Tim Merrick’s Winter 2011-12 Newsletter

Happy New Year

This winter news letter brings a combination of good news and bad news. Let’s start with the bad news and you already know what it is….SKI SEASON. We are off to a poor start due to the warm weather and there is “no foolin’ Mother Nature” when one needs cold weather to make snow. The Crocus plants think spring is here. Hit 70° last week. Good days for winter golf but unfortunately most of the annual income generated for the resort is during the ski season and losing the normal ski crowds of Christmas week and perhaps even the upcoming Martin Luther King weekend upcoming will have an adverse financial impact. I am guessing that in addition to the 5 slopes currently open and the two cross trails that the Highlands Slope should be open this weekend for MLK and then it may turn and stay cold and we could have a decent recovery. It is still going to be a difficult year for W.P.I.

On a brighter side, the Tough Mudder event held this fall was a great success. The Wintergreen Police, WPOA , Tough Mudder organizers, and the WPI resort personnel did an outstanding job of managing crowds of about 35,000 over the weekend. I heard that there were 9000 participants on Saturday and about 7000 on Sunday and then associated friends and families to witness the event. Whether it comes back next year no one knows at this point. It generated about $250,000 for the resort in that one fall weekend.

In regard to real estate, we are seeing improvement.  Sales were stronger than anticipated this past year. However, there are still more sellers than buyers in our market. A mortgage broker colleague offered the following observation in an email yesterday, “The bad news out of Europe helped balance out the good Jobs news here at home…allowing Bonds and home loan rates to recover from their initial negative reaction to the Labor Department’s report. The Euro is continuing to be weighed down by rising concern on member countries’ ability to get their deficits in order and their debt in manageable position. The bottom line is that the problems in the Eurozone are vast, complicated, and without easy solutions, so it will take a very long time for clear resolution. And during times of global uncertainty, money will flow into the relative safe haven of the US Dollar and US Bonds – including Mortgage Bonds, which home loan rates are tied to. This means that home loan rates should continue in their sideways trend and remain near historic lows, making now a great time to purchase or refinance a home.”

One of my friends who has a spectacular home on the mountain also sent me the following email last week which I found interesting and shared with my office colleagues and want to share with you as well. Some of the videos embedded in the email are interesting, others are just a rehash of what you already know. While housing, like politics, is local; looking at national trends is important because there is a lot of money sitting on the sidelines waiting for the bottom and the perfect time to invest and the people who invest at Wintergreen follow the advice and information mentioned below…..

After several years, I think we are there.

Tim,

You may know that I worked for a private equity firm in NYC for five years, (before he became CIO for a Fortune 100 company).   It was long enough to learn not to bet against the “smart money” that run these firms.    They get the big turns right very often.  For example, they were running towards Treasuries and away from housing in late 2007, well before the market turned nasty.   In any event, it appears the hedge funds and private equity folks are now investing in housing, convinced that a bottom has been reached and there is money to be made.    I know all real estate is local, especially vacation property, but it would be helpful to have some macro trends in our favor for a change.   Anyway, in case you had not seen it, here is the article I read today:

Big Funds Build Case for Housing

By GREGORY ZUCKERMAN

Big money is starting to wager on housing.

Hedge funds run by Caxton Associates LP, SAC Capital Advisors LP, Avenue Capital and Blackstone Group LP have been buying housing-related investments, betting on a rebound. And formerly bearish research firm Zelman & Associates now predicts a housing pickup, as does Goldman Sachs Group Inc.

Other investors seem to be making the same bet. Shares of home builders are up 30% since the end of the third quarter, as measured by the Dow Jones index tracking those shares, topping a nearly 10.5% gain for the Standard & Poor’s 500.

Reuters

A worker lays shingles as construction continues on a residential home in Carlsbad, Calif., Sept. 19. 2011.

These stocks rallied during certain periods over the past three years, only to fall again when hopes of a housing rebound proved unfounded. However, home builders haven’t outperformed the broader market by this much in a quarter since the third quarter of 2008.

“We turned bullish on housing. A rebound is coming,” says Andrew Law, chief investment officer at $10 billion hedge-fund firm Caxton. He expects that home prices and construction will rise in 2012.

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Bulls received ammunition last week when the National Association of Realtors said sales of previously occupied homes in the U.S. rose 4% in November from October, topping expectations. The inventory of previously owned homes listed for sale fell 5.8% to 2.58 million, the lowest level since May 2005. That came on the heels of data that residential construction surged in November.

“The housing-price bottom is probably in sight,” Goldman said in a December 15 report. Housing prices might decline by 3% next year before beginning a rise, Goldman says. The bank predicts gains of 30% over the following 10 years, not taking inflation into account.

It is too early to declare an end to the housing difficulties that began five years ago and led to trillions of dollars of losses and a global economic downturn. U.S. home prices fell 3.4% this year as of October, according to the Standard & Poor’s Case-Shiller home-price indexes released Tuesday. Inventories could rise next year if banks move more properties through the foreclosure process.

Some investors and market observers aren’t convinced of an imminent turnaround. Still, investors try to anticipate economic trends before they materialize. Even some housing skeptics acknowledge that real estate may no longer be the drag it has been on the economy.

“I’m sold that it’s a bottom,” says James Bianco, who runs Bianco Research, in Chicago. “It’s gone from a negative to a nothing for the economy,” though it may be hard for the U.S. to grow at an impressive clip until housing ramps up, he says.

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The bullish stance appears to be a growing view among big-money types. Caxton turned bearish on housing in 2007, but the firm became optimistic over the past three months based on the low number of new homes built in the past few years as household formation rebounded.

Caxton has scored recent profits buying shares of home-related companies, such as home builders. “My sense is companies see a turn and are positioning themselves for a multiyear rebound,” Mr. Law says.

SAC Capital, the $14 billion firm run by Steven Cohen, also has been buying housing shares, anticipating a gradual real-estate recovery, according to a person familiar with the situation.

A $3.5 billion hedge fund run by Blackstone’s GSO Capital, which profited betting against housing as the market tumbled in 2008, began buying stakes in Beazer Homes USA Inc. andPulteGroup Inc. in November, as well as certain housing debt, according to people familiar with the situation. The shift partly resulted from an improving outlook for profits of home builders.

Though GSO hasn’t risked a large chunk of its portfolio on housing, it expects a real-estate rebound to bring significant gains.

“We believe housing is at a turning point, not just because of affordability and improving demographics,” says Darren Richman, a senior managing director at GSO. “The inventory picture has cleared meaningfully. It’s more in balance than it’s been in a long time.”

Earlier this year, Marc Lasry, who runs Avenue, a $12 billion firm that specializes in distressed debt, started buying bonds of home builders, including Hovnanian Enterprises Inc., “as a housing play,” Mr. Lasry says. He was enticed by their low prices. “We were six months too early,” says Mr. Lasry. “But we think housing keeps improving over the next year.”

Behind the investor optimism: Pent-up housing demand, say industry observers. Many younger adults and others have moved in with parents or into apartments. But record-low mortgage rates and improving home affordability could spur them to buy homes over the next year or two. Housing starts have been well under 500,000 a year since the downturn, compared with over 1 million before that.

“Given income and population growth, the longer-term outlook is more optimistic,” Goldman said in its recent report, while noting still-high delinquency rates. “Affordability is at record highs, at least for those who can get financing.”

Ivy Zelman, a longtime real-estate analyst who was bearish about housing before the downturn, has been offering clients a different view lately, predicting that rising rents will push would-be buyers to purchase homes. A housing recovery isn’t “happening as fast as everyone would like,” she says. But there are “a lot of pillars in place to give us some optimism.”

Bulls have been burned over the past few years predicting a rebound, and any improvement would be from a very low base. Housing data is seasonally adjusted and tends to be quite volatile. And much of November’s increase in construction came from apartments, town houses and multifamily developments, a sign of demand for rentals, not home buying.

“The smartest money in the world has been carried out on stretchers betting on a true recovery for housing,” says Mark Hanson, who runs M. Hanson Advisors, a research firm catering to hedge funds that argues a sustained rebound is several years away.

Mr. Hanson says too few homeowners have enough equity to enable them to sell homes and buy new ones, something that usually drives housing. He also predicts more foreclosures, short sales and defaults, especially among homeowners who recently modified loans. Mr. Hanson argues that household formation won’t grow much unless unemployment keeps dropping, and that mid-to-high-end homes will fall in price next year.

That’s why some investors, such as Whitney Tilson’s hedge fund T2 Partners LLC, remain bears. Skeptics say many people are becoming more comfortable renting, crimping any housing turnaround.

New York Federal Reserve President William Dudley recently said that while home prices “no longer appear overvalued,” it is “unwise to simply assume the market will bottom out at these levels” because expectations of house-declines “can easily be self-fulfilling.” He also noted that access to mortgage credit is constrained.

Still, some investors are betting the bears are too pessimistic.

James Litinsky, who runs JHL Capital Group, a $1.5 billion Chicago-based hedge fund, turned optimistic in the spring when he crunched numbers on household formation and population growth compared with the availability of new and existing homes. He began buying shares of housing-related companies, including Louisiana-Pacific Corp., which makes wood products for homes, as well as home-improvement retailers The Home Depot Inc. and Lowe’s Cos., and home builder Lennar Corp.

Mr. Litinsky ramped up his buying in the past few months, becoming the largest holder of Louisiana-Pacific according to securities filings. About 25% of his portfolio is in housing-related stocks, up from virtually no such shares at the beginning of the year, he says.

“We’ve already worked off a chunk of the excess supply and eventually there will be shortages,” says Mr. Litinsky, who adds “it’s been lonely thesis until a couple of weeks ago.”

—Nick Timiraos contributed to this article.

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