$HHC Looks Attractive as Vegas, Hawaii and DC Rebound

$HHC Looks Attractive as Vegas, Hawaii and DC Rebound

For the past year we have been saying here that the notion of a national housing market was bunk and simply watching Case-Shiller to determine what housing is doing in your area was a fool’s game. In a “bubble then crash” environment everything in the group is correlated (see dot.com). Post crash and when we get into recovery mode, more normal historical conditions resume with individual (local in RE) performance mattering more. It seems as though more folks are now coming to that conclusion also. Please also read the links article below..

The housing boom and bust gave rise to the myth of a “national” housing market. After all, prices rose in almost every part of the country until 2006, when they began dropping from coast to coast.

But today’s story in the Journal looks at how the beginnings of housing recoveries are neighborhood and even street specific. While the media are often pressed to generalize about the national market, or to highlight cities that, on the whole, are rising or falling, most real-estate agents will remind buyers that broad housing indexes may not hold much water when it comes to pricing their homes.

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Zillow provided data that looks at the share of ZIP Codes within a given market where values are rising or falling. With demand clearly stronger than one year ago, the areas that are doing best are those neighborhoods that have “always had a premium associated with them,” says Stan Humphries, Zillow’s chief economist.

In some ways, this might seem unfair, because many of those communities also saw less dramatic price declines. “The non-premium areas took it on the chin,” says Mr. Humphries. “The premium areas took their cake and are eating it, too.”

The pattern isn’t true everywhere. In markets that have seen a glut of foreclosures, such as Miami and Phoenix, some of the hardest hit parts of town are seeing the most dramatic home price appreciation. (Of course, prices are rising from an extremely depressed level in those areas—and the supply of homes is constrained by many sellers who owe more than their homes are worth and aren’t choosing to sell, even if they’d like to).

The map here of Seattle shows what parts of town are recovering and what parts aren’t.


Desirable communities: The places where people always want to live have done well. This includes neighborhoods that are the closest to the city center, with low crime rates, attractive housing stock, accessibility to major job centers, and good schools.

Attractively priced homes: Just because homes are in a choice neighborhood doesn’t mean they’re selling. They aren’t selling if they’re overpriced, and some high-end neighborhoods are still seeing sellers test the market at unrealistic prices, say real-estate agents.


Far-flung exurbs: Why would buyers move to the outskirts of town, or settle for a neighborhood that tried to gentrify during the bubble but didn’t quite make it, when lower prices have made formerly-out-of-reach communities more accessible? Some of these places could face a double whammy, as they also faced higher shares of subprime loans.

When the so-called “shadow inventory” of foreclosed properties that haven’t yet been taken back by banks does materialize, it’s likely to strike many of these communities while bypassing the more established parts of town that saw less dramatic housing bubbles.

Townhouses and condominiums: These were often an attractive entry point during the bubble to homeowners who otherwise wouldn’t have been able to afford single-family homes in the same neighborhoods. But now that prices have corrected, would-be buyers aren’t interested in these properties if they can get a single-family home. “Townhouses are the inventory of last resort,” says Glenn Kelman, chief executive at brokerage Redfin Corp. “Single-family homes are doing much better.”

The only major flaw above is the “shadow inventory”. It has been shrinking fast and is currently back to 2008 levels. As we have said the “shadow inventory” going forward will have the effect of muting potential upside to prices, not causing another downdraft, that effect of it has already happened. For proof we are seeing housing shortages in many areas and even REO prices are climbing. Where the shadow inventory going to drag down prices, REO prices would be going the other way.

This is what lead us to take a large position in Howard Hughes Corp (NYSE:HHC). Their MPC’s (Master Planned Communities) are located in Houston (right now arguably the national hottest housing market), Las Vegas (buying Howard Hughes Corp (NYSE:HHC) last year was buying in a Vegas’ low point) and the DC Metro area (never really felt the crash). All three market are coming on strong in early ’12. They also have permission to begin a 10M sqft luxury condo/retail complex (Ward Center) on the beach in Honolulu next to Ala Mona (the highest grossing mall in the US) that will be worth more than few pennies.

In fact, one could make the very legitimate argument that the Hawaii project alone are worth what the entire market cap of the company is worth now ($2.3B).

We believed then and so more so now that Case-Shiller is a hugely flawed metric for housing (more on that here) for those looking to invest in it either through builders or RE Co.s. It is a backwards looking metric that encompasses meaningless data for the majority of the housing market.

Because of that you need to know where the investment you are making operates and how those particular markets are doing. How the housing markets in NY, OH or WI are doing has ZERO effect on what Howard Hughes Corp (NYSE:HHC) does or how their business performs.

The housing data has been looking better since mid/end of ’11 and has really been looking better since Feb. More people will begin to notice soon enough…

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Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a RealMoney.com contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.

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