“Sales of previously owned homes in the United States fell in June for the eighth time in the past 10 months, reflecting a continued slowdown in the housing market, according to a report released today by the National Association of Realtors,” begins an article in the Washington Post.

The report, which was released last week, says home sales dropped 1.3 percent in June to 6.62 million units annually.

Reuters followed suit with it’s own take, this one more upbeat and mixed with the latest consumer confidence results. “The pace of existing home sales fell…to the lowest rate since the beginning of the year, as sales of condominiums tumbled and price increases were the weakest in 11 years…

“Analysts had expected home resales to slow even further to a 6.58 million unit rate.”

Existing home sales were written off as if “beating the number” really had any bearing on the housing bubble at all. And because the mindset is that home values can never really go down, many people (especially realtors and anyone trying to sell a home) are saying that prices have “leveled off” and that the market is “returning to normal.”

What we’re seeing in Baltimore’s housing market — and many others across the country — is a staggering increase in homes listed for sale. In fact, these high inventory numbers haven’t been seen since the early 1990s. During the frenzied buying we saw this time last year, one realtor told me the average house in the city was under contract within two days of being listed.

Now we see this incredible gain in inventory, which boils down to more choices for potential homebuyers. We’re entering a point where buyers are reluctant to offer as much for a home, and sellers are reluctant to drop their prices. But prices will have to eventually be adjusted.

Just like Mike “Mish” Shedlock wrote in a recent shot of Whiskey & Gunpowder: “As soon as someone drops their price by $100,000, every house in the neighborhood will be repriced. Comps will drop like a rock. Consumers used to seeing nothing but rising prices are in for a rude awakening. Their house will no longer be an ATM.”

(I highly recommend you check out last Thursday’s issue of Whiskey & Gunpowder for a full account of Mish’s friendly debate with an Atlanta realtor. You can find it here.)

But much of the damage has not yet been done. While foreclosures have risen in some areas, the consequences of irresponsible lending that has transpired during recent years have yet to really take their toll.

And as the housing boom continues to unwind, payday lenders and loan collectors will prosper, especially since many homeowners have cashed out their equity and continue to live beyond their means.

A little more than six months ago, I wrote about some businesses that could benefit when the effects of a stale housing market began to sink in. Now it’s time to check in on these four companies’ progress this year:

*** Portfolio Recovery Associates (PRAA: NASDAQ) buys defaulted credit portfolios and accounts and attempts to collect on the debts. The company plans to announce its second quarter earnings Wednesday after the market closes.

After reaching a high of $52 on April 26, the stock has slipped to $43 last week. When I first wrote about it on February 13, Portfolio Recovery Associates traded for $46 a share.

*** Advance America (AEA: NYSE) shares were slammed last week, down 25% on news that new regulations in some states were hurting business for the payday loan company. When I first wrote about it back in February, the company traded at $13 a share, and after taking a 25% hit last week, it’s back to where it started, closing at $13.19 Friday.

*** QC Holdings (QCCO: NASDAQ) is another provider of short-term loans. QC is a growing business that opened 18 branches during the first quarter. The company’s $4.9 million increase in revenues over the previous quarter was due to improvements across the board: Higher payday loan volumes, more customer transactions and average loan size, according to a company release.

When I first wrote about QC Holdings in February, it was trading at $13 a share. It closed at $14.28 Friday afternoon.

*** First Cash Financial Services (FCFS: NASDAQ) is the big six-month winner out of the four. The company announced a 2-for-1 split on February 22, less than two weeks after it was first mentioned in this column. The pawnshop and payday advance store operator saw a pop in same-store sales this quarter, which increased 15%, boosting its earnings by 25% over the same quarter in 2005.

“The company also increased guidance for 2006 to between 94 cents and 95 cents from a previous range of between 93 cents and 94 cents,” according to the Associated Press. “It also said it is on track to open between 60 and 70 new stores by year end.”

All of these companies — except Advance America, whose business has been damaged by factors beyond its control — are still worth looking into to hedge your bets during these shaky times.

Best,

Gunner
July 31, 2006

The Slowdown is Just Beginning was originally featured in the Penny Sleuth.