads, Jeff Matthews, (link on my blogroll) has written a book on his trip and insights to the Berkshire Hathaway annual meeting. Jeff is very entertaining and I look forward to reading his book, due to be released on October 4.

You can pre-order the book at Amazon and I have included a handy link in my right-hand sidebar.

Copa Holdings (CPA: 71.59 +1.79 +2.56%) is the parent of Copa Airlines and Aero Republica which provide airline service throughout Latin America. Second quarter financials came in with what could probably be called outstanding results in the face of the increased fuel prices encountered during the quarter.

Fuel cost increased $37 million (56% increase in price per gallon) over Q2, 2007, more than the net income left of $30.4 million. In testament to Copa’s growth the net income is essentially equal to the Q2, 2007 results and provide earnings of 70¢ per share for the quarter. The fuel cost penalty shows up when comparing to the 1st quarters net of 91¢ per share.

Profitable growth is the benchmark for Copa and they continue to perform. Revenue for the quarter was up 26.6% over a year earlier. Capacity expanded 11.3% over the same time period. Year over year the load factor increased 2.9% to 74.5%. Continued growth will come from route expansion as well as pricing. Copa currently offers service to 41 cities in 22 countries through their hub in Panama. They expect to increase to 45 cities in 24 countries by the end of the year.

From personal experience, I can attest that Copa gives an excellent level of customer service. Their fleet of modern, fuel efficient jets allows them to absorb higher fuel costs better than most competitors and stay profitable. Also, I see the stock as an excellent play on growing affluence in Latin America.

Note: I currently do not have a personal position in CPA.