News from Wall Street on the housing bubble. "Joseph Tomkinson, CCEO of Impac Mortgage Holdings, Inc. commented, '2005 was a challenging year for mortgage REITs across the board. Impac's earnings came under pressure as the Federal Reserve continued raising short-term interest rates during the year.'"

"Furthermore, earnings decreased as the yield on new mortgage loans added to the investment portfolio did not keep pace with the steady increase in borrowing costs. Even faced with prepayment penalties, borrowers took advantage of the flat yield curve and competitive mortgage environment by tapping into housing price appreciation to refinance their mortgages."

"William S. Ashmore, President and COO of Impac Mortgage Holdings, Inc., commented, 'The MBA is predicting a decline of approximately 20% in total mortgage originations for 2006 and competition is expected to remain intense.'"

"Home builder Hovnanian Enterprises Inc. is seeing demand slow in certain markets as many other conventional home builders have been reporting, but is not seeing the sharp dropoff in orders luxury builder Toll Brothers Inc. recently posted. Orders declined 11% in the Southwest and 37% in the West but rose 17% in the Northeast and 61% in the Southeast. Analyst Dan Oppenheim said much of Hovnanian's order growth was driven by acquisitions. If acquisitions were excluded, he said orders would be down 10%."

"Oppenheim noted that the 61% order increase in the Southeast was largely due to the company's recent acquisitions of Cambridge Homes and First Home Builders of Florida."

The Wall Street Journal has this report on homebuilders. "Hedge-fund manager David Einhorn has a prediction about publicly traded home builders: 'Slowing orders, reduced prices, reduced margins, slowing backlogs, it's all going to come.' And he's one of the bulls."

"Could it simultaneously be true that there is a housing bubble and that home builders are undervalued? he washout was bound to come, and now it looks like it may have started. Investors are beginning to panic. Toll Brothers, once the most admired home builder, warned in recent weeks that sales would disappoint. The stock is down almost 50% from its peak. KB Home has warned about cancellations and falling orders. That stock is off 25% from its top."

"And the next stage could be big price cuts to move product. Credit Suisse analyst Ivy Zelman, a longtime bear who is finally achieving a measure of vindication, says that Centex is already running sales in select markets. 'Depending on where the builder builds...a great tailwind now becomes a major headwind. It was a great ride up but it could be an ugly ride down,' says Ms. Zelman."

"Even while their earnings were skyrocketing and the shares were soaring, publicly traded home builders didn't win investor respect. Home builders' shares as a group are now trading at six times projected per-share earnings. That means only one thing, the market doesn't believe the earnings. And at the heart of it, they fear builder bankruptcies, as happened in the early 1990s."

"That's why the bulls need this housing slowdown. They are expecting that the companies will be able to have some earnings growth, grab more market share, and throw off enough cash to buy back stock to shore up their share prices. 'For five years, we've been waiting to see how bad it's going to get. It's honest now. We are going to find out whether bears are right and there's no business at the bottom, or I am right and there's a good business and good earnings at the bottom,' says Mr. Einhorn."

"How bad is it going to get? Ms. Zelman sees a substantial profit squeeze coming. Over the past year, home-builder operating-profit margins were around 17%; she thinks those margins will fall in the next three years and eventually return to a more typical 10%. investors can't take solace in builders that are more geographically diversified. That's because many of the home builders have profit concentration."

"KB Home sells in the Southeast, Midwest and West Coast. But Ms. Zelman estimates that about three-quarters of its profits come from selling houses in booming Las Vegas and California. Even if other markets pick up the slack, the profit margins on homes sold in Texas, for instance, are much lower."