Builder Confidence Suggests Industry Is ‘Rolling Over’
The homebuilders association has this out today. “Reacting to what they perceive as increasing consumer uncertainty regarding the market for new single-family homes, builders tempered their views on current and expected sales activity in the Home Builders Housing Market Index for August, released today. The HMI declined seven points to 32, its lowest level since February of 1991. This was the seventh consecutive month in which builder confidence, as measured by the index, has fallen.”
“‘Two big factors are coloring builders’ perceptions of the market right now, rising sales cancellations and substantial growth in inventories of both new and existing homes,’ said NAHB Chief Economist David Seiders. ‘These factors are largely the result of an increasing number of potential buyers adopting a ‘wait-and-see’ attitude because of uncertainty about where the housing market is headed. We’re also seeing an anticipated withdrawal of investors/speculators from the market.’”
“Builders in all four regions of the country are pessimistic about the market. In August, all three components of the home-builders’ index fell. Current sales index fell to 36 from 43, the expected sales index dropped to 40 from 46 and the traffic of potential buyers’ index fell to 21 from 27.”
“Housing starts have fallen about 18% since the peak at the beginning of the year. New-home sales are down about 17% from the peak last July. As housing slows, employment in construction, real estate, banking and related retail sectors has also weakened.”
“‘Builders are pulling out the stops in terms of incentives to try and keep inventories down, but it’s a pretty tough battle at the moment,’ said Seiders. Real estate speculators, who flocked to the market in recent years, are also abandoning their bets in droves, adding to builders’ supply, Seiders added. The NAHB’s Seiders expects industry weakness to worsen before it improves.”
“Inventories of unsold existing homes have jumped 39 percent in the year through June. The slide in builder confidence suggests the industry is ‘rolling over,’ Joseph LaVorgna, Chief U.S. Economist at Deutsche Bank AG, said.”
From MarketWatch. “ECC Capital Corporation, a mortgage finance real estate investment trust that originates and invests in residential mortgage loans, today announced (a) loss for the three months ended June 30, 2006 of $18.6 million including accounting adjustments to increase reserves $16.4 million for expected losses on repurchased loans and to mark certain loans to the lower of cost or market.”
“In addition, during the second quarter of 2006, ECC Capital disposed of certain aged and repurchased inventory at a significant discount to par, which resulted in an overall loss on sale of loans.”
“Shabi Asghar, CEO of ECC Capital said, ‘Unfortunately, overall results were negatively impacted by an increase in repurchase claims related to whole loan sales made in prior periods. We are currently in the process of managing through these claims. We’ve resold a large portion of these repurchased loans, but at a significant discount to par.’”
The LA Times. “Reflecting the slowdown in the nation’s housing market, more U.S. banks reported weaker demand for mortgages in July, the Federal Reserve said Monday in a survey of senior loan officers.”
“As the housing sector cools from its torrid pace, the Fed found that about 60% of respondents saw weaker demand for mortgages, which was ‘a significantly larger net fraction than in the April survey,’ the report said.”
“The Fed also asked about the performance of so-called nontraditional mortgages, such as interest-only mortgages. ‘Nearly 30 percent of banks, on net, indicated that they expect the quality of the nontraditional residential mortgage products currently on their books will deteriorate somewhat over the next 12 months,’ the Fed survey said.”
“‘Builders are pulling out the stops in terms of incentives to try and keep inventories down, but it’s a pretty tough battle at the moment,’ said Seiders.”
Builders’ conundrum: Pulling out all the stops in terms of incentives effectively reduces the price. But if prices are falling, a buyer would do better by waiting to buy until prices stop falling. Who wants to catch a falling knife?
Wait till they see JULY fugures…these guys are a dollar late and a dollar short. Bloodbath after Labor Day!
“Inventories of unsold existing homes have jumped 39 percent in the year through June.
Exactly. This is what we’ve been saying all along. A lot of people have said that the RE bust would resemble the dot-bomb, where there was a lot of knife-catching and “buying the dips.” However, it’s a lot easier to buy the dips when you’re working out of some brokerage account and you fancy yourself a nimble trader or investor - timing the bottom or trying to dollar-cost-average. I doubt very highly that this theory applies to the typical RE buyer (non-flipper.) Besides, now that appreciation is negative, the flippers are gone and everybody else (80% home ownership rate) already bought. Are we to believe that this huge glut of inventory can be absorbed by move-up buyers and ever-elusive first-time-buyers?!?!
Where did you hear 80% homeownership? I thought the latest statistic was 69%.
Just got off the phone with a borrower who finally got it. After opening her eyes, she realized she was about to purchase an over priced peice of crap in a new development in Fernley NV (about 40 miles east of Reno) It was going to be an investment property, and yes, she had never even gone out and visited the development until two weeks ago (she’s been in contract for 5 months) Upon visiting the site she saw a for sale sign on every other house of the previous phases, then found out from the locals about all the cancellations. Fortunate for her is the builder has taken too long and is currently out of contract, not that she had a big deposit ($1000). So she’s bailing out. The interesting thing is the builder just called her and told her to “throw him a number”. So she calling me to get an opinion. I tell her if the builder is telling you to “throw him a number”, what does that tell you? Desperation time! She going to tell the builder that she’s going to put her money in CD’s, were she can a least make 5% on her money, and reanylize in 6 months. (for he record, when I pre-qualified this borrower 5 months ago, I threw a bunch of warnings her way about that area. She didn’t want to hear it the time. Of course, when she just called me, she asked how the hell I knew. Ummmmm, I was paying attention?!!! Yeah, maybe that’s it)
Yeah, like this has been all ONE BIG SECRET! lol.
Yeh i get that!
“who knew??”
Are you kidding me!
“Rolling Over - so a 32 on the homebulder index is just rolling over….I would hate to see what collapse would be in this guys vocabulary! (the index referred to in the article is the one of 5 lowest points on the index since 1985….
Maybe we just hit bottom only 9-10-11-12 months from the top?
NAH - just kidding!
Don’t want anybody to cart me away in a straight jacket for that “bottom” remark!
Your a hell of guy nnvmtgbrkr. And I’m not being sarcastic.
Have her offer the guy 50%!!
I mentioned 20% -30%, but she’d rather slide off into the sunset rather than sending the builder into a fit of rage that ends with him on an over-pass with a deer rifle. I imagine that will be the outcome anyway, but she just doesn’t want to be the one who triggers it.
Not to be overly cold-hearted, but I’ve seen builders take 20-30% off asking and live to build another day. In recent times, margins have been rumored to be at record highs, not razor-thin. Less that 20-30% is not low-ball, to me.
He probably paid 10k/acre, 5 lots per acre, offsites and fees 20k per lot. Wet back labor, $100/ft. Figure it out. Good mtg broker for a change.
Chip & nnvmtgbrkr,
As you may know - I am looking to buy in the Tampa area. Cannot rent as my wife doesn’t want to move our daughter multiple times, etc. Don’t say to convince her, it’s just not happening. Will be using “bubble money” of my own from my sale at the top to make a 25 - 35% down payment on my purchase with a 30 yr. fixed (or 15 if my numbers work out as best I can) & keep at least 2 yrs. worth of pure cash in cd’s as a buffer for possible bad times, this besides our 401K’s .
What if I told you that I have a major builder ready to capitulate to the tune of a 20% markdown (was 360K I worked out 290K) for 2600 cooled sq. ft. with my choice of upgrades. They will pay my closing costs & buy down my rate to 6.00% fixed??? Utility value of this home would be at least 1300 - 1500 / month for renting. My PITI nut at 1600 and change.
I wouldn’t have even thought of trying to negotiate a deal like this if not for my learning on this blog, but if you have to jump - I think this is my deal. Everything I want,on MY terms. Although I feel there is still downside risk in the bubble for me, I feel like I can offer price support in the Tampa market at $108 per sq. ft.
Whaddya think?
PITI nut = rent *1.10 is apparently a good judge of a good deal. And $108/sqft is good too, from what I’ve seen on here.
Don’t take my word for it though; my specialization is in Engineering Physics.
He probably paid 10k/acre, 5 lots per acre, offsites and fees 20k per lot. Wet back labor, $100/ft. Figure it out. Good mtg broker for a change.
You know, a lot of us are fed up with illegal immigration from Mexico, and we’re trying to get the politicians to stop it, and we’re trying to get the MSM to stop with the semantics of “undocumented workers” blah blah blah. When assholes like you nonchalantly toss out slurs like “wetback,” it sets us back.
why?
the “why” landed in the wrong spot!
My question was:
Why offer at all? - demand the deposit back!
A bad deal is a BAD Deal, she should count her blessings and run {don’t walk!} away.
50% ???? remember we don’t want to over pay.
Sir, you are a true gentleman. I hope this person realizes how lucky she was to run into you. Wish you could do biz in FLA.
I was doing a little research today on the homebuilders, pick any one you want. I was shocked at the quick ratios i was coming up with each one, gadzooks…the amount of inventory they are carrying on their books relative to their current assets is astounding. absolutely amazing.
as this bursting bubble and related slowdown becomes more protracted…this could just get very ugly for shareholders.
No wonder builder confidence is waning.
They have been in a precarious cash situation for some time, yet they continue to buy back hundreds of millions of dollars in company stock. And this was during the supposed ‘good time.’
WCI Communities was upgraded by JMP Securities. JMP cut their 2007 earnings estimates on WCI to a negative seventy-five cents per share. The only thing in the reasoning for their upgrade was they saw WCI as having the ability to “remain solvent”. An upgrade on the ability to remain solvent? It is “tech-bubble revisited”. The analysts are just as irresponsible in 2006 as they were in 2000.
great.
i counld´t find the reason for the upgrade.
this is a joke
http://www.immobilienblasen.blogspot.com/
Yep. The builders are taking the train to the place where webvan rests now.
buying back stock props up the stock price so the insiders can keep selling stock grants and options.
Ben,
Is this your guess for why their share prices often rally on bad news release days? I still find this puzzling, but will stay away from the tinfoil hat theories, as we have already beaten them to death here…
Then they exercize the executives’ options at a greater profit.
most of their assets are inventory. what’s so amazing?
A report today on CNBC was about writeoffs of land by Homebuilders at the end of last quarter- DR Horton $57 mil Pulte $62 Mil (& 25 mil this quarter already) NVR $26Mil Centex $23Mil & Lennar $22Mil
“We’re also seeing an anticipated withdrawal of investors/speculators from the market.”
I’m not sure which is more laughable: that they’re calling a mass exodus a “withdrawal,” or that they claim to have “anticipated” the withdrawal. Sure you did.
i still get three calls a week from encore offering 100% investor loans, ficos down to 540, etc. aggressive selling while the house is burning, typical.
Who would buy this crap in the secondary market? Looks like the buyers of this crap are starting to disapper - they look to have taken some writedowns.
Noone - it’s mixed in with a higher grade loans. The packages are sold on the international market where the details are lost and only the statistics like averages are known.
What will be interesting is when Fitch and Moddy’s have to start downgrading these loan portfolios. These companies make their money from institutionstha tinvest in the loan portfolios, but if they downgrade then they will be hurting the institutions financial statements, thus PO’ing these co’s that pay them…
If I were an institutional investor, I would also be PO’d at them for valuing portfolios as being say “Alt A” paper when they were really C+ to D- credit-worthy, on the front end.
What happened to the Fed guidance that was supposed to go into effect this summer regarding no-doc and other similar loans? I haven’t heard anything about it in awhile, but I thought it was supposed to go into effect on Sep. 1. Anyone know what the status is and what effect, if any, it will have on lending standards?
It may turn out to be pretty much moot. A bit like telling a kid not to stick his hand under hot water — after he’s done it. The bag holders seem to be catching on all by themselves.
Wall Street Journal story today said the OCC expects to issue that guidance in the next 30-60 days, if memory serves. But as I’ve pointed out before, it’s closing the barn door long after the horses, the cows, the sheep and the farmer’s daughter have all done and run away.
The article on p. 2 of today’s WSJ mentioned “sixty- to ninety-days” until guidance is released, if memory serves. I am guessing it will be too little / too late, when-and-if it is released.
It’s B.S. to make it look like the Fed actually gave a sh*t. They caused this to begin with and now that the sh*t is hitting the fan, they don’t want it to come back to them so they take the advisory position and give some very vague and verbose guidance written in legalese that no lay person will understand anyway.
Dataquick has a release out today, and I have copied the paragraph below from the release. Hmmm, now where did I read exactly this same concept, only about 9 months ago?
“Our sense has been that many who bought homes in recent years purchased them sooner than they otherwise would have because of very low interest rates and a great sense of urgency, given the fear of being priced out forever or missing out on a great investment. That phenomenon helps explain why there’s not more demand today.”
http://www.dqnews.com/RRSCA0806.shtm
We have been saying that very thing on this board since the board’s inception and for a longer amount of time on other real estate sites. Record home ownership numbers bear this truth out.
This just in:
‘On the same day a report showed the confidence of U.S. home builders collapsed to a 15-year low, Bank of America and National City executives offered their own bleak views of the real-estate market and economy on Tuesday. The executives didn’t waste time debating whether real estate and economic growth would continue to deteriorate, instead presenting their banks’ defensive strategies. ‘There will be a slowdown,’ said Eugene Godbold, president of commercial real estate lending at Bank of America, speaking of both residential and commercial real estate. ‘The question nobody knows the answer to is how far will it dip and how long will it last.’
‘Capitalization rates, which measure how fast a real estate investment pays itself off through the income the asset generates, remain at an all-time low. But “this doesn’t make sense mathematically,’ Godbold said. ‘They’re going to have to go up’ as energy and insurance costs on real estate properties have soared.’
‘The BofA executive said his division began taking defensive measures last summer such as cutting back on its land advances to developers and keeping tight debt-to-cover ratios.’
‘The housing bubble seen in U.S. real estate over the past few years was fueled by the Federal Reserve taking interest rates down to historically low levels, encouraging investors seeking for high returns to borrow and to invest heavily in high-yielding assets.’
Who cares about ‘Builders Confidence’ - we have ‘Consumer Confidence’ and will continue to spend our way out of trouble.
So BAy, apparently you haven’t seen the ABC consumer confidence data tonite!
minus 15 not a 15 year low, but certainly not in positive territory either.
Please make a stop by http://www.safehaven.com / article 5640
US Savings rate deficits - Only 13 years, since the FED began watching out for us in 1913, has OUR US Savings Rate been negative, 7 were in the last 7 years.
Pass the “kool-aide” or “rum”, please matey!
But “this doesn’t make sense mathematically,’ Godbold said. ‘They’re going to have to go up’ as energy and insurance costs on real estate properties have soared.’
And just how is that going to work? Raise the rents and they’ll keep coming?
I used to work for Mr. Godbold (down the ladder a few wrungs) and can say that the whole real estate group at BoA went through hell the last downturn in RE, hence the caution. When I left, they were not making the rediculous loans some banks were.
Raising rents was not where he was going with that, instead that cap rates must go up. It is amazing what some companies are paying STILL for commercial properties and land. Retailers only pay so much rent, there is a ceiling for occupancy costs.
Interesting that BofA was taking defensive measures a year ago. The interest rates they are offering on CDs and such have been lower than average. Does this mean that their caution hampered their income? In return for security? If so, am I happy that I have CDs with them?
Everyone on this blog should browse http://www.treasurydirect.gov The 4-week TBill is 5.25%, roughly. You can buy bills and bonds online.
yeh to bad the guys over at Wells Fargo weren’t listening to BofA.
They just decided to GROW their SUB PRIME book!
There goes that stage coach!
Slightly off-thread but since you bring up B of A I could not resist. I have banked with Bank of America since 1991 when they took over my local bank. With multiple retail and business accounts, a CD, and two credit cards, I have decided to take my business elsewhere. They made a big mistake with me and when I allowed them the opportunity to fix it, they acted like they could not have cared less about my business (this was not at the branch level mind you as many dealings unfortunately have to be handled over the phone nowadays). After all my accounts are closed later this month, I plan on writing a letter expressing my dismay at their apparently new business model which is based not on customer retention, but instead, an infinite number of “new” customers. I think their long term prognosis is not so good. They are “banking” on the fact that the customer is in favor of these “superbanks” with an unusually poor level of customer service. They could not be more mistaken in my opinion. Farewell B of A, and may you rot in hell!!
Excellent post Ben……
‘There will be a slowdown,’ said Eugene Godbold, president of commercial real estate lending at Bank of America, speaking of both residential and commercial real estate. ‘The question nobody knows the answer to is how far will it dip and how long will it last.’
Thank you sir, for putting a cap into the crazy notion that commerical RE is somehow….”different”. That’s the line I hear all the time about commerical RE in AZ…that commerical real estate ventures are “immune” from the residential bitchslap that’s happening.
Man, I can’t believe the fast and furious pace of mainstream news spewing the bad news.
I think Leahry just threw up a little in his mouth.
Sorry this is OT, but I need some advice. I live in D.C. and I responded to an ad for a house for rent that’s managed by a realty company. After I told the realtor we were interested and agreed to a credit check, she called me and said that there is another party interested and that they’ve “escalated” the rent by $150 a month and wanted to know if we would match it. I told her we were no longer interested. Is what she did unethical???
“Is what she did unethical???” Borderline, but probably “no.” You didn’t sign anything — you expressed interst and proceeded to the next stage and someone else apparently scarfed it up. I wouldn’t do business with her again, though. And don’t let that incident make you think rents are rising — there should be great deals to be had, as stuck stubborn flippers agree to bleed cash until they make their deserved fortune.
Thanks for your help Chip.
Swimming:
If I were you
#1) - i would not speak or take that rental agent’s call again
#2) - from the area’s pictures i have seen. I would pick out a district i want to live in and walk by each for sale sign and grab the “info page”, and methodically contact the owner to feel out their “for rent” interest. -I bet there is a great place and deal in your future.
stumbled on this site months ago in an attempt to find like-minded people. sold my townhouse in oct ‘05 for more than 2x what i paid for it in 1999…no commissions, no open house, no advertising. everyone thought i was crazy. though i miss my granite countertops and my fabulous location, i realized that i owned a home that i could not afford to buy and someone was willing to write me a ridiculous check. why did i do this? i’m in the financial advisory business. my clients may be early, but they’re always wrong. the number of people who wanted to sell or margin their accounts to buy property was staggering. amazingly, no one was having this conversation with me in 2000. this housing bubble talk was eerily like 2000…couldn’t get people to sell ANY of their tech stocks/funds. they didn’t want to hear it. and only a few would acknowledge your advice after the bubble had burst. ah…human nature…a predictably irrational thing.
keep your funny, intelligent comments coming. i’m addicted to them.
Spoke with my broker a couple of months ago and asked what his other clients were doing (I definitely go against the grain). He said that in 2005 many of them had withdrawn money from the brokerage accounts to invest in property - residential, but also spec. strip malls and offices. Just a great sign of where I don’t (and didn’t ) want to be.
Me? I bought puts on homebuilders last summer, and am tempted to cover. The only reason I don’t is that I think one or more goes bust. Shorted Rinker early in the year when a commodity cement company who has 70% of their business in Arizona and Florida was trading at 5.5 times book.
Recent? We’ve seen homebuilders tank, we’ve seen specialty retailers tank (Urban Outfitters and Chico’s for example). My new calls are to short Guess? and the mall reits such as Simon Property Group and Taubman. Half their rents are factored off of retail sales. Plus, they are yielding 150 - 200 basis points below risk free treasuries (5 years ago they were yielding 200 basis points above US treasuries). Any flaws in my thinking?
I have puts on GGP and am thinking about puts on Simon. I also have puts on mortgage reits–TMA and FMT. FMT came out with news last week that they had fired their auditor. I expected them to drop big time–there was a couple day delay. They even dropped yesterday when the market rallied. Rental reits might still go up, but mortgage and retail property look like good shorts and/or puts.
Michelle,
I have had such a diffcult time with advising people not to get caught up in the hype of the past few years, but most of the people did not listen and are no BK or in some stage prior to that.
After almost 20 years in R.E. and/or Finance, I now work for a CPA firm. I think because of this blog I am going to focus and developing business from all of the people that will need financial advice when they have to give the house back and file for BK. I think I can do well getting additional clients for this advisory service. People will need help with the decisions to file BK or not, how to setup a budget, how to realistically plan for retirement, etc.
I am not sure exactly what the focus will be, but I know that there will be some hurting people who need the advice - can they pay for it is the issue?
If you or anyone else have any ideas, please let me know. Thanks.
This is a good business to get into. I know it is so because about three months ago - 2 of the sharkiest shark lawyers I ever met in my life, who are always ahead of the curve in making money, started credit counseling out of the office I work in. They have customers lined up all afternoon to see them.
stumbled on this site months ago in an attempt to find like-minded people. sold my townhouse in oct ‘05 for more than 2x what i paid for it in 1999…no commissions, no open house, no advertising. everyone thought i was crazy. though i miss my granite countertops and my fabulous location, i realized that i owned a home that i could not afford to buy and someone was willing to write me a ridiculous check. why did i do this? i’m in the financial advisory business. my clients may be early, but they’re always wrong. the number of people who wanted to sell or margin their accounts to buy property was staggering. amazingly, no one was having this conversation with me in 2000. this housing bubble talk was eerily like 2000…couldn’t get people to sell ANY of their tech stocks/funds. they didn’t want to hear it. and only a few would acknowledge your advice after the bubble had burst. ah…human nature…a predictably irrational thing.
keep your funny, intelligent comments coming. i’m addicted to them.
michelle –How true!
I was stomping on peoples desk to buy stocks in 1982.
Since 1998 Ive been telling equity mutual casual investors to get out before they get trapped!
Like in 82 no one wants to listen, especially now with Cramer and CNBC giddy talking heads chirpping about every 10 point rally.
People in my office still think the 2000 top was just a pull back {limited to “dot coms overvaluation} and we have never left the ole BULL!
Every stock that gets taken to the woodshed and gutted has an excuse, “earnings, options, forecasts, CEO leaving, industry segment issue, they tell me….Whatever - One by one is fun!
If this it what the builders are admiting to, you know it’s a lot worse.
good point!
Ditto.
Great time here in Monterey County for the spring and summer rally in RE. Ah, it didn’t happen and now all the little kiddies are back in school on Monday.So much for selling more houses into the fall season.
Today on CNBC, Bob Toll was quoted as using the “Greater Fool” word. At the end of a long paragraph about dumping land at the end of an RE cycle he actually used the words waiting for a “greater fool” to come along and unload it onto, something to that effect.
Now that the SDCIA board and the homebuilders are talking about greater fools, how long can it be before the phrase seeps out into the general public?!
Ah, but who is using the GF phrase? Are they genuine SDCIA members, or us trolls?
I like lurking over there. I’m not going to laugh at them; I’ll just try to learn from them (and their mistakes).