‘The Over-Heated Parts Are Seeing The Biggest Drops’
Some housing bubble reports from Wall Street. “We know how D.R. Horton deals with success. Now we’ll see how the Fort Worth company handles adversity. It won’t be pretty, it won’t be subtle, and it won’t be alone.”
“CEO Don Tomnitz laid out Horton’s strategy for retrenchment after the company reported its first-ever decline in business. Some Horton plans are standard-issue, like laying off workers and cutting overhead by $200 million. Others are industry-specific, including a major reduction in speculative homes and land lots.”
“It has also anticipated the housing bubble bursting, saying a downturn could work to its advantage. The company expects to pick up market share and perhaps some distressed competitors during a prolonged slump. Those plans are being tested.”
“Tomnitz said, ‘June absolutely fell off the Richter scale for us.’ Horton responded by canceling option contracts for more land, eating the earnest money and other fees. Now the division presidents are pushing land sellers, who had agreed to an option price, to reduce it. ‘It doesn’t make any difference whether we’re short [of] land in that market or not,’ he said. ‘We’re basically using the excuse that the market is softer across the U.S. Across the board, we’re asking for decreases in our land prices.’”
“Some land sellers are still in denial, and he wants the big write-off to send a message: ‘The first loss is the best loss, and we’re going to walk away if we can’t get the land price correct,’ Tomnitz said. Horton had 396,000 home lots, 43 percent of them secured through options. It plans to reduce that to 340,000 and get a 50-50 mix of lots owned and optioned.”
“Subcontractors will get similar treatment, as Horton tries to drive down costs everywhere.”
From Danielle DiMartino. “Many apologists for the housing industry remain insistent that because house prices have never fallen on a national level, they never will. Actually, they already have. Since the fourth quarter, median home prices have fallen about 1 percent, according to data Goldman Sachs mined from the National Association of Realtors.”
“The numbers are even worse for condos. The median price of a condo nationwide has been falling at a 9 percent annual rate since the fourth quarter of 2005, according to Goldman Sachs.”
“The average mortgage loan size is declining on an annual basis for the first time since 2001. And over the last year, the housing vacancy rate has risen at its fastest pace since data collection began in 1956. ‘Since excess supply is perhaps the most ‘leading’ indicator of market weakness, we would strongly caution against the assumption that the housing downturn is already entering the end game,’ Goldman added.”
The Chicago Tribune. “A summer swoon for the housing industry is creating some restless nights. The struggle to sell a home, even after cutting the price, provides a ready explanation for the Federal Reserve”s decision last week to hold interest rates steady. The glut of unsold houses has hit historic highs, with mortgage rates near a 4-year peak.’
“As the nation’s No. 1 driver of job creation, the construction industry can’t afford to fall much further before other sectors of the economy feel a pinch.”
“‘Home building continues to decline, amid slowing sales and rising inventories. The overheated parts of the country, which include California, Las Vegas, Phoenix, parts of Florida and the Northeast, are seeing the biggest drops,’ said economist Lynn Reaser, of Bank of America.”
And a fund had these comments in their third quarter report. “The real estate bubble, whose existence had been denied for some time, primarily by those who stood to and did profit mightily from it, has clearly popped. Around the country, inventories of both new and existing unsold homes have hit five-year highs. Builders have adopted any number of ‘incentives’ to clear out inventory and batten down the hatches.”
“Falling house prices, coupled with the increase in interest rates, have deprived many consumers of their last source of ready liquidity; the home equity and mortgage refinancing combination that many used as a giant piggy bank.”
“In addition, a considerable number of home buyers opted for once-attractive adjustable rate mortgages, which are now adjusting upwards rather dramatically. Given these factors, it is easy to see that discretionary consumer spending is at risk.”
Thanks to the readers who contributed to this post.
One sent in this:
‘NEW PLAN: Florida based Del American, developer of Vegas Grand luxury condos on Flamingo Road at Swenson Street, has changed its business plan for the 8.6-acre site next to the Palms that was originally planned for Vegas 888. The developer now plans to build a mixed-use luxury resort hotel-casino.’
I love how Chicago points to Florida, Las Vegas, Phoenix and California as the places that will see price declines. Implied message “…but not Chicago”
Yeah, we’ll see. Mina
1st stage - NO BUBBLE
2nd stage - Bubble other places BUT NOT HERE (insert city)
3rd stage - Soft landing here, hard landing other places (inseert city)
4th state - Brother can you spare a dime!!!
lol, you’re right on
You hit the nail on the head Mina!
We won’t crash as hard but we will crash.
There are multiple bubbles surrounding Chicago but almost everyone here won’t even speak of the elephant in the room.
I was in Chicago last weekend and bought a Chicago Tribune.
There were 4 real estate sections in the paper. By the looks of the prices, which are about 75% LA value, I would say YES CHICAGO IS IN A BUBBLE AND PRICES WILL FALL.
From the looks of it, denial is still in full effect. LA is passing the denial phase.
Shhhhh….if we don’t talk about it nothing bad will happen.
You can bet when I’m in the market to buy a home from one of these builders I’m going to give them the same spiel as Mr.Tomnitz is trying to give the land owners. Cut your prices or I’ll find someone who will. I also want passive solar and 6″ exterior walls. I don’t want one of those obscene energy hogs they’ve been pawning off on us lately.
At least land doesn’t wear out like a crappy house. Maybe I’ll just buy land and build the house myself, it’s not rocket science.
It might actually be a good way to bring down the cost of housing without hurting the economy to much. If the builders can steadily bring down the cost of new homes, they can keep people working . Instead of having the whole market lock-up and crash. It’ll suck for the people that bought the last few years, but it may help this slowdown from turning into a national crisis for us all. I’d rather be a little more patient than be afraid for my job, when the time is right to buy.
JMO
anyone fly over cape coral fl- for years thos empty , lots = spooky
Lots alone in our area (Portland, OR) were going for OVER 80K! Unbelievable. Then add in all the “because we can” fees and you’re easily over 100K and haven’t even driven a nail yet. I visited my old neighbor the other day and the guy on one side had a mobile home ripped out and is “cattle prodding” 2 duplexes in post haste before anyone gets a chance to complain! I will give this specuvestor a LITTLE credit. At least he’s trying to “shoe horn” an additional dupe in there to give him a shot at generating “some” positive cash flow. Once liquidity dries up, there’ll be plenty of land.
Buildable lots in California cities/coast go for $300K to $800K+. The anti-growth NIMBYs disguised as environmentalists put up all sorts of barriers to development.
It can get a lot worse! California lots (near the oceans or big cities) go for $300K to $600K or more! Incomes are modestly higher than Portland, but not anywhere near 4x higher.
Don’t forget permits and fees, which in my neighborhood add to 50k to build a single house.
Did someone say the RE market was over-heated? It might be running a little hot, but no fukkin way is it over-heated. Geez, that kinda talk really frosts my cake!
According to Mr. Greenspan, the useless babbler from FED-land, he said he was seeing “a little froth” in some markets, but that was no concern to the overall landscape.
Nothing to worry about.
I guess me and Greenspud are on the same page here.
Nothing to see here, please disperse.
Ah…the genius who touted ARM’s as a great cash management tool. I remember him…
Bubble, what bubble? …bitter renter.
“…borrowers are in such bad shape, they’re barely able to make their first couple of payments, ”
http://www.moneyandmarkets.com/press.asp?rls_id=381&cat_id=6
The effect of falling home prices on the economy, as per The Daily Reckoning:
The gods have gone over to the other side.
What is happening is that trends that worked so beautifully on the upside
are now slipping into reverse.
People still watch Fed policy setters as if it were a live sex show. They
don’t want to miss anything. But the thrill is gone. The magic no longer
works.
The most important of these is the housing market. When house prices were
rising, homeowners enjoyed what economists call a “positive wealth
effect.” Interest rates fell. Housing boomed as more and more people went
to work in the industry; 20% to 40% of all new employment in the last five
years was in the housing sector. As everyone’s house rose in price, people
felt richer and spent more money.
But now house prices have stalled…and are beginning to slip back.
From Dallas comes news that house sellers are offering incentives such as
free maid service, swimming pools and appliances - whatever it takes to
move stuck merchandise. The trouble is, after ten years of boom
conditions, there’s a lot of merchandise to move. And much of it is not
really suited to buyers’ interest.
For ten years, people have bought expensive condos, for instance, not
because they really want a condo…but because they think it is a way to
magnify the wealth effect. The more condos they own, the more effect they
get.
Or, they might have decided to get more bang by putting up more bucks. A
buyer signs up for a plusher, pricier house than he really needs,
realizing that the wealth effect is proportional to the investment.
Property, he sees, has been rising at 20% per year in many areas. Twenty
percent of $1,000,000, he tells himself cannily, is more than 20% of
$500,000. So he buys the million-dollar home, even though he really
doesn’t need it.
But now that that 20% per year froth has disappeared, homeowners no longer
have an interest in more house than they need.
“Homeowners say ‘downsize me,’ reports Reuters. It costs money to maintain
a house. Property taxes, heat, mortgage payments and maintenance are all
proportional to the size of the house. With nothing to gain, people
naturally want to cut out the unnecessary expense.
The positive wealth effect has gone negative. The more house you own, the
more it costs you to hold onto the house…and the more you lose when
house prices go down.
Meanwhile, the homeowner is also getting squeezed by higher interest rates
and higher fuel bills. “Gas prices inch up to another record high,” says
an AP report. The national average rose to $3.03 last week.
Now our hapless consumer is in a bind. His real income is flat or falling,
while his expenses are starting to rise. He has to cut back. Naturally,
the first thing to go will be the house he doesn’t need, which makes the
negative wealth effect even more effective - and even more negative. Not
just for the seller, but for everyone else. Every house sold at a discount
drops the value of all equivalent housing stock - even for people who
don’t intend to sell. All of a sudden, none of them are as rich as they
used to be. They, too, cut back their spending.
We know what the Fed will do once this trend builds up momentum: cut
rates. But by then, the magic will have gone. And no matter how many
passes in the air the magician makes, it will not come back. For, if the
Fed really could manipulate the economy any way it chose, we need never
have worried. It could have jerked the economy around like a puppet on a
string. Want faster growth? Just cut rates. Want less inflation? Just
raise them.
But there comes a time when financial officials can fondle rates as much
as they want; they will never get the response they’re looking for.
As Nouriel Roubini explains in last week’s Financial Times:
“Once the housing and consumption slump starts, demand for durable goods
becomes interest-rate insensitive. Indeed, the recent housing bubble has
led to a glut of housing stock, consumer durables and lingering excess
capital capacity in the rest of the economy. Thus, as we saw in 2000-01,
the housing and consumption slump will dominate any monetary easing effort
by the Fed.”
The Fed can chirrup as much as it likes; lower rates simply won’t reverse
the negative wealth effect of a falling real estate market. Mortgage rates
may go up or they may go down (the Fed only controls short rates), but
people won’t borrow at all if they sense they will have a hard time making
the payments. This is because the old star-spangled circus magic has
turned into black magic…a kind of voodoo economics curse, where the
tricks all go wrong: The magician pulls a rabbit out of his hat and it
bites him on the nose. He saws his pretty assistant in half and finds her
actually cut into two bloody pieces. And the ace up his sleeve turns out
to be an Old Maid.
It is what happened to Japan in the 1990s. Could it happen in the United
States?
We don’t doubt it.
Dawnal — great article. Thanks for posting it.
It is refreshing to read that I’m not the only one who sees the financial train wreck coming over the hill.
Good article. I’ve been banging on that same drum for quite awhile now. When a borrower goes into default practically right out of the gate I tend to think it’s more the lender’s fault than the FB. Let’s have no illusions here, both (along with the poor investors) are in a pickle here but there were so many warning signs along the way it’s just inexcusable.
let’s see, no down payment, no 1st, 2nd or 3rd payments means what? what’s the guy’s point?
Death_spiral,
Well, if all I wanted to do was find someone that couldn’t make payment ONE I could just pull some guy off the street, right? My question is why aren’t these guys being investigated. I mean come on! You wrote a loan for a dude that is already in peril after just a few months? These guys should be charged back for their commissions!
Let’s see you find any of that commission money. These jerks are up to their eyeballs in debt too.
Great article, I was laughing while I was reading as if Gary Larson wrote it.
The DRHorton news is a hoot. So now they’re trying to squeeze the people that they optioned land from - but raw land doesn’t cost much to own, so unless the landowners are speculators also, they can tell Horton to take a hike and keep the option money.
They’re also trying to squeeze their contractors, let’s see how that turns out - wanna bet they have quality problems on every structure they finish from now on?
Horton is acting like they’re on the verge of BK.
“but raw land doesn’t cost much to own”
It may not cost much, but the costs do exceed the income that flows from raw land (ie almost zero).
Not necessarily true in the exurbs, though, where “vacant” land is often put to agricultural use.
Perhaps, but it hardly pays for itself. I don’t know any small-time farmers able to turn a real profit from the land. (It takes a *serious* amount of hard work). We have some silly land-floppers here in the Northern VA exurbs. (Grabbed it in 2004-2005 and re-listed for 100% more). The land isn’t moving just like the rest of the stuff, prices are being lowered, and the floppers can’t exactly rent it out!
Not to mention the financing costs!
You mean they speculated on RAW LAND with “hard money financings”?
Let’ see 12% interest, +3-6% default interest, 5% taxes, & the buyers are trying to squeze you… Heck let the property go!
And elliminate the aggravation!
One thing about raw land…..it’s been that for a while….say 5 billion years!
Horton is acting like they’re on the verge of BK.
_______________________________________________
I said that on this board many many months that one of the big boys was going down and I was openlyu criticized as not understanding how these guys were doing it different this time around. There business model is to build homes and when they can’t build them for a profit or at all their massive debt loads will crush at least 1 of the top 10 builders!!
D. R. Horton = I. M. Shortin
Right, all the public homebuilders have the same down-cycle strategy; buy out the folding competitors. Only problem is, somebody has to go!
exactly…they have no down-market strategy. That’s why so many will end up closing shop.
MC - that is the strategy!
Get out of business before you lose everything!
The good builders know it and react!
The flunkies try to stick it out!
There may well be mergers on the downswing, but that doesn’t mean the whole sector won’t shrink a lot.
1 - Some Horton plans are standard-issue, like laying off workers and cutting overhead by $200 million.
2 - “Subcontractors will get similar treatment, as Horton tries to drive down costs everywhere.”
3 - The glut of unsold houses has hit historic highs
4 - “As the nation’s No. 1 driver of job creation, the construction industry can’t afford to fall much further before
I smell job losses and a much slowed economy…except here in CA!
Except in Ca. LOL. When will someone outside of this blog say that there town is going down and anyone in the RE daisy chain is rat -fucked!
…well, maybe in parts of CA, but not in the thriving metropolis of Los Angeles…well, maybe in parts of LA, but not here in the South Bay….well Hermosa might be affected, but not Redondo…OK, maybe North Redondo, but not South Redondo, at least not in the Riviera section, not down by the beach anyway…not here, no way.
anything within 1 mile of the beach will be spared. Everyone knows that.
doubt it…it comes down to affordability and $1M plus houses arn’t affordable.
MC,
Homes within 1 mile of the beach have never, I repeat, never gone down, and always go up at least 10% per year. Go look it up.
Hahaha… I love it. There’s a realtor in downtown Manhattan who tries to spin the same story, all while the numbers already are supporting a 4-5% price drop from last year.
Too many newbies here I guess. I was kidding! Henceforth I promise to write “(sarcasm)” after every such post.
wow, WAY too many people reading posts literally.
We must have some new people.
Don’t with the (sarcasm). It works either way, and I’m loving it!
Judicious1,
LOL! I’ve been having to endure comments not unlike that for about 2 if not 3 years now! Over at patrick’s it’s usually comments about the BA but I get the idea. I’ve even had to put up with perma bulls that were so painted into a corner the argument became mired into “specific streets” and even particular homes just to show there weren’t actually price declines. It gets pretty silly. Thanks for the chuckle though, loved it.
It’s different this time !! hehehehehehehehe
Where did you get the #’s from Crabtree for declines?
Once again for all the RE bulls out there…Nice and slow…There is no one left to buy your overpriced P’sOS! You have sucked all the subprime borrowers dry and everyone with any common sense is just waiting to buy that 900K home for 300K.
Does anyone here know where i can access a history of the ratio between median household income vs median home price for california, or for that matter specific counties in SoCal? I would like to see how previous generations ratios stack up to today’s ridiculously overpriced arena. I mean, how f$%&ed am i really, will the dream of home ownership forever be this elusive.
pigginton.com should have that info for many regions of CA.
I have read that the median home price historically is 5X median income in California (3X nationally). Currently it is 8X median income. I don’t know what the median income is but I would bet my last dollar that eventually it goes back to 5X income, probably less before its over. So you’re staring at a market that is probably about 35-40% overvalued. The only way this bubble doesn’t correct is if we see hyperinflation, in which case, it won’t matter anyway.
the median household income in CA is somewhere around $52K and the median home is $575K. More like 11X.
Hyperinflation can still be a correction!
It may be a correction of wages rather than house prices…
thanks for the lead. i want to see a graph (i just love visuals) tracking a ratio over as far a time period as possible. i would love to track this ratio as the current cycle winds down, or should i say spirals down…or careens down (even better)…
My educated guess is raw median price figures by state are available at OFHEO’s web site — The Office of Federal Housing Enterprise Oversight, http://www.ofheo.gov. They have the most “official” home price data, though it’s also collected nationally by the National Association of Realtors (existing homes) and the Census Bureau (new homes). Speaking of Census, median household income by state should be available at their web site. Try http://www.census.gov
Many apologists for the housing industry remain insistent that because house prices have never fallen on a national level, they never will. Actually, they already have.
We are witness to history in the making.
We have been all along.
“Subcontractors will get similar treatment, as Horton tries to drive down costs everywhere.”
Look for a glut of 4×4 trucks, ATVs, snowmobiles, and boats coming to the market if subcontractors get cut and can’t afford the payments on their toys.
Brandon,
WOW! Wouldn’t that be refreshing for a change? But then again people that build million dollar homes on the waterfront and idiots jamming on jet skis at 8:00am SUNDAY MORNING deserve each other!
A buddy of mine is in the Harley business and sales last month were down $80,000. To top it off they just built a new building for $7 million.
Vroom Vroom!
How many bikes is that, numbers and percentage-wise?
For all of us waitnig and watching, the cash crunch is coming. Orange COunty Credit Union is offering 5.8% on a 5-month CD. The only qualifiers are new money (you can have an existing account, but this needs to be new money coming into the bank) and auto pay deposit or automatic bill payment. I saw the cash crisis coming months ago when I told my wife that Countrywide was offering 5+%. I knew then that all these banks have lent way more than they should have and probably more than they have in reserve.
As a side note and this is a scary one. My wife used to work as the bookkeeper of the church we attended. One day I went to lunch with her about 3-4 years ago and took her to one of the banks the church used (Washington Mutual) so she could get a cashier’s check to deposit at another bank the church used. The amount she needed was $125K. The teller said that even though the money was in the account and everything was fine, she could not issue the cashier’s check, meaning the bank would not issue a check that another bank could honor on the spot as the money needed to be transferred that day. Long story short I asked the teller if the bank even had that much money on hand and she just looked at me like I was from Mars. I can read between the lines and I know what that meant. NO WE DON’T HAVE THAT MUCH MONEY ON HAND!!!!!!!!!
The day my bank can’t cut a check for six figures on the spot is the day I go back to stuffing the old matress.
How long did it take for the bank to finally issue the cashiers
check?
I felt the same thing (and posted about it here in April) about a credit union that started a 5 month, 6 percent CD special for “new money” only. I decided not to go for it thinking that they must need cash badly.
From Chay (Charles) Schwab, 90 day cds 5.3 and up. They are offering a great selection of CD’s, MM, and you can buy T-Bills direct with no markup at actual auction rates.
Try taking out five figures worth of actual green stuff — BofA made me wait a week (and claimed it could take two).
Most branches don’t keep much cash on hand anymore. That’s a result of both reduced use of cash/checks by most people for spending and the drive for efficiency. A bank with $500 million in assets that keeps $100,000 on demand at say 100 branches would have to make almost 10 basis points (0.1%) more on their interest rate spread than one that keeps $10,000 on hand.
First off, this was Washington Mutual, so we are not talking about some local savings and thrift. Second, for Russ, they did cut a check on the spot, but it had some dopey stipultion of 5 days or something for clearing. Yeah and everytime I send in my payment to the gas company I tell them to wait 5 days for clearance. I love how banks and financial institutions pull this crap all the time and then can’t give everyday citizen a break on a bill even if it is 1 day late. Like the double standard. I can’t wait to see what happens when the wifey and I pull that matured CD out in 6 months and switch to another bank with much higher rates. I am sure the credit union will grasp that check tightly before letting it go to us. They love to get the money, but they don’t like to part with it unless it is a subprime loan. Just don’t ask for a check or cash.
The Grapes of Wrath. A great movie about how the Banking industry screwed America. They are doing it again.
Too bad Congress was paid off to scrap the usury laws. We need them back.
Make sure you go see “Freedom to fascism” when it comes to a theater near you. http://www.freedomtofascism.com for screening schedule
auger-inn,
Did you check out “V for Vendetta”? Just picked up the DVD and it was excellent. Who was it that said “He who sacrifices liberty for security deserves neither”?
Benjamin Franklin.
Ben Franklin
Have any of the lenders/brokers heard anything more about the Fed guidance that is supposed to be coming soon? I’ve heard that it is supposed to go into effect on Sep. 1, but there just doesn’t seem to be any info out about, and what effect it will have on lenders doing no-doc and other similar type loans. Any info is greatly appreciated, as tighter lending standards will make this correction happen a lot faster, what with the $1.5 trillion (at least) in loans due to re-set during the next 18 months.
“June absolutely fell off the Richter scale for us”
Tomnitz, CEO DR Horton
Its about time an industry CEO capitulate. More importantly, its about time we got some truthiness from a housing industry leader.
Invariably however, I am still short the entire industry.
The cash crisis thing is scary.
Cash itself is quite the conundrum. On the one hand, the amount of paper money could become quite scarce. On the other hand, the amount of digital money could simultaneously skyrocket. What to do, what to do…
Also, it really cracks me up when people talk about the safety of T-bills, savings bonds, muni’s, etc. It’s all just government issued paper. When the SHTF, it could all very easily be toilet paper.
That’s what I worry about. I think the system of credit, derivatives, etc. is so complex and pervasive nowadays, and so dependent on liquidity, that when we get a sharp pullback (which may be almost here) everything will just seize up. Like the early 30’s, but even faster. A lapse in liquidity just feeds on itself, as time-dependent derivatives’ values become unknown, asset prices become unknown, balance sheets can’t be computed, almost no one has cash, and there just isn’t time to sort things out. Most likely outcome, I think, is that the Fed guarantees an unbelievable amount of debt, and the dollar becomes nearly worthless. If this plays out, homeowners who’ve held on may come out alright. Precious metals owners definitely will.
Might sound crazy, but don’t underestimate the force of virtually everyone pulling back at once. And the greater the overall amount of debt, the more likely and powerful that becomes — at some point.
When everyone on all levels is playing the same game, there’s not much to actually go around. It eventually comes crashing down.
Everyone looks rich on paper right now, but in reality they are all sharing a finite resource.
…kaboom!