‘Existing Homes Compete Head To Head With Builders’: CO
Some housing bubble reports from Colorado. “For the sixth consecutive month, Colorado has the highest foreclosure rate in the country. Colorado Attorney General John Suthers said he thinks the state will be grappling with the foreclosure problem for at least another year or two.”
“Suthers said that ‘creative financing,’ such as interest-only loans and the lack of home appreciation, are bigger culprits in rising foreclosures than fraud. ‘But in a market like this, where homes are going up 3 percent or 4 percent, you face losing your home to foreclosure if your mortgage adjusts upwards by hundreds of dollars each month,’ Suthers said.”
“Denver City Council member Michael Hancock said there are so many vacant homes on some streets, it is ‘going to change the shape and profile of some neighborhoods for a very long time. It really is a sad situation.’”
“‘I do not think there is a greater issue threatening the economic and social vitality of our communities than the rising foreclosures in our city,’ Hancock said. ‘I think predatory lending has played a role. However, I think the lack of buyer education has played a greater role in the increasing rates.’”
“Investors, especially those from California, who recently have been accounting for 70 percent of the bidders, are willing to pay record prices for Denver office and retail buildings because they look cheap.”
“Asked if investors are concerned that real estate foreclosures in Colorado are leading the nation and heading toward record territory, investment broker Patrick Deveraux said: ‘We hear about that some, but not as much as you would think. It may sound crazy, but a lot of investors are dealing with OPM, other people’s money.’”
“He said the question he increasingly is getting from ‘really smart guys who are investing for their own accounts is, ‘Hey, are you buying houses?’ It sounds like a good time to buy houses, sit on them for a while, let the job growth kick in, and make some money.’”
From the Brighton Standard Blade in Colorado. “With more houses for sale than buyers, some local homeowners are no longer seeing their largest asset appreciate. Three conditions are driving the problem: more owners filing for foreclosure, higher rates of new home building and rising interest rates.”
“Distressed property is not selling at distressed prices. ‘We’re seeing banks just sit on repossessed property,’ said Adams County Assessor Gil Reyes. ‘They’re waiting for full value.’”
“The old adage, a house is only worth what someone will pay for it, has become a rude awakening for many local homeowners. Despite modest gains during the last five years, existing homes are not selling for what homeowners believe they are worth.”
“One owner who wished anonymity, said she and her husband want to sell their 35-year-old home in a neighborhood near East Bromley Avenue. The home’s last tax assessment was $210,000. ‘Our house is worth $240,000,’ she insists.”
“Not if a buyer can get a better deal. And that’s the problem.”
“Existing owners are competing head-to-head with new builders who offer incomparable loan packages. ‘They (builders) will do anything to get someone into their homes,’ said Realtor Dee Durland.”
“While the county’s next tax assessment will provide a better gauge of values, Reyes predicts more established neighborhoods will see stagnant appreciation. ‘Perhaps even declines in more older neighborhoods,’ Reyes said.”
“In May, the number of new single-family permits increased 38 percent from the same month in 2005. ‘Brighton’s problem is the number of new homes being built,’ Reyes said, agreeing existing homes are probably not moving very fast. Likewise, many new houses are being bought with unconventional loans, which portend further bad news for foreclosures.”
“The largest chunk of adjustable rate mortgages and zero-interest loans in Colorado have yet to explode. Observers like Jeannie Reeser, Adams County public trustee, says she see no end in sight for foreclosures.”
“Adams County Treasurer John Lefebvre agrees. ‘We hear 2007 will be the year of reckoning in the mortgage industry,’ he said.”
‘We’re seeing banks just sit on repossessed property,’ said Adams County Assessor Gil Reyes. ‘They’re waiting for full value.’
I’m sure the Colorado banks appreciate the ’smart guy’ speculators taking the foreclosures off their hands, even with ‘other peoples money,’ just as the economy appears ready to take a break. Also note; no mention of mortgage backed securities, etc.
What is smart about buying houses to “sit on” waiting for imaginary job growth to occur ?. Without inside knowledge that a major employer is about to go on a hiring spree this is nothing but speculation. And there are always the possiblity of layoffs in an area to drive values down. I don’t see anything about cash flow being in the equation.
attended a continuing ed class presented by fannie mae yesterday in denver. the big thrust of the presentation was fannie’s “my community mortgage” program. the new program to be rolled out by mid august is downright scary. highlights:
1. targeted to those borrowers in demographic sectors that fannie sees as an opportunity, hispanics, blacks, new immigrants and single mom or alternative households.
2. allows a purchase with no money down with outside housing authority secondary financing to 105% ltv.
3. allows up to $5000 in collections to be left unpaid.
4. reduces the cost of mortgage insurance by more than half (fannie reduces the amount of coverage from 35% to 20%).
5. removes any differentiation between single family homes and condos (they are the same in fannie’s eyes).
6. includes a built in credit “boost”. in other words, someone who was previously classified as an EA 1 (marginal borrower) will now be boosted to AAA paper, reducing their rate (and increasing fannie’s risk).
this is all in a backdrop of the worst foreclosure market in the country, fueled by putting these types of borrowers into toxic loans. fannie apparently wants to be part of the party.
Thanks for the summary (of an idiotic situation).
allows up to $5000 in collections to be left unpaid.
What exactly does this mean? Sounds like you pay back $5K less then the load amount. If so, I will declare myself an alternative househould and borrow exactly $5K for my soon to be build woodshed.
The woodshed of course will double as the place of punishment for the loan officers pushing this offer.
you could step into a 105% ltv loan owing up to $5000 to other creditors (on you credit report as collection accounts) without having to pay them off (a usual requirement by most lenders, as they wouldn’t want them attached to the house). the whole thing defies logic. forget the homebuilders, fannie is the ultimate short.
Fannie Mae’s new motto:
“Bankruptcies for Everyone!!!”
did Fannie get point #6 by looking at how Wall Street regards GSEs.
Which is exactly what I expected.
The solution to the “overbuilding” will simply to move people into the overpriced houses, with a govt. loan.
The lenders have already been providing loans to ILLEGAL aliens, claiming they do not want to discriminate on “immigration status”. The Bush Administration PONZI SCHEME is to keep filling the Country with CONSUMERS who will be given PRINTED MONEY to spend in the economy.
The only LOSERS will be US, the Responsible Citizens.
Multiculturalism will rule the day as our people are over-run by foreigners who get hand-outs from Uncle Sam with our money.
Who cares how much the house costs if you aren’t the one paying the bill? I expect the FED to try an inflate out of it’s debts…….welcome Weimar Republic.
This STINKS !!!
Whoa, I agree that the inflation problem is huge, but don’t go getting all racist about it. Multiculturalism is a good thing.
No, it isn’t. It’s just something you’ve been “sold” the past 20 years.
Sure it is. What do you think America was founded upon?
Hey MB Renter,
Please come to Denver, and allow me to drop you off, after nightfall, in some of the more heavily “multicultural” neighborhoods in the city. When the gangbangers, er, local youths come out to greet you, please feel free to share your views on what a fine thing multicuturalism is. You will find them a most grateful and appreciative audience.
Fannie Mae’s job is to socialize the inevitable losses of too-loose credit standards onto whatever bagholders can be found. Hopefully the widening perception of a housing bust and recession will ensure that the foreign central banks and taxpayers both tell it to go to hell in the near future. This pig desperately needs to be drowned.
Fannie Mae has done an admirable job of shoe-horning Section 8 low-lifes into formerly decent neighborhoods, resulting in a subsequent drop in both the quality of life and (predictably) property values. Your tax dollars at work — thank you, Republicrats!
I see this happening also in SoCal. Countrywide Los Angeles foreclosure list has gone from 63 to 103 in the past 6 weeks (and from 3 to 103 in the last 12) but everything is still priced at the tippy top or higher, and to my knowledge, not a single reduction has happened. Rather, I’ve seen their REO asking prices go HIGHER after they were foreclosed on.
Hard Landing
July 14, 2006 9:17 a.m.
Send suggestions and tips to marketbeat@wsj.com. Find this feature every day at WSJ.com/marketbeat.
9:17 a.m.: Amid the steady drum beat of bad news from home builders, D.R. Horton’s report Thursday night that it was sharply slashing its earnings guidance for 2006 is especially worrisome to the battered sector. The Fort Worth, Texas, homebuilder has long been the golden child of many analysts who were convinced that D.R. Horton’s management style and its ability to dominate certain markets would allow it to keep profiting even when conditions slowed. Gregory Gieber, an analyst for A.G. Edwards & Sons, says that scenario might have come true if the housing market was coming in for a soft landing. But Mr. Gieber says Horton’s profit report on Thursday — which revised its guidance from a range of $5.25 to $5.35 of earnings per share down to $3.65 or greater — helps to confirm, that “this is not a soft landing.” The failure of Horton’s incentives to drive sales in certain markets — a hallmark of the company’s strategy — shows that the current slowdown in homes sales is more profound that many had first thought.
D.R. Horton’s stock was crushed in after-hours and pre-market trading, with shares down more than 11% to $20.30. Other builders may also take a beating, as they report earnings in the coming weeks. “No one is safe,” says Banc of America Securities analyst, Daniel Oppenheim. “Everyone will feel the impact.”
covered my HIC shorts too early,but hey it was fun
07 won’t be fun for anyone
whew.. DHI got their ass kicked today
Txchick57’s got to be moving like the proverbial one-legged girl today :).
she saw “value”
She’s hedged as any prudent person would be trying to do this.
She’s hedged as any prudent person would be trying to do this.
Glad to hear it. FWIW, some of us here really enjoy hearing some independent thinking.
hedged =/= no loss.
Yeah, but does hedged then also mean no profit? The big questions for these stocks going forward are as follows:
What will these companies do with their cash flow (buy debt, stock or land)?
Will there be any M&A?
Are book values accurate or will they go down with more write-offs?
How bad will 2007 be?
Barring any M&A deals I don’t see any impetus for these things to go up so even though they may look cheap what is going to make them tick up? You know there is more bad news coming in future months so why own these at all, hedged or not?
It means you have to manage your exit on both ends to either minimize loss or actually make something. I don’t “own” them because of any fundamental reason. I never claimed they were value plays, contrary to the gratuitous sniping above. I, like others, tried to gauge at what point a bounce play in these stocks might materialize, to resistance, at which point an exit would be taken.
I”m thinking about lifting the put side of the equation very shortly in fact.
I understand. Besides a dead cat bounce or some M&A transaction, I don’t see why you would want to lift the put side here. I know they have been hammered, but there are more builders to report orders shortly and then quarterly conference calls coming out and I can’t see them saying anything positive - without lying that is. Good luck on the trade.
I wasn’t putting you down, just observing (in a humorous fashion) that given your stated position you would surely be paying the market very, very close attention.
I’ve positioned my own investments on the assumption that (in Australia) we’re going to see inflation except in RE.
I could never be a trader.
Pulte (PHM) is getting clobbered, also. What gets me, following this blog for the last 14 weeks, and reading the research coming out of the Wall Street experts, I thought I was in the twilight zone. It was a replay of the dot.com research, where every stock had a buy rating as the dumped 90% in value. I still don’t get the relationship of earnings to what somebody is willing to pay for a stock. All I know, is Ben was light years ahead of these talking heads,
and it’s about time the investing public turned off CNBC and Krammer and started thinking for themselves
DHI got their ass kicked today
It’s not 2:00 yet. Isn’t that the hour miracles happen?
some arn’t seeing appreciation- really ?
sugar coaters,economic girliemen
I’m surprised by banks holding onto foreclosures.
Maybe they cannot afford to show the write-down on their books.
Or maybe most of the foreclosed loans are held by mortgage-backed securities, with special servicers in charge of the work out. The staffing levels of the special servicers, and thus the amount they charge, was presumably based on a lower number of foreclosures.
And, special servicers are often those who hold the first loss piece of a mortgage backed securities portfolio, meaning they have an incentive to avoid sale, which wipes them out but preserves value for those with higher rated portions of the mortgage pool.
Worst case: the whole thing could just seize up.
I suspect many lenders will be in the same position as underwater homeowners. The lenders aren’t lending their own money, they’re borrowers, too. They make money on the difference between the rate they borrow at and the rate they lend at. To be allowed to get into that game, they have to put up a certain amount of their own capital. If that amount is, say, 8% of what they’ve lent, and their loan losses come to 8% of their loans, they’re out of business (in fact the regulators will put them out of business even before it gets that far). So if losses threaten to become greater than the nominal amount they’ve set aside reserves for, the managers will do all they can to postpone the day of reckoning so they can keep on collecting their pay, and look around for other jobs (after all, they’re usually not the main stockholders).
jm,
Good observation. I’d never thought of it that way. Awhile back I worked for a large bank (securities division) and even with rumors of a buy-out in the works and terrible numbers our managers kept on sugar coating the numbers (and calming our fears) b/c what the heck, it was a great “gig” so why not milk it out as long as you can? Our mgr. would “go to lunch” dressed oddly like a man going on a job interview. Funny? He’s never taken two hour lunches before? Getting paid salary + commission to go on job interviews? Great gig!
Well he probably wasn’t making any comission.
So if the property sits on the books as ‘non’ performing, they hide it as long as possible to avoid writing off the losses and thereby reducing their own earnest money, which impacts their ability to write loans, which reduces their earnest money… This can’t go on long though, and analysts will soon start sniffing around the water-coolers, looking for rot. If the holding of these properties is undetected long enuff, won’t the collaspe be more of a neutron star implosion?
I’d have thought there would be a direct correlation with the end of their tax year. Once the end of year is looming, they should have greater incentive to dump the properties, to keep them off the EOY financials. Reminds me of the wisdom of reading the footnotes and management notes before looking at the numbers.
Really, if the foreclosures are just sitting, and not being sold or worked out with the existing occupant, it’s something to worry about.
This happened in the suburbs in Austin in 1986….the early foreclosures sat as did a lot of inventory…Then by 87-88, the price collapse came as the banks and RTC then realized these things weren’t going to sell for prices in the 50s and 60Ks….quite quickly….3-2s 1500 sf went from $65-$70K (down from $80K in 1985) to $39K-$45K. And there were tons of them into 1990-91 when it began to dry and firm up at the 45K to 50K level.
A friend of mine bought out there during that trough. It seemed at the time that he got an enormous house for $85K.
> “One owner who wished anonymity, said she and her husband want to sell their 35-year-old home in a neighborhood near East Bromley Avenue. The home’s last tax assessment was $210,000. ‘Our house is worth $240,000,’ she insists.”
Wow. I hope she gets a nice notice of back taxes for that statement.
LOL
“One owner who wished anonymity, said she and her husband want to sell their 35-year-old home in a neighborhood near East Bromley Avenue. The home’s last tax assessment was $210,000. ‘Our house is worth $240,000,’ she insists.”
Well, a tax assessment is usually a pretty worthless number in valuing a property anyway; those values are often waaaay of the mark. Had it been a proper (private) appraisal, that might be a different matter. But whatever the case, if you can’t sell it for $240k, it’s not worth $240k.
…more owners filing for foreclosure…
“Owners” filing for foreclosure? Unlikely! It’s the bank that files for foreclosure. You can get the point OK, but the reporter needs to get his terminology right. Perhaps more foreclosures being filed would be more appropriate.
who owns the houses?
Technically, the FB does. He’s the on whose name is on the title deed. Yes, even though you owe the bank $500k on a $450k house, you “own” the house, not them. They have a claim (mortgage lien) against it, and they won’t actually own it until they execute their foreclosure privilege once you fall behind in payments.
That actually depends on the State you are in.
There are title states and lien states, where you don’t own it until the mortgage is paid.
Or another “depends”: the contract for deed, where you don’t get the title until you finish paying all the payments.
And “lien state” versus “title state” is something I’ve only dealt with on motor vehicles, though I certainly won’t claim to know real estate law in all 49 states plus DC plus that weird Napoleonic Code in Louisiana especially.
But you get the drift… in most states (all?) when you generally refer to the owner of a property, you are referring to the person/corporation who bought it, and not the person/corporation who lent the money.
try missing a few payments in any state and you’ll find out who really owns the house.
Probably isn’t the right place but since last month I’ve been following Portland Oregon and Boise ID inventory from their respective paper’s Real Estate web searches. Total inventory:
DATE PDX BOI
6/12/06 3473 2793
6/13/06 3454 2793
6/14/06 3472 2833
6/15/06 3489 2858
6/16/06 3494 2875
6/19/06 3129 2886
6/26/06 3778 2886
6/27/06 3753 2886
6/28/06 3754 2886
6/29/06 3837 2886
7/5/06 3259 3105
7/6/06 3245 3102
7/7/06 3283 3111
7/10/06 3568 3131
7/11/06 3601 3184
7/13/06 3613 3177
7/14/06 3645 3260
‘It sounds like a good time to buy houses, sit on them for a while, let the job growth kick in, and make some money’
Since they are pre-supposing job growth, one can assume they will enjoy negative cash flow in the mean-time.
w/o HIC and after the next election MIC- there is no growth
Minyan Mailbag: Homies Collateral Damage
Fil Zucchi
Jun 13, 2006 9:00 am
Some of the banks tied to the unfolding housing implosion are just too dangerous to short.
A couple of questions:
1. The builders have been relatively active buyers of their own stock. A lot of them at relatively higher prices. I know that it has the effect of boosting earnings - smaller denominator. What is the effect of the large capital losses? Am I correct that it only has an effect on the balance sheet and not on earnings? Who looks at balance sheets?
2. I have thought that the next great overvalued area has to be the banks. If the housing market goes into the crapper, then I assume that a number of financial institutions are going to have more bad loans than they are presently calling for. So far the Street hasn’t (judging from the price action of the banks) agreed with my scenario. I am short Corus Bankshares (CORS) and Wells Fargo (WFC). Do you have any comments or better suggestions of stocks to be short?
3. Do you have any suggestions on how to play the demise of the home building bubble besides being short the homies?
I welcome your comments.
Thank you
Minyan Duke
Hi Minyan Duke –
With respect to your first question, you are correct that the share buybacks tend to increase reported Earnings per Share. That is why I find it far more useful to look at Net Income to determine the growth trend of a company’s business. EPS is useful for valuation purposes but does not tell you as much about the business momentum.
When shares are bought back at prices higher than the subsequent prevailing market price, companies do not incur capital losses the same way shareholders do when a stock’s price falls. If share buybacks are undertaken with cash on hand, they return cash to shareholders much like a dividend would (but without the tax consequences), and they have no impact on the intrinsic value of the company. The shares repurchased are simply canceled and there is no impact on the balance sheet. Looking at the balance sheet is, IMHO, critically important, especially when it comes to companies with high debt levels, or with non-liquid assets that are often valued by management through very rosy lenses. The classic example is the land banks of homebuilders, which – again, IMHO – wildly overstate the book value of these companies. Take a look here for more vibes on using “Book Value” as a yardstick to value homebuilders.
As for collateral plays on the continuing demise of homebuilders, I wish I had an easy answer. Many companies directly connected to homebuilders have already commensurately taken it on the chin. You are right that so far bank stocks seem to ignore the dangers that the housing market poses to them, but ultimately I believe the “no underwriting standards” of the last few years will come home to roost.
That being said, I am resisting the temptation of shorting housing related banks for several reasons: first, I am concerned about the current buy-out frenzy. Golden West Financial (GDW) was the poster child for an ugly looking portfolio of housing loans, but it did not matter to Wachovia (WB) when it bought it out at a fat premium. Those loans are now WB’s problem but within a much broader and diversified asset base.
Second, I think it is very dangerous to short names that are “closely held” by management and that are already heavily shorted. Corus Bank is both. The Glickman family controls 39% of the shares outstanding, and 42% of the float has already been shorted. The shorts are a natural source of support for the stock price, and the Glickmans (which have a reputation for being a rather “aggressive” bunch) would likely have no trouble taking the company private if they wanted to. Look at what happened with William Lyon Homes (WLS) for a template.
Next is the “what am I missing” dilemma. Take BankUnited Financial (BKUNA) for example:
They are a smallish S&L that operates in Miami-Dade, Broward, and Palm Beach counties, Florida; pretty much ground zero for the current housing implosion.
More than half of its loans consist of option ARMs.
18% of its loans are to Non-Resident Aliens for purchases of investment properties.
In the last quarter a full 1/3 of its net interest income came from non-cash negative amortizations.
ARM’s loans can negatively amortize up to an LTV of 84% of the original “la-la land” appraised value, meaning that if property values were to fall 16% below “la-la land” appraisals, BKUNA would be upside down on those loans.
Despite all of the above, BKUNA’s current loan loss reserves are laughable relative to an objective estimate of its portfolio’s risks.
And to put the final coat of lipstick on this puppy, BKUNA’s general counsel is the law firm headed by BKUNA’s CEO.
IMHO, this is as close as you can get to the making of a train wreck. So how does the stock behave? It’s up more than 50% since October. What am I missing?
If one absolutely wants to get involved with the lenders, there are very thinly traded and expensive options on the KBW Mortgage Finance Index (MFX). With 32% of the weighting going to Fannie (FNM), Freddie (FRE), GDW, and Countrywide (CFC), it lacks the really “implosive” potential of the sub-prime lenders. I do have a position in these options, but so small it’s mostly for “entertainment” purposes.
In short, despite the beating already taken by the homebuilders, the best way I see to play the homies demise is still to play the homies demise. But, as I have vibed recently, I think the leg down we have seen since early April in the Philly Housing Index (HGX) needs a pause, and – right or wrong – I am going to wait for better prices to get involved again.
-Prof. Zucchi
Position in MFX
It will take time but all those houses will be sold for whatever they can bring. The lenders will be liquidated. The government will be forced to step in. This US bubble is truly huge. It seems to have started in CA and extended itself cross-country in ever widening concentric circles, even outside the country, this thing knows no bounds, it’s like the blob or something. The noise of the pop will be deafening. (gloom & doom tags off) BTW - Hey lady, yeah, your house is worth $240k, to you maybe. Why don’t you stay there awhile longer, maybe it will grow on you?
$240K - Hey lady, I’ll let you give me $240K to take that white elephant off of your hands.
I say it’s time to liberate more equity!!
“‘But in a market like this, where homes are going up 3 percent or 4 percent, you face losing your home to foreclosure if your mortgage adjusts upwards by hundreds of dollars each month,’ Suthers said.”
Gives new meaning to the term “reverse mortgage”; watch the value go down while the cost to you goes up.
Don’t forget, San Diego condos for everyone.
Woohoo!!! San Diego condos for everyone!!!
But with very few neighbors to enjoy “the good lfe” with.
Or “life”
““Denver City Council member Michael Hancock said there are so many vacant homes on some streets, it is ‘going to change the shape and profile of some neighborhoods for a very long time. It really is a sad situation.’”
This is going to be much sadder out in the desert communities with boarded up houses, graffiti on the buildings, weeds in the yards, etc and only a few people remaining in the neighborhood. Then what’s the bank gonna do? I’m waiting to see how many in the banking industry start getting pink slipped; that should be the tell all on their exposure.
And, alll SAN FRANCISCO SQUIRRELS for everyone. Don’t forget to feed them.
Mmmmm — Squirrel Burgers with Gingered Shiitakes: cilantro, mint, lime juice, nam pla, Jalapeno, garlic, ginger, lime… and fresh San Francisco squirrel, acquired at the closing table.
I’ll feed ‘em to the homeless FBs and ex-realtors.
I drove to Las Vegas yesterday from San Diego for business. I was amazed at just how many projects have broken ground in the last 3 weeks. These range from small 10 unit developments to large scale subdivisions. I know the builders stay in business by building, but the level of new starts seems ill advised given the current market conditions. This after what seemed to be an “operational pause” during the last 3 months where everyone seemed to halt most construction.
Could opening the floodgates of new construction really do something nasty and unexpected given the ballooning inventories?
Did you take the 215 frwy? I had to go to our San Jacinto service center a few months back and couldn’t believe all the development going on around all those IE cities. Total gridlock on the frwys.
Waiting for job growth? There hasn’t been any job growth here for YEARS!
This co-worker of mine is from CO and he says the western side of the state (I guess where all the ranch property is?) is still booming with multiple offers on lots. Is that true? He said though that Denver is completely dead which I already knew about from reading this blog.
Good hearing from you ockurt. Have not seen you in a while. How are things in OC, anything selling?
What’s happening Norcal. Yeah, I haven’t been able to post here as often as I like…got a new job where I actually have to work
Things are very slow here. It’s almost like the “Twilight Zone”. Inventory in Irvine is over 1200+ (6 mos ago it was only 600 or so) and climbing. With a 30 yr fixed at nearly 7%, the party is over!