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08-23-2006

CHARLIE STEIN & HOWARD LIEBERMAN, co-anchors, Bloomberg Radio

Home sales are just coming across the wire.  They fell to 6.33 million; that was down 4 percent, more than analysts were looking for.  We'll take a closer look at the numbers and what they mean with Hugh Bromma, CEO of Entrust Group.

Robert Toll, the chief executive officer of Toll Brothers, said on the conference call yesterday he's confident housing will post a strong recovery.

Mr. ROBERT TOLL (CEO, Toll Brothers):  With mortgage interest rates still relatively quite low, the economy basically sound, and household formation still increasing, we continue to believe that when buyers become confident that home prices have stabilized, that is probably hit bottom, the market will return to firm footing.

LIEBERMAN:  Just moments ago, the National Association of Realtors, as we told you, said sales of previously owned homes fell 4.1 percent in July to an annual rate of 6.33 million.  That was more than analysts had forecast.

And joining us now on the Bloomberg business hotline, Hugh Bromma, chief executive of Entrust Group.  The company manages $2.3 billion in retirement assets, most of that in real estate.

Hugh, thanks for being with us.  What does this morning's report tell you about the state of the housing market?

Mr. HUGH BROMMA (CEO, Entrust Group):  Well, it definitely indicates that we're at the end of the boom, as it were. In other words, we're starting into the decline.  It's not a big surprise to anyone in the industry, anyone who's been following the news.  What we do see is that the decline is as a result of increasing interest rates, and of course housing starts are lower.

And we've now looked at statistics that are rivaling 1995. In addition to that, what we are seeing, some very positive indicators, if you want to call them positive, is the commercial market isn't all that terrible.  It continues to do well.  And also, we're going to see that the rental market is going to be strong as well.

STEIN:  Let's focus, initially here at least, on the houses before we move to the other areas.  You said interest rates were causing, you know--triggered this slowdown.  And certainly rates have come up, but we're talking about mortgage rates of a little bit more than 6.5.  That's certainly not terribly high by historical standards.  Is that what's going on here, or is there a broader sort of affordability problem?

Mr. BROMMA:  There is a broader affordability problem as well as interest rates.  What's happening is, of course, is that we've had an oversupply, houses are staying on the market longer because people are looking at the slowdown at that particular level that says when can I really afford that house and at one point can I afford that interest rate?  So, from the point of view as we're seeing the ramp up, or if you wish, the ramp down of real estate home sales, the interest rates are going to continue to have an effect.

LIEBERMAN:  So, Hugh, when you look at your--putting the money that your clients have, these are retirement assets, a lot of it's in real estate.  Retirement money is generally pretty long-term investing, so when the market does the kind of thing we've been seeing in housing, you just hang out and if some of the companies you may own go down for a while, you figure they'll be coming back up eventually?

Mr. BROMMA: Yes.  In other words, what's happening is that people are going more toward a buy and hold strategy.  In addition to that, they're going to be looking for bargains. As the market cools and houses stay on the market longer, they're going to be looking at those particular areas where the home prices are going to be--or, let's say, investment property prices are going to be decreasing over time.

STEIN:  Hugh, we're going to ask you to hang on one moment while we check in on the market.

STEIN:  We're talking about the housing numbers we got this morning on existing home sales, 6.33 million.  That was lower than analysts were looking for.  And we're talking to Hugh Bromma, he's chief executive of the Entrust Group.

Hugh, the boom in housing lasted quite a long time.  We had a lot of very strong years before this one.  How long does it take to unwind?

Mr. BROMMA:  Well, the--as you mentioned, the market's been hot for the last 10 years, and now it's at the bottom of that.  And generally, what we've seen is cycles vary around the United States, but it would not be surprising to see a cooling for the next five to 10 years, and that's something that is shocking, if you will.  But what happens is that demand and prices and interest rates have to catch up, and it takes a long time.  That lag can be a very long time.

STEIN:  Have we ever had a period like that?  I'm hard pressed to remember, you know, a five- to 10-year period where housing struggled.

Mr. BROMMA:  Yeah, we've had five-year periods, but 10 years is something that's unprecedented.

LIEBERMAN:  And that's national slowdown, not just regionalized things we always talk about?

Mr. BROMMA:  Mostly the regional and the national is a matter of averages.  For example, we see that the Midwest is doing not too badly in terms of home sales, but again, it's a matter of averages.  But this time we're at unprecedented increases in terms of what we're going to be seeing as far as slowdown is concerned.  It's fairly, fairly significant, and I think one might do well to look at this on a longer term basis than five years.

STEIN:  If you're correct, and you know, particularly we're talking about the coasts, are we talking about prices essentially flattening out for five or 10 years or worse than that?
Mr. BROMMA:  Definitely flattening out, and in--as we've seen in the previous three cycles let's say on the coasts, what we see there is declines on an average basis and then they start to creep up again.
So, it's not a matter of thundering down to the bottom, but also looking at it from the point of view, saying, all right, as we start to see the market become more fluid, more capability that people can afford the homes and that interest rates may be decreasing or coming to a rate where people can see that it's sensible for them to purchase homes and also if inflation indicators are important in this chemistry, if you will, and at that particularly point we'll see the rise.  So, it's going to be definitely a big slowdown and then a gradual rise.

LIEBERMAN:  Now, Hugh, if this is a 10-year event, what does that mean as far as investing?  I mean somebody that might be 55 years old is going to be affected by what's going to be happening then for the next decade, how do those people need to invest their retirement money?

Mr. BROMMA:  Well, that's where it becomes a matter of art, and those individuals who are going to be investing their retirement money are going to be looking for bargains on the way down.  They're going to be investing in the rental markets because those are going to be pretty good.  Those individuals who can't afford to buy houses are going to be looking at rentals.

Also, commercial properties look like they're probably going to be good for a little while, at least a couple of years, based on our analysis.  So--and the buy and hold strategy, people aren't just going to make quick money on a flip or a turnaround or something like that, it's going to be purely based on having property that does cash flow. And that's going to be something that people are going to be looking for.

STEIN:  Hugh, I was in the Boston area and I lived through a downturn in housing in the late '80s and early '90s, it lasted quite a while, but it was triggered by a severe decline in the economy.  Massachusetts lost 10 or 12 percent of its jobs.  We're not seeing anything like that at this point--about 30 seconds and we'll continue-what makes you think it's going to be such a long-term adjustment process in a reasonable economy?

Mr. BROMMA:  In a reasonable economy which is measured, it's important to recognize that the factors are all working in confluence together.  So, if we did, let's say, have a decline in the general economic indicators, then we'd see something that's a little bit more, let's say, robust in its down trend.  We're not seeing that.

We're seeing a relatively gradual flattening, and ease into this particular change in how the housing market works. So, it's not a matter of a crash, it's a matter of change gradually over time and people can adjust to that relatively well.

STEIN:  Hugh, thanks for that.  We're going to continue with Hugh in a moment.  We're continue talking about housing and also rental properties and commercial real estate, both areas that Hugh pays attention to.  Stick with us, you're listening to BLOOMBERG ON THE MONEY.

STEIN:  Let's get back to our discussion about real estate. We're talking to Hugh Bromma of the Entrust Group.  We just got housing numbers this morning that showed home sales--existing home sales came in weaker than analysts had forecast.

Hugh, if you're correct, and as we were saying, you're looking for a long-term slowdown in home sale market, perhaps five years, perhaps as much as 10 years, what are the implications of that for the rental market?  And how does one want to play that as an investor?

Mr. BROMMA:  Well, that's the silver lining, if you will, because the rental market is going to be increasing over time.  It provides the investor an opportunity to look for rental properties because there are going to be more renters than there are going to be buyers.

So, we've seen basically those data show us that there is an increase in that particularly area pretty much throughout the United States.  And as our housing prices stay and stabilize let's say, and go down, there will be a balance, an equilibrium between rental property and house prices over the years.  So, right now the idea is that one would look at rental property for individuals who are not able to afford homes as a good investment choice.

LIEBERMAN:  I want to go back to just the whole issue of this slowing housing market, Hugh, and I wonder, is the concern here really, or is the driving force not necessarily the higher mortgage rates and all the exotics and people who are getting--were into adjustable rate mortgages that are getting adjusted and that sort of thing, but the fact that there's now a big inventory glut and there are fewer buyers and a lot less in the way of speculation?  What's more important there, that factor or the mortgage prices?

Mr. BROMMA:  Well, I think that when you combine them, it's not necessarily just a matter of, as you say, mortgage prices, although the mortgage rates are increasing.  There is a glut on the market--not a glut yet, but there is longer inventory staying on the marketplace.  We're seeing housing starts decline pretty dramatically and people are just basically not in the situation where they're going to be buying it.

So, when you combine all of the factors, that's really talking about--if mortgage rates continue to increase then things are going to be sliding down a lot--lot more than we had expected and down to '95--1995 levels.  So, it's just a combination of all the factors.  One needs to be aware that all of those factors really impact the investor.

STEIN:  Hugh, on the rental side, is the way to play that as an investor to be investing in REITs, and any particular ones you'd want to recommend?

Mr. BROMMA:  REITs that are involved in the rental market or in a commercial market and rental market might be those that are good.  I can't--because of our charter, can't recommend any individual real estate investment trusts. But my concentration would be those individuals who are interested in that marketplace and interested in REITs that they would concentrate in that arena.

LIEBERMAN:  So, when you're looking at dealing with the rental market and other ways of dealing in real estate, you get into commercial real estate.  What about the kinds of REITs that would be, for example, supporting shopping malls?  Is it--do you want to be on kind of the consumer side and buy the REITs that deal with the shopping malls or are you better off buying the ones that are in charge of office buildings?

Mr. BROMMA:  Office buildings are doing pretty well, and what we're seeing is the rate of absorption on the marketplace is starting to decrease as well.  So, from now until, let's say, mid-2007 is probably a really good time to look at the commercial market on a broad scale.
Shopping malls certainly among one of the probably better arenas, large commercial buildings also involved in that.

So, as time goes by and the market is starting to not be able to absorb anymore, that's when to watch out.  So, I'd say mid-2007 that people between now and then need to start looking at what's happening in that arena and then make their choices after that.

LIEBERMAN:  Hugh Bromma, thanks so much for taking the time to be with us here ON THE MONEY this morning, appreciate it.  Interesting discussion.