Speculators Lose Appetite ‘With A Flick Of A Switch’
The largest homebuilder in the US had a conference today. “D.R. Horton Inc., the nation’s top residential builder by units, said Thursday its third-quarter profit dropped 21 percent due to a tighter housing market. ‘Selling conditions are very difficult in the homebuilding industry,’ Chairman Donald R. Horton said. ‘The current home sales environment is characterized by an increase in both existing and new homes available for sale, higher than normal cancellation rates and an increase in the use of sales incentives in many of our markets.’”
“Chief Executive Don Tomnitz in a conference call Thursday said the company is operating in a more difficult and challenging housing environment. Speculators have left many markets which has led to higher inventories, while builders are offering more incentives to buyers as cancellation rates rise, he noted.”
“Also Thursday, M.D.C. Holdings said second-quarter profit slumped 25%. ‘During the first six months of 2006, the generally robust demand characteristics of the last several years have given way to an increasingly competitive environment in many of the country’s key markets,’ CEO Larry A. Mizel.”
“The company said it is scaling back its investment in land as profit margins shrink, and it noted increased competition and inventory pressures in its California market. The company also took a $7.9 million write-off for project costs, including option deposits and other costs related to lots it has decided not to acquire. The company said orders for new homes dropped 43% from last year to 2,738 units.”
“The cancellation rate surged to 43% from 19% the prior year, reflecting jitters over the housing slowdown. ‘The cancellation rate is the highest we have seen from the publicly traded builders due to M.D.C.’s high concentration in weakening markets,’ said Banc of America Securities analyst Daniel Oppenheim.”
“The company focuses on first-time and move-up buyers with significant operations in Arizona, California and Nevada.”
“Like other builders, NVR said Thursday orders for new homes fell in the quarter as activity continues to slow in the U.S. housing market. The company said orders fell 13%. Orders in its Washington, D.C. and Baltimore markets slipped 27% and 24%, respectively. Cancellations also rose as more buyers backed out of contracts as mortgage rates ticked steadily higher.”
“‘Housing demand reached a state of frenzy last year, driven by investors,’ said Rick Murray, a housing analyst at Raymond James & Associates. ‘With a flick of a switch, the investors no longer have an appetite for real estate.’”
A related link:
‘In a move that shocked the mortgage industry, Seattle-based Washington Mutual agreed late Wednesday to sell its entire government servicing portfolio and part of its conforming portfolio — $140 billion in receivables — to competitor Wells Fargo in a deal valued at more than $2 billion.’
Wow, glad I got my $ out of WAMU.
Who was the bear in name only (BINO) that was talking up WAMU doing workouts for the FBs at advantageous terms for the FB?
I think that we are in the phase of the bubble known as musical chairs.
The music is slowing and everyone is looking to stay close to the 1 or 2 chairs left.
Somebody is going to lose big on the MBS and Mortgage markets we just don’t know who yet.
Can someone explain what Wells Fargo is thinking with this deal?
I thought this was old news! WAMU hasn’t originated an FHA loan in months and has stated that it wanted no more FHA loans.
i bank at wamu and i tell you they are hurting.their cd rates have gone down and they call me to see if i want a heloc.only problem is i sold 1.5 years ago and have no mtg.they have free checking which is good.
Wow! Glad I didn’t sell my house and buy a new one with Wells Fargo.
I listened to the conference call yesterday.
They are focusing more on “higher margin” loans like neg. am and option arm! (hahaha… idiots) Check the stock price for a short candidate! (pretty much still at a record high)
I wonder how much the average speculator is going to lose, especially the one’s with multiple homes. they’ll find out real quick what leverage is about. good luck paying those realtors(apparently you put a TM next to that word).
how much actual cash does the average flipper have, especially when the refi spigot gets shut off?
This just in in:
‘D.R. Horton Doesn’t See Housing Rebound For 3-4 Quarters’
try years
3-4 years are probably more inline.
Quarters or Years? It should make a big difference for the value of homebuilder stocks, unless fundamentals just don’t matter any longer in this new era we have entered.
A little something from across the pond:
http://uk.news.yahoo.com/20072006/325/britons-hope-houses-fund-old-age-income.html
Britons hope houses may fund old age income Thursday July 20, 06:32 PM
Click to enlarge photo
LONDON (Reuters) - A survey of Britons showed a third of them expect to use their homes to help provide an old-age income, but many people may fall short as house sales may not give them enough money, consultants said on Thursday.
With house prices rising strongly in recent years and pension systems under strain from a greying population, unlocking property values to pay for old age has become a talking point in the financial industry.
At least 33 percent of citizens who have a defined contribution pension — in which benefits depend on market returns — expect to use brick-and-mortar assets to help finance their retirement, Mercer Human Resource Consulting said.
Mercer surveyed 670 people.
Selling a house to earn an annuity is unlikely to create the income that many people need, particularly if they have not put aside sufficient savings, the consultancy said.
“If people fail to save enough now and rely on selling their homes to provide an income they could be in for a nasty shock at retirement,” Deborah Cooper, principal at Mercer, said.
“For most defined contribution scheme members selling a home to buy an annuity will provide little income, if any at all, once rental or repurchasing costs have been taken into account,” she said.
An average house costing 173,000 could be sold to buy a pension annuity of 6,700 pounds a year after tax but the average annual rental cost of 6,800 pounds would wipe out such a rental income, Mercer said.
same story in the Netherlands, and you can’t blame the uneducated homeowners as the latest housing crash is already more than 25 years ago here, and most areas have had 10-15 years of strong (often double-digit), uninterrupted price growth. History just seems to prove that the sky is the limit for Dutch housing prices. So yes, many people here are convinced that their home will provide their pension even if they already have taken out all the equity. Also, there are other special constructions for older homeowners to extract equity from their home, like lease-back constructions etc.
I wonder how much the average speculator is going to lose, especially the one’s with multiple homes.
If they can hold onto those homes for 100 years or so they’re bound to go way up in value! The trick will be finding the next big thing so that they can cover that super-high debt load.
Yeah, I here some of those 1980 Tokyo condos are finally above water if you don’t count opportunity cost and carry cost. Another 70 years and the mortgages will be paid off, and the great grandchildren can rejoice.
“‘Housing demand reached a state of frenzy last year, driven by investors,’ said Rick Murray, a housing analyst at Raymond James & Associates. ‘With a flick of a switch, the investors no longer have an appetite for real estate.’”
News that prices are starting to fall might be expected to have a dampening effect on flipper enthusiasm.
They haven’t lost their appetite, it’s hard to eat when you are barfing all day. Caged rats ready to jump ship. Smart ass know-it-alls that took the late nite infomercial course on how to get rich quick, and now its dump city.
speaking of smart ass know it alls,i wonder how long till donald trump goes bk this time around.
I have a local observation of the construction slowdown around Boise. The sub I live in has a section of single-family homes with about 45 lots priced 250k-350k:
7 homes are for sale- none have sold in the last month
2 homes for rent- on the market at least a month
3 empty lots- no construction activity
3 homes slowly being finished
It is obvious the investor frenzy has died since activity in the sub has ground to a halt. The picture is the same in other subs around the area. I was talking with th president of the HOA and she said most of the SFH are rentals owned by investors; she has written a lot of citations for yards not being maintained, etc. She has even written up builders who have stopped working on new construction.
The writing is on the wall in Idaho- the party is over and prices are going to drop.
HOAs “writing people up” HA HA HA!
And sending the complaint to a drop-box in LA. Some fun.
350k for a lot in idaho.yeah id say prices will drop.oh but there is a land shortage in idahoe.
I remember in January 2005, I finally gave up waiting and decided to join the masses and buy a house in the northern NJ market. I looked at Realtor.com and all the other websites looking for something to buy. A few months later I was still looking and saw the announcement that 38% of all purchases in 2004 were 2nd home and investors. I remember thinking to myself that if 38% of the market stops buying, the market will tank and I’d better hold off on buying. Good thing too. The NAR announced this spring that 40% was 2nd home and investor purchases.
Rick Murray’s, “With a flick of a switch, the investors no longer have an appetite for real estate.” was exactly what I predicted.
Well guys, here we are. Nobody’s buying 2nd homes or investment properties anymore, so I think we can expect a 40% decline (tank)
seeing as I’m out of the lurking closest these days, I also wanted to add this perspective.
a 40% drop would correspond to a relative “return to mean”. however I’ve noticed with large scale market trends, that when things fall they tend to under shoot by another half of the return to mean drop
This would roughtly translate from a peak to bottom decline of 60% which considering how dependant the world has become on the US’s debt and how the US has become dependant on foreigners propping up the dollar, I think a 60% drop over a 3 to 5 year period is reasonable considering the massive global recession (depression?) we’re in for
-
you may find this tool useful to help find an entry point during the bloodbath -
http://www.files.bz/files/11251/RealEstateValuationMethods.xls
My own simple test will be as follows;
If you buy a property with 20% down and get a 30 year fixed mortgage mortgage at the prevailing rates, you should be able to rent it out for whatever that monthly payment is, plus taxes & insurance. If you can’t rent it out for anything close to that payment, the property is still overpriced. If your monthly payment is $2,500 and you can only rent it out for $1,500/mo, don’t touch it
Hence, my Model #2 is Price vs. Rent. my Model #3 is “Regression to the Mean”. Mean (Average Appreciation) over last 100+ Years is about 3.5% per Robert Shiller. Plug it in at a 1997 price and there’s your offer.
trouble with model 3 is that historically the mean appreciation is not really 3.5% yoy, but the inflation number plus a little bit extra. With the huge manipulation of inflation numbers over the last 15 years, there is no way to tell what ‘regression to the mean’ for housing prices is…
I agree with your theory, however one of your comments is very wrong. The world is not dependent on US debt, the US is dependent on the World’s credit.
Your idea on whether this could trigger a global recession is interesting, but on balance I don’t think so.
Japan is picking up nicely, China is going like a steam train, India growing much more rapidly than before, Northern Europe pretty healthy (watch out Italy & Spain though), Middle East awash with cash looking for a home (although they may steer clear of the US for a bit).
So my view is that this will be particularly unpleasant in the US - especially as investment by US companies goes overseas to more promising markets - but will not trigger a global recession.
Just my 10 cents / penny’s worth (which ironically could be quite an interesting USD GBP exchange rate…!)
Regards,
Loafer
The Chinese and Indian economies will go into a tail-spin if the US consumer capitulates. Western Europe will get hurt as well.
Exactly!
Toyota/Lexus/Scion, Honda/Acura, Nissan/Infiniti, Mitsubishi, Suzuki, Kawasaki, Yamaha, Sony, Nintendo, Pioneer, National Panasonic, Hitachi…
Do not forget Japan!
I think Northern Europe is just about as healthy as the US; they have a smoke-and-mirrors economy as well, with most of the gains based on housing (unlimited fiat money) and manipulation of the cpi.
“…a peak to bottom decline of 60%…”
**************************************************************
I hope we are that lucky. It was 90% in the 30’s and I worry that we are going to have an experience at least as painful as the Great Depression of the 30’s.
in the Netherlands a return to the mean for housing would already require a 85% drop (in nominal prices); add the usual overshot and 90% down seems an easy bet.
Of course, the ECB will make sure that that doesn’t happen by speeding up the production of their toilet paper, just like their FED friends are doing.
I Kid You Not…
ReMax is running a new national TV ad. At the end, it says:
“Visit ReMax.com. Now with more listings of available homes than ever before”
LOL
I saw that the other night and just started laughing. At least they were honest for once.
Saw it. Thought the same thing (at least they are honest).
Good one. People like all of us on this blog site will of course laugh. But I think the general public won’t realize what “more listings of available homes than ever before” really means. Most people do not understand the “law” of supply and demand and how price fits in. That includes a lot of people who coasted through beginning economics class in college.
It’s happening just like many of you all said it would. Nice job, Ben. Too bad it still has so far to go to unwind completely.
People still think my resistance to buying has something to do with lack of finances or that I simply don’t want the responsibility of home ownership.
I try to put it in simple terms: “Buy low, sell high.” For some reason, people think this is impossible with regard to houses.
So I tell them, looks like I managed to avoid buying high, what makes you think I can’t figure out when to buy low?
You can, even if you are not trying. Waiting until the papers are all lamenting what a terrible investment real estate is, then making a
side-by-side comparison of what you can buy or rent for the same $ should work well.
Not to be left out of the HB parade today…
Brookfield Homes net rises on land sales; outlook lowered
By John Spence
Last Update: 3:43 PM ET Jul 20, 2006
BOSTON (MarketWatch) —
Last: 23.63-1.48-5.89%
3:27pm 07/20/2006
Brookfield Homes Corp. Thursday said second-quarter profit rose 34% to $43 million, or $1.57 a share, compared with $32 million, or $1.03 a share in the year-ago quarter. The company said land sales contributed $11 million, or 40 cents a share, to quarterly earnings. Brookfield also lowered its 2006 earnings outlook to a range of $6.20 to $7.20 a share on slower homes sales. “After benefiting in 2005 from increases in home prices, in 2006 we are experiencing the impact of the long anticipated slowdown in housing markets, particularly in the San Diego and Washington, D.C. area,” said Chief Executive Ian Cockwell in a statement. The board also approved an increase in the stock buyback plan to $50 million. The stock was down 14 cents at $24.97 in late afternoon trade.
Recent news from Silly Valley (aka Silicon Valley)
Home prices climb higher
COUNTY MEDIAN HITS RECORD $770,000
http://www.mercurynews.com/mld/mercurynews/business/15080752.htm
“A home she recently listed at $685,000 in San Jose’s Rose Garden neighborhood sat with no offers for nearly three weeks, she said. The owners dropped the price to $649,000 and got multiple offers right away, selling it for $675,000. They would have taken $675,000 in the first place, she said, but no one bid low.”
“I couldn’t understand why people wouldn’t make an offer on it,” she said. “They’re used to that `list price or above.’ . . . They were afraid to negotiate it.”
Its no surprise many buyers are not told what the other bids are. Therefore the bid over ask is common. There is no transparency in this market. Seems very odd 685 list down to 649 and then up to 675. ???
If we had an open auction i doubt it would cet past 650K.
Psych 101.
The Jedi mind trick works on weak minds only.
Conclusion: Lots of weak minded buyers get fooled.
Conclusion: Lots of weak minded fools get bought.
From same issue:
South Bay rents rising fast
NEWLY AVAILABLE APARTMENTS SNAPPED UP IN HOURS
http://www.mercurynews.com/mld/mercurynews/business/15082237.htm
This despite plenty of R&D parks empty, thin weekend jobs section, no wage increases.
The merc is way off track….
“The average monthly rent in the area was $1,414. Palo Alto was the most expensive city at an average $1,929, and Campbell the least at an average $1,231.”
Since when is Palo Alto a bench mark for rental property…. rents in Cupertino, San Jose and Campbell are flat.
The press has been handed this meme and they ain’t gonna let go of it until the counter trend is obvious. It’s part of the realtor pillaging theory. Buyers are stubborn so they’re going to have to pay ransom to the rightful sellers in higher rents. Bow down to the might property owners, serfs.
“Buyers are stubborn so they’re going to have to pay ransom to the rightful sellers in higher rents. Bow down to the might property owners, serfs. ”
I’ll just continue having roommates. Bring on the war between greedy sellers and the buyers.
latest news [BHS] Brookfield Homes: Slowing demand in San Diego, Washington
Brookfield Homes net rises on land sales; outlook lowered
BOSTON (MarketWatch) — Brookfield Homes Corp. (BHS : brookfield homes corp com
Thursday said second-quarter profit rose 34% to $43 million, or $1.57 a share, compared with $32 million, or $1.03 a share in the year-ago quarter. The company said land sales contributed $11 million, or 40 cents a share, to quarterly earnings. Brookfield also lowered its 2006 earnings outlook to a range of $6.20 to $7.20 a share on slower homes sales. “After benefiting in 2005 from increases in home prices, in 2006 we are experiencing the impact of the long anticipated slowdown in housing markets, particularly in the San Diego and Washington, D.C. area,” said Chief Executive Ian Cockwell in a statement. The board also approved an increase in the stock buyback plan to $50 million. The stock was down 14 cents at $24.97 in late afternoon trade.
This looks really suspicious to me. They cut their SG&A expense from about 20 million to under 2million this quarter.
HOW?
Bye Bye salespeople and the expense accounts.
William Shakespeare (1564-1616)
Modern Version
from Macbeth
A dark Cave. In the middle, a Caldron boiling. Thunder.
Enter the three Witches.
Thrice the price has grown
Thrice and once the realtor chimed
Investor cries:-tis time! tis time!
Round about the city go;
With the poison’d ARMs in tow
Toads that wait to close
Days and nights of thirty-one
Swelter’d venom is what the got
This will boil them in the pot!
Bubble, Bubble, housing’s in trouble
Houses burn while while prices stumble
Fillet of investors make
Soon thier tempers boil and bake
Condo’s not so cute, tons of fog
Hungry cat, and starving dog
They’re a dork, and lower prices sting,
Sell the benz and wedding ring,-
The charm is gone and we’re in trouble
Like a hell-broth is the bubble
Bubble, Bubble, housing’s in trouble
Houses burn while while prices stumble
Sales are drag’on, damand went poof
Where’s my money, where’s my roof
Of the raving realty shark;
He is living in the park
lying blaspheming shrew
Tattered coat and slips of goo
sliver’d in the moon’s eclipse;
Knows he’s a jerk; with lying lips;
Dinners a pigeon babe
Ditch-deliver’d by a car
Make the gruel thick and hard
Add thereto some fb lard
For the ingrediants of our caldron.
Bubble, Bubble, housing’s in trouble
Houses burn while while prices stumble
Cooled it with a repo flood
Then the price was firm and good.
Flipper’s lament:
“Tomorrow and tomorrow and tomorrow
creeps in this petty pace from day to day,
as all my listings languish unsold with no offers,
and all our yesterdays have lit fools the way to purchase overpriced McMansions.
Out, out, brief bubble. Life is but a poor flipper who invests his home equity gains in speculative preconstruction condos and is then heard no more. It is a tale told by an idiot investor, full of sound and fury, and signifying bankruptcy.”
Good one, the bard would be proud;-) A realtor, an appraiser, and a mortgage broker walk into a bar. The bartender says: “What is this, some kind of joke?”.
Warren Buffett increased his already large stake in Wells Fargo earlier this year, he must be seeing something he likes there.
As great as Warren is or was.. His time is coming up. His wife passed away last year, and his thinking about his final years. One reason he gave his Billions to Gates. I dont think his mind is on WFB deal.
Warren’s “stakes” are often pretty complicated. Sometimes they are convertible bonds and other options with caveats that heavily favor him if the company doesn’t perform in the next 5-10yrs. I have not followed this Wells Fargo stake, is it purely stock with no catches? If so, the stake is probably small.
I would love to hear more actual FB stories. Especially those with multiple homes. The sadder the tale, the more entertaining. Especially if it has pictures. LOL - sorry for being morbid. But, it is well deserved for some of these specuLOSERS.
I recently visited my father’s birthplace in Germany. What an eyeopener!
He grew up 45 minutes south of a large German city(Dresden). In his small village many of the houses have been abandoned due to limited employment opportunities. Anyway, I saw a house close to his chilhood home which I found quite charming. It’s about 2000 sq feet, solidly built(1895) bricks and mortar,and does require some minor updates. Now 30 days later I am the proud owner of this house.
Price paid? 3000 Euro’s- as in $3720.
There are literally hundreds of similar houses for sale all over the former East Germany. I could quite easily get a similar paying IT job in Dresden as I have in SoCal, which would be a 45 minute commute from my new house.
Anyway the lesson I learnt from this, is just how out of whack the California housing market is.
A 50% correction would be an absolutely best case scenario( for homeowners).
Today,
Otto,
I live in the Western part of Germany. There are a few Americans I know of that worked in Dresden.
I read an article about East German housing prices last week. They are out of wack to the downside I think… Trouble is, no one wants to live in these small villages because there is nothing to do in the area. If you have an internet job, don’t have to visit the office and value the countryside: great. Although the countryside is often not what it used to be because of pollution and other problems. Reality is that most young people have been leaving for the last 10 years or so and that still continues.
3000 euros is a great price of course, that amount of money would be a 1.5% downpayment for a POS starter home in the Netherlands, a few hundred km to the West …
On the other side, in Spain there are some nearly-deserted villages where you can get a good home for free if you have a family (and sometimes, this even applies for illegals).
It’s no wonder their sales have gone down. Go to their website:
http://www.drhorton.com/
Pick a city and then look at the site plans and how many houses they have built and sold in the last five years. Classic pattern of over-building spurred on further by loose lending and speculation. They are toast, the market is saturated.
MIlpitas CA
800 sqft at over $560K…. geez no thanks
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