September 17, 2009

Where Home Prices Are Likely To Rise
By Francesca Levy for
Economists' prognoses for the shape of a recovery.
Though home prices in many areas still have room to drop, economists say some of the country's real estate markets are showing early signs of repair. A two-year slide in values has eased its stomach-turning pace, and some analysts expect the national market to bottom out by mid 2010. That's the good news. But just as subprime lending, the housing bubble and the country's subsequent wave of foreclosures had distinct consequences in separate areas of the country, the recovery will also look dramatically different by region.


When prices do rise, they'll inch, rather than soar, and some areas won't match their pre-bubble prices for a decade, according to home price forecasts by Moody's

In cities in Florida, such as Miami and Orlando, housing prices peaked late, leaving ample time for developers to go on a building bender. This has resulted in a bloated inventory. As a result, these areas may have a long wait before real estate costs level out. In Texas metros like Houston and Dallas, sustained economic health and less exposure to the 2004-2006 run-up in prices are expected to help homeowners there weather the bust better than most.


Behind The Numbers

Moody's provided Forbes with a housing price forecast for the country's 40 largest metropolitan statistical areas (or metros)--geographic entities defined by the U.S. Office of Management and Budget for use in collecting statistics. The forecast predicts the percent change in home prices over one year, three years and five years, using data from the S&P/Case-Shiller Home Price Index. In the MSAs for which Case Schiller does not publish numbers, Moody's used a weighted average of metropolitan divisions within those areas.


Moody's calculates future changes in home price by measuring both long-term demographic and economic fundamentals, like income and population changes; and changes caused by short-term supply and demand shifts.


The data provider's forecasters evaluated not only the relationship between such drivers in each metro, but the effect of overlying economic principles. Typically, prices will continue on the trajectory they are on, a trend that economists call persistence.

"When people see prices rising, they think housing is a good investment," says Celia Chen, Moody's research staff senior director, specializing in housing economics. For some time afterward, these buyers will bite, helping to push prices even higher.

But, "sentiment can turn when prices are proceeding very quickly," says Chen, referring to post-bust buyer reaction. "At some point people can think, 'it's not realistic, nothing is supporting this increase,' and there's a drop in demand for housing."

Moody's predicts a 16.08% decrease in prices nationwide by the end of the year. By 2012, however, prices will be 3.7% above 2009 levels, and by 2014 they will have nearly reverted to their pre-2009 state.


The Crisis In The Country's Metros

But nationwide data doesn't tell the whole story. To understand the effects of the crisis one must examine thousands of micro-economies.


"This whole cycle didn't play itself out uniformly across the country in magnitude or timing," says Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida. "All housing markets are truly local. They're a function of the structure of the local economy."

Moody's data show how prices will move relative to where they are now. Thus the depths to which prices have fallen in many metros means that what looks like a dramatic recovery may only reflect a prior correction that was just as severe.

In San Jose, for example, the five-year forecast calls for a 23.04% jump in prices. That sounds impressive until you note that at the one-year mark, prices will have fallen by more than that--25.14%.

But the numbers are useful for sketching out the potential shape of a recovery, and many experts agree with Moody's outlook.


"Recent trends show a slowing of declining prices and the formation of a bottom," says Susan Wachter, a professor of real estate at the University of Pennsylvania's Wharton School. But she stops short of heralding a new real estate boom. "The big picture here is that there's no rebound. I think it is in fact far more likely that we will see an L-shaped outcome."


Trouble In Florida While Texas Holds Steady

That L shape is evident in Florida. Miami, Orlando and Jacksonville are three of only six cities Moody's predicts will still see home prices falling, albeit modestly, after five years. Values will have dropped 2.93%, 3.58%, and 1.01%, respectively. Overbuilding, a population that is growing at its slowest level since the 1970s and a weak local economy have sucked the demand from cities like Miami's housing market.

"Miami's got the worst of both sides of that supply and demand equation," says Snaith. "Growth is not going to come back with a bang."


Although prices in Austin and San Antonio are also expected to have dropped mildly five years out (by 0.57% and 1.01% respectively), the reasons for, and implications of, this drop are quite different. These are also the only two cities expected to see prices rise this year; their home price correction will be late, and gentle. Texas metros Houston and Dallas will only see modest drops by the end of the year and a small lift five years out.


Texas in many ways dodged the housing bust and the recession as a whole because of its energy-driven economy and tougher zoning laws that curbed overbuilding.

"The market didn't get as inflated as it did in other parts of the country," says Chen. "I think what's going on in Texas metro areas is that it's having a bit of a lag in terms of correction."


But even Texas housing is not immune to price swings.

"Declines in Texas were the biggest in history prior to this cycle," says Eric Belsky, executive director of the Joint Center for Housing Studies of Harvard University. "They occurred even though they didn't have a big run-up in prices or significant job loss; what happened there was that the Savings and Loan associations stopped providing loans."


Systemic Problems In the Midwest, Mixed News In California

Midwestern cities will see a grim housing future for reasons that are neither temporary nor cyclical.


"Generally speaking the industrial Midwest has been hit very hard by the housing downturn, because the manufacturing economy has been very troubled and areas there have shed many jobs," says Chen. "The decline in population has also weakened housing markets."


Detroit, whose housing problems are inextricably linked with the decimation of the auto industry, will have barely seen housing prices claw back to their 2009 levels after five years. In Minneapolis, housing will still be nearly seven percentage points lower after five years than where it was in 2009.

Read on for more lists and rankings, including America's most stressful cities, and a look at America's most expensive ZIP codes.

The micro-economies on the West Coast show yet another angle of the housing crisis. Here, where housing prices rose dramatically and subprime lending peaked earlier than in other parts of the country, home prices will likely rebound after five years. Seattle, San Francisco, San Diego and San Jose are poised to see the highest percentage increases in home prices at the five-year mark, but all will see prices fall substantially by the end of this year.

"California won't rebound sooner, but growth rates look stronger than average," says Chen.


New York--A Unique Market

Just like California, the New York metro area's housing troubles have followed a different schedule than the rest of the country. But New York's pain is just beginning, while California's is winding down. The metro's housing prices are expected to plunge 13.08% by the end of the year, and only creep back up by 4.29% after five years.

Housing declined only modestly there until last year; but after the near-collapse of the Wall Street economy, that decline accelerated. New York is now expected to lag behind the nation in recovery.

"We expect it to be one of the last markets to come back; something on the order of a Florida market," says Chen.

The forecasts show a spotty and relatively weak recovery. To make matters worse, even the forecasters concede that predicting home-price increases is harder than ever. Economists are used to drawing on history to predict the future; but a housing cycle this dramatic is unprecedented.

"Forecasting is part art and part science," says Snaith. "And in the recent environment, it has to be more Salvador Dalí than Milton Freidman."

September 17, 2009

More Principles of Dividend Investing
by Greg Donaldson for Forbes
I read article after article about dividend investing and, in many cases, I hope that no one is really following the suggestions being made. The reason for my concern is that I have tried about every form of dividend investing known to man, including dividend capture strategies, since I became a dividend investor in the late 1980s, and I have found that there is no single strategy that assures success.

For this reason, in all three of our dividend investing styles we break the portfolios into three smaller portfolios. These three smaller portfolios each follow one of the following stock selection disciplines: (1) High Yield -- companies with much higher than average dividend yield and very low dividend growth; (2) High Growth -- companies with low dividend yield and high dividend growth; and (3) Balanced --companies with slightly above average dividend yield and growth.

Our three styles of dividend investing, then, overweight one of these smaller portfolios. Income Builder overweights the high yield stocks; Capital Builder overweights high growth stocks; and Cornerstone consists, primarily, of balanced stocks.
Performance for Capital Builder and Cornerstone goes back nearly 15 years. During this time, they have both outperformed the S&P 500. However, they have accomplished this feat traveling very different paths. As you would imagine, the faster growing companies in the Capital Builder portfolio have a volatility very near that of the S&P 500, while Cornerstone's volatility has been only about 75% of that of the S&P 500.

Rising Dividend Investing is the name of this blog and the single ingredient that powers all of our portfolios. Yet, while growing dividends are essential, over the years we have averaged about a company a year that has cut its dividend. Our preference in these cases is to sell the stock right away. Oftentimes, however, that is not wise because a dividend cut is normally associated with a steep selloff in the stock when the news is announced. Our experience has shown us that holding the stock for a few months is usually rewarded with significantly better prices.

This year has been the toughest year for dividends I have seen in my 34 years in the investment business. Dividends for the S&P 500 Index will fall for the second year in a row. Having said this, however, it may seem remarkable that in our current portfolio holdings only about 15% of the companies cut their dividends, 10% kept their dividend the same, and 75% of the companies increased their dividends by an average of nearly 10%.

Almost all of the banks we held were forced to cut their dividends during the year, either by the government or to save capital. We decided to hold most of the banks because we believed they were being priced as though they were going out of business. Since we did not believe that would happen, we held the majority of our positions and even added to some. That decision has been a good one, with many of our banks stocks having risen 3x to 6x since March.

Some of those banks have now repaid their TARP loans; all have repaired their capital ratios; thus, most, in our judgment, are in a position to raise their dividends in the coming years. We continue to do extensive research into the banks. From this point, we will sell any bank that we do not believe will begin raising its dividend in the next couple of years.

There are about 212 companies in the world that can pass all of our financial strength and dividend growth requirements for possible inclusion in our portfolios. Of that figure, we rate fewer than 100 stocks as being outright buys. Think of it, in a world of perhaps as many as 15,000 major stocks, fewer than 0.6% can get through all the doors to reach our portfolios.

If we can say that over the long run, our brand of dividend investing has been a success, we believe it is due to three important tenets: (1) Investing in companies with financial staying power whose products and services we use everyday, (2) Investing in companies who use the dividend as the linchpin between themselves and their shareholders, and (3) Buying when the markets forget that there are companies in the world who can meet points 1 and 2.
Original article can be found here