8-11-05                                                                                           Vol. 8: No. 4 RealtyStocks' Observer If you're not receiving this free monthly e-newsletter, please register. Monthly Feature: Strong Home Sales Keep Most Housing Markets Strong, But Rising Oil Prices & Rates Cool REITs A. Home Sales & Prices Set Records B. Concerns over the anisette Yuan Raises Rates C. Technology Contributing to REITs Performance D. Equity REIT Performance E. Large Cap REIT Performance F. Mortgage REIT Performance G. Realty Corporations A. HOME SALES and PRICES SET RECORDS, BUT INVENTORIES INCREASE Most experts expected home sales to slow down this year and Home Builder stocks to cool off. However, along with the weather in much of the country, housing continues to sizzle.Home sales set a 25-year record in June with sales of 7.33 million units, according to the National Association of Realtors (NAR), a gain of 2.7% over May. This pushed the national median price of a home up 14.7% from a year ago to a new high in June of $219,000. However, in many urban coastal areas, the median price is nearly double, and in very desirable areas, entry-level homes can exceed $1 million. Entering a traditionally slow month as people generally vacation in August, listing inventories have increased 10% nationally with a corresponding increase in the period before a home sells. In some markets, listing inventories are up more than 40%. Along with rising rates, there are more predictions of a housing market peak, or at least slower increases. Early this year as rates were on the rise, home builders were soft. But the strong housing activity and low interest rates has heated up the stocks of home builders, rising 9.4% last month and 12.4% the month prior, based on RealtyStock's calculations. Though these stocks dropped in the beginning of August, contracts on new homes are up 3%. Five of the 10 highest rated stocks for June are home builders, according to Investor's Business Daily. Though mortgage rates rose about one-quarter of a point over the last couple of weeks and seem to be headed higher with revaluation of the Chinese Yuan (see the section below), this could actually fan the fire for home demand rather than restrain it in the short term. Many home buyers may feel that rates now near a 45-year low will (finally) not be at this level again for possibly another generation. Fearful of continued rising prices and rates, indecisive home buyers could soon change their minds. The Federal Reserve has expressed concern over the speculative activity in various markets, and has been uneasy about rising home prices. Though the rise in short-term rates has curbed some of this speculation, along with the strength of the economy, we expect the Fed will continue to raise short-term rates and the fed rate will be at or slightly over 4% by the end of the year. It would therefore seem the 10-year Treasury, now around 4.25%, is destined to be higher than at present, barring any major unforeseen events. As a result, it is expected that housing later this year and especially in 2006 will soften in many markets. However, as mentioned in our prior newsletters, we do not believe in a housing bubble that compares to anything like the dot com crash at the beginning of this decade. Yet, if rates go back to the levels of a few years ago, it is possible we could see housing prices in much of the country decline. Rather than use a metaphor as a popping bubble, we believe a more appropriate metaphor is a slow hissing leak. Depending upon the pace and level of long term rates, inflated home prices could ultimately drift down for a much longer period than the 3-years for the major stock market indices to recover.   Top B. THE RISING YUAN AND PRICE OF OIL It was expected that the Yuan would increase sometime this year, but it came a little faster than most expected. After a strong GDP growth of 9.5%, China decided to change a decade old procedure of pegging their currency to the dollar. Instead, in an effort to try to keep their growth manageable, and bending to increasing pressure from our nations Capitol, China decided their currency would now be based on a group of major currencies. The first increase was only about 2%, but what concerned many investors, is that the appetite for U.S. treasuries and bonds could dampen, creating higher interest rates. Though there is a still a strong demand for 10-year Treasuries, they have increased about a quarter of a point over the past month. Of course, the tragic terrorism is London killing over 50 people was also unsettling to markets. Still, the expected rise in rates by most economists has not materialized over the past couple of years. However, the change in the valuation of the Yuan could signal a major new development in this regard. Since some authorities believe the Yuan is undervalued by about 40%, this first increase is considered minor and is expected to have minimal near term effects for the remainder of the year. However, as the Yuan increases, possibly by about 10% a year from now, it will start affecting consumer purchases and become more of a factor to retailers. Yet for U.S. manufactures and especially agriculture, it could make them more competitive. In order to assure it's economic growth, China has increasingly become concerned over access to natural resources at reasonable costs. In particular, China expects a dramatic several fold increase in the number of cars in their country in only a decade or two creating a much greater demand for oil. As a result, some experts are predicting oil prices will continue to rise and this in turn, could become inflationary, and eventually dampen economic growth. Just four years ago, China did not need to import oil, but in order to assure itself global access to oil, China has recently aligned themselves with countries, sometimes using their veto vote in the United Nations, with which the U.S. that has strained diplomatic relations, such as Iran. This presents problems for the U.S. when China is using its influence to benefit countries, when the U.S. is trying to impose sanctions upon these countries, (i.e. Iran). The recent offer from a Chinese company (CNOOC) to acquire U.S. based UNOCAL (though recently withdrawn), has also caused greater tension among our political leaders in Washington. Just as Japan's economic growth was a concern to the U.S. a couple decades ago, China's emergence as a major power is creating issues on several fronts. However, important differences is that Japan does not have the military eminence as does China, a communist society, nor the ambition to eventually unify itself with a country (Formosa) that desires to be independent. Without question, China will have more global influence and therefore, may also be in positions where their interests are different than those of the U.S. This past month, China's trade imports were the highest ever and they have increased nearly 50% within just the last year. Along with much higher oil imports, this has caused our trade deficit to set record highs and jeopardizes our sustained economy recovery. China's increased influence and apparent unwillingness to implement more significant currency revaluation are a concern to a growing number of analysts and investors. With more people traveling during the summer, interruptions at major oil refineries and concerns over oil production, oil prices are setting new highs and are closing in on $70 per barrel. Not long ago there was a concern over $60 per barrel oil. We were told that it would take prices around $80 per barrel before we would be at similar price adjusted levels that caused havoc to the economy over a couple decades ago - and we are getting much closer. Though many experts feel oil will drift down around $40/barrel in a year or two, the current oil increases are taking a toll on airline, hotel and resort industries. Further, rising oil costs cause increased manufacturing costs, which can be difficult to pass through to customers, thereby causing margins and profits to slip. Rising gas prices also cause people travel to less for shopping, which hurts retail sales. Why rising oil prices have not been a greater deterrent to stock prices recently, however, is that the corporate earnings reported for the past quarter are strong and so are other important economic indicators, like job growth, which beat forecasts and grew over 200,000 last month.   Top C. TECHNOLOGY CONTRIBUTING TO REITs PERFORMANCE At this years Realcomm conference last month, which covers technology in commercial real estate, an interesting assortment of companies exhibited and participated from those that emerged during the dot com era to some larger established firms, as well as some start ups. One of the most compelling areas in real estate technology involves intelligent buildings, or the use of technologies to improve the operation, security and safety of buildings. Such technology can not only provide considerable cost savings, but can keep tenants satisfied in reduce turnover. The largest REIT, Equity Office (EOP), provided a testament of how providing regional maintenance and leasing centers utilizing email and cell phones has been able to reduce staffing and administrative office space needs in half over the past couple of years. This has not only helped offset higher expenses, but has contributed to stronger earnings. A new generation of smart directories, surveillance cameras, motion sensors, lights with chips, automated HVAC systems, as well as high-speed and wireless networks, are all providing more efficient building operations. Not only are many building operations now performed off site, but also offshore.   Top D. EQUITY REIT PERFORMANCE After a negative first quarter drop of -8.16%, Equity REITs were building on a strong second quarter gain of 11.46% with an additional gain of 4.89% last month. For June, Apartments were the second best performer with a gain of 6.75%, only exceeded by Retail Outlets, and again had an above average return of 5.48% last month. Despite a robust housing market, it appears that there is a mounting anticipation that Apartment REITs will become a beneficiary as housing prices top out and rates increase, as we discussed in past newsletters. The worst monthly performers for June and July were Retail Malls/Centers and Specialty, with price changes of -7.02% and 0.99%. For the year, the best performer is Regional Malls with a gain of 20.23% followed by Self Storage up 14.27%. The largest company in this group, Property Storage (PSA), is trying to acquire it's largest rival, Shurgard (SHA). The laggards for the year are Retail Malls / Centers and Specialty, down -10.34% and -1.57%, respectively. For July, none of the property type groups declined and in June only one (as noted) declined in June. In May, all groups had gains and only two groups posted losses the month before. Though REITs experienced a sharp pull back of over 3% on Monday, August 8th, this is not entirely unexpected with a strong performance over the past few months and increasing rates. However, with 10-year T rates dropping at the end of last week, should a more stable interest rate occur in the coming weeks, REITs might avoid a more significant pullback. Still, more investors are concerned over the high valuations of REITs compared to their asset values, as we previously discussed. Also, as the inevitability of rising rates expected for the past two years finally materializes, there is a fear that it could negatively impact REITs for some time. (Please see Equity Gainers and Losers.).   Top E. LARGE CAP REIT PERFORMANCE Large Caps posted gains of 4.6% for June and 6.9% for July. Though this sector declined -7.0% in the first quarter, it was up 12.1% in the second quarter and had a strong performance last month. For the year, the price of Large Caps is up 11.4%. All issues but one were up in July and only three issues declined the prior month. The best performer In July was Prologis Trust (PLD), up 13.2% and the worst was St. Joe (JOE), falling -0.2%. For the year, the best performer is General Growth, up 27.2%, and followed by St. Joe, rising 26.8%. The worst performers for the year are Hospitality Properties, down -3.5%, and Plum Creek, off -1.5%. (Please see Large Cap REITs.)   Top F. MORTGAGE REIT PERFORMANCE After out performing Equity REITs for three straight years beginning in 2001, Mortgage REITs had lower REITs last year and are at a negative -.02% this year. The loss they sustained the first quarter of -4.14% was offset by a gain of 4% in the second quarter. (Please see Mortgage Gainers and Losers.)   Top G. REALTY CORPORATIONS Realty Co's. outperformed REITs in July with a gain of 5.36%, but fell short in June with a gain of only 3.62% With a YTD gain of 13.77%, Realty Co's are slightly ahead of the price appreciation for REITs. All sectors were positive in July, with the Construction & Engr. having the strongest showing, up 14.9% while the laggard was Developers, posting a slight gain of 0.33%. For June Home Builders was the strongest group gaining 9.4%, while the weakest was Resort Co's, falling 1.85%. For the year, the best performer is lodging with followed by Const. & Engineering, while the weakest and only negative group was Mobile Home Mfgs., off -0.5%. (Please see Realty Corp. Gainers and Losers.)   Top Stock Changes. None. Note: In reporting group percentage changes, if a stock is under $2 for more than two months, it is subject to removal from our coverage. All gains or losses regarding Realty Stocks are price changes only; dividends are excluded, and are calculated as of the end of each month. Disclaimer: The material provided herein should not be taken as endorsements or recommendations to invest in a stock, fund, a group of stocks or other securities. No guarantee can be made as to the expected performance of such investments. Investors should consult all available information, including data external to RealtyStocks and associated Web sites, and exercise own best judgment before making any investment decisions. The author may have equity positions in some of the companies covered in RealtyStocks, which may change from time to time, and will divulge such information upon request.   Top InRealty Sponsors Inquire about our special advertising banner promotions! E-MAIL: stocks@inrealty.com Copyright ©2004, WebVisers Inc. All rights reserved .