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How auction buyer data foreshadows housing market shifts

The retail housing market data, released by Redfin at the end of June, shows the median asking price for newly listed homes for sale in the four weeks…

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Retail housing market data from June showing early signs of a real estate slowdown was foreshadowed three months earlier in buyer behavior at foreclosure auctions.

The retail housing market data, released by Redfin at the end of June, shows the median asking price for newly listed homes for sale in the four weeks ending June 26 dropped 1.5% from an all-time high in the previous month even while a record share of all homes for sale saw price drops.  

This data shows early signs of a slowdown in the retail housing market in June that was anticipated by real estate investors buying properties at foreclosure auction in March. After purchasing properties at an average discount of 9% below estimated “as-is” market value in February — a 13-month low — investors built in a bigger discount cushion of 12% in March, according to proprietary data from Auction.com. The as-is market value is typically based on a drive-by broker price opinion or external-only appraisal given the properties are usually still occupied.

The average number of online saves per property brought to foreclosure auction in March also pulled back from an all-time high in February. The online saves indicate how many potential buyers are interested in bidding on properties available for auction, providing a reliable measurement of real estate investor demand for those properties.

More Conservative Offers & Buy Box

These two key foreclosure auction metrics show a clear shift in March toward more conservative bidding behavior, both in terms of max offers and buy box for investors. Both trends have continued since, through at least June (more on that later). This shift in foreclosure auction buyer behavior was likely the result of rising mortgage rates, which increased above the 4% threshold in March and have since risen well above 5%, approaching 6%.

The downshift in buyer behavior at the foreclosure auction came two months before the downshift showed up in retail housing market data. That’s because buyers at foreclosure auction are on the frontlines of the local housing markets where they operate, often the first to identify and react to coming market changes. Behavioral buyer data from the foreclosure auction, therefore, acts as an early warning system for imminent market shifts.

“We’re transitioning from a super red-hot market, and it’s cooling off a bit, mostly interest-rate driven,” said Paul Lizell, a Florida-based real estate investor who buys distressed properties at auction in several states and coaches other real estate investors to do the same. “We’re telling them to back off of some of the higher-end properties and stay under the $350,000 (price point based on after-repair value). That’s a safer range.”

Rising mortgage rates were the catalyst for a market slowdown that many investors believed would be coming at some point given a decade-long housing boom capped by the pandemic-triggered buying frenzy of the last two years. More than half of Auction.com buyers (55%) described their market as “overvalued with a correction possible” according to a March 2022 buyer survey. That was up from 40% a year ago.

Lizell said he’s building an extra 10% haircut into his calculations for “maximum allowable offer” at auction. The extra margin will give him and his students a cushion in case of a retail market correction, which would impact the price at which they’re able to sell renovated homes to owner-occupant buyers.

“Up through May our sale price (on the properties we sell post-renovation) was still going up. I think we’ll see the end of that. Next month you’ll see a plateau. If rates continue to go up that’s where you’ll see that 10% shift,” said Lizell, who has been investing since 2001 and noted that a correction is already taking place in non-real estate markets. “If you look at equity markets, real estate is the last man standing.”

From Real Estate’s Frontlines

On the frontlines of the housing market, investors like Lizell are often the first to know about and react to shifts in the real estate market. They’re constantly monitoring the market, using their own proprietary data as well as external data to help them adjust ahead of market shifts that could impact their bottom lines.

“I get big into the macroeconomic stuff to keep ahead of the curve as much as possible,” Lizell said, noting he learned the importance of staying ahead of market shifts in the wake of the 2008 recession. “I went through that crisis, and it was a bad one, and it hit quick. … (You’ve) got to be nimble in this market. Super important, otherwise we’ll be out of business.”

Atlanta-area Auction.com buyer Tony Tritt also survived the housing crash following the 2008 recession. Like Lizell, he isn’t expecting a housing market correction anywhere close to the scale of that event in the coming months or years, but he is starting to see signs of a changing market.

“It’s a cyclical industry. We might see some pain again. A slowdown in price appreciation does not make a crash,” said Tritt, who said he renovates and resells between 35 and 50 properties a year, mostly reselling to owner-occupants. “I view our houses like a 180-day business cycle. When I acquire a property, I look out six months from now. That six-month cycle causes me a little more anxiety in 2022 than it did in 2019.

“I’m not concerned, I just give more pause,” he added. “We are still undersupplied.”

Foreshadowing a Continued Slowdown

What is the latest foreclosure auction behavior from forward-looking buyers like Tritt and Lizell predicting about the retail housing market in the second half of 2022 and into 2023?

Investors have continued to increase their average discount cushion below estimated “as-is” property value. That discount rose to a 22-month high of 17.1% in June, the highest since August 2020 although still below the average of 21% in the pre-pandemic market of 2019.

Demand in the form of saves per property brought to auction has also continued to recede in each month since March, falling to a six-month low of 23.6 saves per property in June. That’s still strong demand by historical standards, a function in part of the low inventory of properties available at foreclosure auction.

Foreclosure Auction Demand by State in Q1 2022

The shrinking buy box and more conservative offers by real estate investors at foreclosure auction is starting to impact the sales rate — the percentage of properties brought to auction that end up sold to investors. That rate pulled back to a 23-month low in June, although also well above pre-pandemic levels.

Combined, these three metrics — sales rate, saves and average discount — are highly correlated to retail home price appreciation in the following month (0.94 correlation). That means auction data from June can provide a reliable early indicator of retail home price appreciation in July, as measured by the National Association of Realtors (NAR).

Since the NAR data is typically not released until around the 20th of the next month, this means the June auction data available on July 1 provides an early indicator of data not available until more than 45 days later, around August 20.

Using a regression analysis based on this correlation, May and June foreclosure auction buyer behavior indicates that home price appreciation will continue to slow in June and July, dropping to a 23-month low in July while remaining in double-digit territory. While far from a crash, or even correction, the trajectory of the last year — if it continues — would put home price appreciation on pace to fall to single digits in the second half of 2023.

This fits with the slowdown-not-crash scenario that both Tritt and Lizell say is likely. But both are also keeping powder dry for a more severe correction, particularly in some local markets.

“It’s more shifting to get cash quicker,” said Lizell. “So, if it does shift, we are more in the position to take advantage of falling prices.”

Figure-2

The post How auction buyer data foreshadows housing market shifts appeared first on HousingWire.

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Economics

Here’s Why Royal Caribbean, Carnival Stock Are Good Buys

Yes, Carnival reported a bigger-than-expected loss but in this case, unlike taking a cruise, it’s the destination not the journey for the cruise lines.

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Yes, Carnival reported a bigger-than-expected loss but in this case, unlike taking a cruise, it's the destination not the journey for the cruise lines.

For the past two years, since the covid pandemic hit in late-February 2020, the cruise industry has taken one punch after another. And, while the situation has improved from the extended period when cruises were not allowed to sail from United States ports, that does not mean that it's back to 2019 for Royal Caribbean International (RCL) - Get Royal Caribbean Group Report, Carnival Cruise Line (CCL) - Get Carnival Corporation Report, and Norwegian Cruise Line (NCLH) - Get Norwegian Cruise Line Holdings Ltd. Report.

The industry has done a remarkable job bringing operations back to near-normal. All three cruise lines not only have put all their ships back in service, they're also still moving forward with plans for new ships and other investments including improvements to private islands, and developing new ports.

That being said, Carnival just reported its second-quarter earnings and the market did not like the numbers at all. Shares of all three cruise lines were down double digits on Sept. 30, but traders clearly missed that aside from rising costs and a loss (both of which were expected) the cruise line largely delivered good news.

Image source: Shutterstock

Carnival Did Well in Areas it Controls  

Carnival reported a GAAP net loss of $770 million for the quarter. That was driven by higher costs with the company specifically citing advertising expenses and having some of its fleet unavailable to produce revenue.

While the company's year-to-date adjusted cruise costs excluding fuel per ALBD during 2022 has benefited from the sale of smaller-less efficient ships and the delivery of larger-more efficient ships, this benefit is offset by a portion of its fleet being in pause status for part of the year, restart related expenses, an increase in the number of dry dock days, the cost of maintaining enhanced health and safety protocols, inflation and supply chain disruptions. The company anticipates that many of these costs and expenses will end in 2022.

If you're investing in any cruise line you have to do so on a very long-term basis. That makes profitability less of a concern than the company building back its business and Carnival showed some very positive signs in that direction.

  • Revenue increased by nearly 80% in the third quarter of 2022 compared to second quarter 2022, reflecting continued sequential improvement.
  • Onboard and other revenue per PCD for the third quarter of 2022 increased significantly compared to a strong 2019
  • Total customer deposits were $4.8 billion as of August 31, 2022, approaching the $4.9 billion as of August 31, 2019, which was a record third quarter.

  • New bookings during the third quarter of 2022 primarily offset the historical third quarter seasonal decline in customer deposits ($0.3 billion decline in the third quarter of 2022 compared to $1.1 billion decline for the same period in 2019).

Carnival (and likely all the cruise lines) is being hurt by prices generally being depressed and some passengers paying for their trips using future cruise credits from cruises canceled during the pandemic. That's not really what matters though. Carnival has been increasing passenger loads and getting people back on its ships.

"Since announcing the relaxation of our protocols last month, we have seen a meaningful improvement in booking volumes and are now running considerably ahead of strong 2019 levels," Carnival CEO Josh Weinstein said. "We expect to further capitalize on this momentum with renewed efforts to generate demand. We are focused on delivering significant revenue growth over the long-term while taking advantage of near-term tactics to quickly capture price and bookings in the interim."

Basically, cruise prices are cheap right now because it's more important to get customers back on board than it is to maintain pricing integrity. That's a tactic that could hurt long-term pricing, but the cruise industry is less vulnerable than other vacation options because there have always been large pricing variations based on the calendar and the age of the ship being booked.

It's a Long Voyage for Cruise Lines

Carnival was trading at its 52-week low after it reported. That's a pretty major overreaction given that the cruise industry was barely operating in the fall of 2021.

Yes, the industry has a long way to go. All three major cruise lines took on billions of dollars of debt during the pandemic. Refinancing that debt in an environment with higher interest rates is a challenge, but it's one Carnival (and its rivals) have been meeting.

That has come with some shareholder dilution. Carnival sold $1.15 billion in new stock during the quarter, but the company has over $7.4 billion in liquidity. Weinstein is optimistic (he has to be, that's part of his job) about the future.

"During our third quarter, our business continued its positive trajectory, achieving over $300 million of adjusted EBITDA and reaching nearly 90% occupancy on our August sailings. We are continuing to close the gap to 2019 as we progress through the year, building occupancy on higher capacity and lower unit costs," he said.

Usually it's easy to dismiss a CEO making upbeat comments after posting a loss, but in this case, Carnival has basically followed the recovery path it laid out once it returned to sailing. Both Royal Caribbean and Norwegian have followed similar paths and while meaningful shareholder returns may take time, these are strong companies built for the long-term that made a lot of money before the pandemic and should do so again. 

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Spread & Containment

Three reasons a weak pound is bad news for the environment

Financial turmoil will make it harder to invest in climate action on a massive scale.

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Dragon Claws / shutterstock

The day before new UK chancellor Kwasi Kwarteng’s mini-budget plan for economic growth, a pound would buy you about $1.13. After financial markets rejected the plan, the pound suddenly sunk to around $1.07. Though it has since rallied thanks to major intervention from the Bank of England, the currency remains volatile and far below its value earlier this year.

A lot has been written about how this will affect people’s incomes, the housing market or overall political and economic conditions. But we want to look at why the weak pound is bad news for the UK’s natural environment and its ability to hit climate targets.

1. The low-carbon economy just became a lot more expensive

The fall in sterling’s value partly signals a loss in confidence in the value of UK assets following the unfunded tax commitments contained in the mini-budget. The government’s aim to achieve net zero by 2050 requires substantial public and private investment in energy technologies such as solar and wind as well as carbon storage, insulation and electric cars.

But the loss in investor confidence threatens to derail these investments, because firms may be unwilling to commit the substantial budgets required in an uncertain economic environment. The cost of these investments may also rise as a result of the falling pound because many of the materials and inputs needed for these technologies, such as batteries, are imported and a falling pound increases their prices.

Aerial view of wind farm with forest and fields in background
UK wind power relies on lots of imported parts. Richard Whitcombe / shutterstock

2. High interest rates may rule out large investment

To support the pound and to control inflation, interest rates are expected to rise further. The UK is already experiencing record levels of inflation, fuelled by pandemic-related spending and Russia’s war on Ukraine. Rising consumer prices developed into a full-blown cost of living crisis, with fuel and food poverty, financial hardship and the collapse of businesses looming large on this winter’s horizon.

While the anticipated increase in interest rates might ease the cost of living crisis, it also increases the cost of government borrowing at a time when we rapidly need to increase low-carbon investment for net zero by 2050. The government’s official climate change advisory committee estimates that an additional £4 billion to £6 billion of annual public spending will be needed by 2030.

Some of this money should be raised through carbon taxes. But in reality, at least for as long as the cost of living crisis is ongoing, if the government is serious about green investment it will have to borrow.

Rising interest rates will push up the cost of borrowing relentlessly and present a tough political choice that seemingly pits the environment against economic recovery. As any future incoming government will inherit these same rates, a falling pound threatens to make it much harder to take large-scale, rapid environmental action.

3. Imports will become pricier

In addition to increased supply prices for firms and rising borrowing costs, it will lead to a significant rise in import prices for consumers. Given the UK’s reliance on imports, this is likely to affect prices for food, clothing and manufactured goods.

At the consumer level, this will immediately impact marginal spending as necessary expenditures (housing, energy, basic food and so on) lower the budget available for products such as eco-friendly cleaning products, organic foods or ethically made clothes. Buying “greener” products typically cost a family of four around £2,000 a year.

Instead, people may have to rely on cheaper goods that also come with larger greenhouse gas footprints and wider impacts on the environment through pollution and increased waste. See this calculator for direct comparisons.

Of course, some spending changes will be positive for the environment, for example if people use their cars less or take fewer holidays abroad. However, high-income individuals who will benefit the most from the mini-budget tax cuts will be less affected by the falling pound and they tend to fly more, buy more things, and have multiple cars and bigger homes to heat.

This raises profound questions about inequality and injustice in UK society. Alongside increased fuel poverty and foodbank use, we will see an uptick in the purchasing power of the wealthiest.

What’s next

Interest rate rises increase the cost of servicing government debt as well as the cost of new borrowing. One estimate says that the combined cost to government of the new tax cuts and higher cost of borrowing is around £250 billion. This substantial loss in government income reduces the budget available for climate change mitigation and improvements to infrastructure.

The government’s growth plan also seems to be based on an increased use of fossil fuels through technologies such as fracking. Given the scant evidence for absolutely decoupling economic growth from resource use, the opposition’s “green growth” proposal is also unlikely to decarbonise at the rate required to get to net zero by 2050 and avert catastrophic climate change.

Therefore, rather than increasing the energy and materials going into the economy for the sake of GDP growth, we would argue the UK needs an economic reorientation that questions the need of growth for its own sake and orients it instead towards social equality and ecological sustainability.

The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.

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Economics

Covid-19 roundup: Swiss biotech halts in-patient PhII study; Houston-based vaccine and Chinese mRNA shot nab EUAs in Indonesia

Another Covid-19 study is hitting the breaks as a Swiss biotech is pausing its Phase II trial in patients hospitalized with Covid-19.
Kinarus Therapeutics…

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Another Covid-19 study is hitting the breaks as a Swiss biotech is pausing its Phase II trial in patients hospitalized with Covid-19.

Kinarus Therapeutics announced on Friday that the Data and Safety Monitoring Board (DSMB) has reviewed the company’s Phase II study for its candidate KIN001 and has recommended that the study be stopped.

According to Kinarus, the DSMB stated that there was a low probability to show statistically significant results as the number of Covid-19 patients that are in the hospital is lower than at other points in the pandemic.

Thierry Fumeaux

“As many of our peers have learned since the beginning of the pandemic, it has become challenging to show the impact of therapeutic intervention at the current pandemic stage, given the disease characteristics in Covid-19 patients with severe disease. Moreover, there are also now relatively smaller numbers of patients that meet enrollment criteria, since fewer patients require hospitalization, in contrast to the situation earlier in the pandemic,” said Thierry Fumeaux, Kinarus CMO, in a statement.

Fumeaux continued to state that the drug will still be investigated in ambulatory Covid-19 patients who are not hospitalized, with the goal of reducing recovery time and the severity of the virus.

The KIN001 candidate is a combination of the small molecule inhibitor pamapimod and pioglitazone, which is currently used to treat type 2 diabetes.

The news has put a dampener on the company’s stock price $KNRS.SW, which is down 22% since opening on Friday.

Houston-developed vaccine and Chinese mRNA shot win EUAs in Indonesia

While Moderna and Pfizer/BioNTech’s mRNA shots to counter Covid-19 have dominated supplies worldwide, a Chinese-based mRNA developer and IndoVac, a recombinant protein-based vaccine, was created and engineered in Houston, Texas by the Texas Children’s Hospital Center for Vaccine Development  vaccine is finally ready to head to another nation.

Walvax and Suzhou Abogen’s mRNA vaccine, dubbed AWcorna, has been approved for emergency use for adults 18 and over by the Indonesian Food and Drug Authority.

Li Yunchun

“This is the first step, and we are hoping to see more families across the country and the rest of the globe protected, which is a shared goal for us all,” said Walvax Chairman Li Yunchun, in a statement.

According to Walvax, the vaccine is 83% effective against the “wild-type” of SARS-CoV-2 infection with the strength against the Omicron variants standing at around 71%. The shots are also not required to be stored in deep freeze conditions and can be put in storage at 2 to 8 degrees Celsius.

Walvax and Abogen have been making progress on their mRNA vaccine for a while. Last year, Abogen received a massive amount of funding as it was moving the candidate forward.

However, while the candidate is moving forward overseas, it’s still finding itself stuck in regulatory approval in China. According to a report from BNN Bloomberg, China has not approved any mRNA vaccines for domestic usage.

Meanwhile, PT Bio Farma, the holding company for state-owned pharma companies in Indonesia, is prepping to make 20 million doses of the IndoVac COVID-19 vaccine this year and 100 million doses by 2024.

IndoVac’s primary series vaccines include nearly 80% of locally sourced content. Indonesia is seeking Halal Certification for the vaccine since no animal cells or products were used in the production of the vaccine. IndoVac successfully completed an audit from the Indonesian Ulema Council Food and Drug Analysis Agency, and the Halal Certification Agency of the Religious Affairs Ministry is expected to grant their approval soon.

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