Housing Sector Facing ‘Major Headwind’
News from Wall Street on the housing bubble. “Joseph Tomkinson, CCEO of Impac Mortgage Holdings, Inc. commented, ‘2005 was a challenging year for mortgage REITs across the board. Impac’s earnings came under pressure as the Federal Reserve continued raising short-term interest rates during the year.’”
“Furthermore, earnings decreased as the yield on new mortgage loans added to the investment portfolio did not keep pace with the steady increase in borrowing costs. Even faced with prepayment penalties, borrowers took advantage of the flat yield curve and competitive mortgage environment by tapping into housing price appreciation to refinance their mortgages.”
“William S. Ashmore, President and COO of Impac Mortgage Holdings, Inc., commented, ‘The MBA is predicting a decline of approximately 20% in total mortgage originations for 2006 and competition is expected to remain intense.’”
“Home builder Hovnanian Enterprises Inc. is seeing demand slow in certain markets as many other conventional home builders have been reporting, but is not seeing the sharp dropoff in orders luxury builder Toll Brothers Inc. recently posted. Orders declined 11% in the Southwest and 37% in the West but rose 17% in the Northeast and 61% in the Southeast. Analyst Dan Oppenheim said much of Hovnanian’s order growth was driven by acquisitions. If acquisitions were excluded, he said orders would be down 10%.”
“Oppenheim noted that the 61% order increase in the Southeast was largely due to the company’s recent acquisitions of Cambridge Homes and First Home Builders of Florida.”
The Wall Street Journal has this report on homebuilders. “Hedge-fund manager David Einhorn has a prediction about publicly traded home builders: ‘Slowing orders, reduced prices, reduced margins, slowing backlogs, it’s all going to come.’ And he’s one of the bulls.”
“Could it simultaneously be true that there is a housing bubble and that home builders are undervalued? he washout was bound to come, and now it looks like it may have started. Investors are beginning to panic. Toll Brothers, once the most admired home builder, warned in recent weeks that sales would disappoint. The stock is down almost 50% from its peak. KB Home has warned about cancellations and falling orders. That stock is off 25% from its top.”
“And the next stage could be big price cuts to move product. Credit Suisse analyst Ivy Zelman, a longtime bear who is finally achieving a measure of vindication, says that Centex is already running sales in select markets. ‘Depending on where the builder builds…a great tailwind now becomes a major headwind. It was a great ride up but it could be an ugly ride down,’ says Ms. Zelman.”
“Even while their earnings were skyrocketing and the shares were soaring, publicly traded home builders didn’t win investor respect. Home builders’ shares as a group are now trading at six times projected per-share earnings. That means only one thing, the market doesn’t believe the earnings. And at the heart of it, they fear builder bankruptcies, as happened in the early 1990s.”
“That’s why the bulls need this housing slowdown. They are expecting that the companies will be able to have some earnings growth, grab more market share, and throw off enough cash to buy back stock to shore up their share prices. ‘For five years, we’ve been waiting to see how bad it’s going to get. It’s honest now. We are going to find out whether bears are right and there’s no business at the bottom, or I am right and there’s a good business and good earnings at the bottom,’ says Mr. Einhorn.”
“How bad is it going to get? Ms. Zelman sees a substantial profit squeeze coming. Over the past year, home-builder operating-profit margins were around 17%; she thinks those margins will fall in the next three years and eventually return to a more typical 10%. investors can’t take solace in builders that are more geographically diversified. That’s because many of the home builders have profit concentration.”
“KB Home sells in the Southeast, Midwest and West Coast. But Ms. Zelman estimates that about three-quarters of its profits come from selling houses in booming Las Vegas and California. Even if other markets pick up the slack, the profit margins on homes sold in Texas, for instance, are much lower.”
Toll Brothers is up 6% today on above-average volume. Someone is buying…
The most vicious rallies come in bear markets.
At first they do, until the trend becomes solid and then with time the rallies get smaller and smaller.
TsChic, Did you move out of TX already
From the Sarasota link. ‘First it was Centex. Then it was Lennar/US Homes. Now it’s Kimball Hill Homes that’s offering massive savings on new homes at Lakewood Ranch. Jonnie Dwyer, a Kimball Hill agent, sent the following e-mail message to Realtors on Jan. 25. ‘I had to share with you what’s going on and I can hardly believe it myself … All homes in Greenbrook Banks have been REDUCED! That’s $60,000 — yes, SIXTY THOUSAND DOLLARS! Save an additional $25,000 toward options and $10,000 toward closing costs if you use KH Financial for your loan and Enterprise Title Co. for your closing.’
‘Reached by phone last week, Dwyer said the price reductions are still in effect. ‘I don’t know when prices will go up again,’ she said. ‘We’re just being aggressive, and it has caused sales to increase.’
OT But not sure if anypne sure this paper article I like this guy, now all we need to do is have this printed on large banners and hang it off freeway overpassess. LOL
opps missed the link:
http://www.dailyrecord.com/apps/pbcs.dll/article?AID=/20060219/COLUMNISTS04/602190327/1103/COLUMNISTS
Builders aren’t the only ones getting a cut in the deal. Where I live the it costs about $45k to cover buiding permits, sewer tap, water tap, etc. I’d say that’s quite a headwind.
While the government folks can keep up their margins they lose out in volume. Also, there is competition out there. I can chose from about 5 different jurisdictions and still commute less than 1/2 hour.
45k for permits and fees is ridiculous. They are extorting the consumer badly here and we wonder why homes are costing so much. Tack on envrionmental assessment fees and your really screwed. The local governments are raking us over the coals with all these fees. I wish there was a consumer group that represented us on this. I’m so tired of the bs.
Why is 45k in fees ridiculous??
How much does running the water and sewer lines cost. Doing the traffic study and putting up street signs. building an extra fire house/police station buying extra police cars and fire engines. Hiring the teachers and the garbage men and builing more school space?
Why in the hell are MY TAXES going to subsidize a builder/flipper.
CAUSE IF THEY DONT PAY FOR IT I SURE AS HELL HAVE TO.
Amen.
party on Garth
http://finance.yahoo.com/columnist/article/moneyhappy/2643
“Even faced with prepayment penalties, borrowers took advantage of the flat yield curve and competitive mortgage environment by tapping into housing price appreciation to refinance their mortgages.”
Either that, or they needed $20K so badly that they were willing to pay $10K in prepayment penalties to get it.
“Over the past year, home-builder operating-profit margins were around 17%; she thinks those margins will fall in the next three years and eventually return to a more typical 10%.”
I know two things for sure: 1) Home prices never go down; 2) HB operating-profit margins never go negative.
Tolls margin is already at 10% by some measures.
you can bet the hedge funds probably were buyers of homebuilders stocks and now they are shorters.
do you guys realize that homebuilders stocks are up 1000%, probably less now, in the last 5 years. I don’t know about you, but I banked that in my memory for the next bubble! if you were really smart you’d do this:
buy a house at the bottom and maybe an investment property(or two)
buy the homebuilder stocks cheap a few years before the bubble crests
sell homebuilders stocks when the bubble rears it’s head
sell investment property
pay your house off
sell house?
rinse.
repeat.
haha.
no, I’m sure that there are some people here who did this right now and will probably do it again.
That is a great recipe for surfing the CA coastal bubble market
I recommend a chiled 2006 dr. pepper with the recipe.
Yes, but only because some of us were caught in the 1989-90 housing slide. If you bought in 1989, you learned that housing prices can come down a lot.
In Summer 2005 we sold. No debt now. Will rent while waiting.
I also sold in Irvine in Feb. 05 and will wait as long as it takes.I am enjoying the renting thing. No troubles or wories except finding the best value on my saved equity.
Toll’s price went from about $5/share to $55/share or so last August — 1000% increase as you said. Now, at $32/share, they are on sale for only 540% higher than their price in 2000, either a great bargain, or else the stock market equivalent of wearing lead boots while swimming in deep water.
Life is a neverending learning experience!!! It’s great to have Ben’s Blog as a tool along with others. Since news travels faster now than ever before, I feel that the crash will be harder and faster than they predict.
Great advice…the next one will be the third housing bubble in my adult life. I was too young to know what was going on during the first one and the second one was a learning experience, Hopefully I’ll remember what you said above during the next one. It will be a lot easier to trade the HB stocks than actual houses. I think this will run in about a 7 year cycle.
Inventory has officially doubled in Tampa since September 21, 2005 according to the housing tracker.
prices have barely budged except in the high range where they are off about 10%
Phoenix is getting ready to triple.
Orlando inventory is up 11.2% in just over a month.
Prices are off in San Diego about -5.5% and Inventory is up a meager 14.2%
Washington D.C. Prices are down about -4.1% while Inventory is up 30%
Your site says SD inventory = 11,076, while ziprealty.com shows 17,042 as of today (2/22/06). Is ziprealty’s definition of “Greater SD” more encompassing? My guess is that even 17,042 is low, due to missing FSBOs.
“I feel that the crash will be harder and faster than they predict. ”
Either that, or the average home in California, if it follows the current trajectory for another five or ten years, will be worth more than all of downtown Tokyo.
My theory is that the greater the magnitued of the bubble, the greater the degree of misallocation and resulting economic suppression in it’s aftermath, and the further prices will decline.
Any substance to this?
It’s true that the greater the price bubble, then the greater the price will fall (either a fall in nominal prices or flat nominal prices and inflation eroding the real price).
As far as economic disruption, it depends on a few things. Some would argue that a quick pop would be best, because it would align prices with fundamentals, and then everyone could go about business as usual. If prices are sticky downward, then everyone is in a holding pattern, with everyone knowing that prices will fall, but people just waiting until it does. In the mean time, lot of people who want to buy homes will not, because they will wait until it bottoms out.
On the other hand, if prices deflate too much, it may threaten the financial health of lenders, and credit may suffer as a result. Remember,easy credit is as much to blame for the bubble as anything. But NO credit would be a bad thing.
I suspect that Bernake will watch how this all unfolds. If lenders take a hit (but don’t go belly up) then interest rates can rise. But if the health of banks and other financial companies declines too much, then he will need to ease up.
I agree. Had this monster burst earlier, maybe it would have been a softer landing. But now…now I’m really worried. I mean, I want to pick up a nice little house at a 50% discount just like we all do, but I never wanted to see economic collapse. And that’s what I’m worried about now.
Total price reductions reported in Craigslist ads today (3,126) versus a month ago (2,300)
http://www.theburstingbubble.com/pages/reductions.php
Comment by GetStucco
2006-02-22 12:20:55
“Over the past year, home-builder operating-profit margins were around 17%; she thinks those margins will fall in the next three years and eventually return to a more typical 10%.”
I know two things for sure: 1) Home prices never go down; 2) HB operating-profit margins never go negative.
Funny, I thought the typical homebuilder profits in a normal market were 5% for each home sold, not including upgrades (which is where the homebuilders really made their money). So, it might just be possible that the homebuilders will be still pulling in 10% only if they are selling houses loaded with cosmetic upgrades.
I walked down and visited 3 different major condo builders in downtown San Diego. Prices have been reduced fairly dramatically. The condo I looked at was listed and sold for 410k but the buyer backed out. It had 20k knocked off the top. It had 2 years of HOA fees included (12k total). It had 1% of the closing cost covered (4k). Additionally a realtor could pocket 3% for a referal (12k). 410-20-12-12-4= 362k! That is a 48 k price drop from a few months ago. Don’t tell me prices aren’t dropping already…
Keep it our secret