“Increasing Turbulence And Broad Weakness”
Some housing news from Wall Street. “Home builder Ryland Group Inc. said Wednesday that its third-quarter profit fell 26% as sales incentives reduced earnings. Ryland said new orders fell 45.6% to 2,372 from 4,361 in the same period last year.”
“‘They’re willing to take a volume hit but maintain pricing and margins,’ said Josh Spencer, a research analyst.”
“Banc of America Securities analyst Daniel Oppenheim said he expects to see land write-downs once Ryland responds to market conditions with lower prices. ‘We expect weak 2007 earnings due to a sharply lower backlog at the end of the third quarter (down 35%) and lower margins as a result of price declines and a negative mix shift into lower margin regions (Texas) at the expense of the Southeast and West,’ the analyst said in a report.”
“Accredited Home Lenders Holding Co., a subprime mortgage lender, warned on Thursday that its earnings would lag its previous forecasts because of intense competition and rising loan delinquencies.”
“‘I think the outlook for the mortgage sector is not so good,’ said Anton Schutz, president of Mendon Capital, which manages $270 million in financial services stocks. Lenders like Accredited that focus on borrowers with weaker credit face the risk of much higher defaults as well.”
“‘That segment of the economy is the first to crack when things slow down. I worry about subprime lending,’ Schutz said.”
“Accredited, the San Diego mortgage lender, warned of weak 2006 profits because competitors are offering cheap mortgages and debt investors have lost their appetite for subprime loans.”
“The company cited several factors, suggesting ‘increasing turbulence’ and broad weakness in the subprime mortgage industry.”
“Firstly, Accredited Home Lenders hasn’t been able to issue as many mortgage loans as it thought it would. Secondly, investors who buy mortgage loans in the secondary market have grown skittish on risky debt, meaning the company earns less when it pools its mortgages into bonds.”
“The company blamed a mergers and acquisition wave. Accredited Home Lenders said a wave of acquisitions has spurred lenders to issue loans without proper regard to prices or credit risk because the lenders want to maintain a hefty portfolio to look attractive to a potential suitor. This trend has boosted the ‘ferocity of pricing competition’ in the subprime mortgage industry, the company said.”
“The company also warned more borrowers are defaulting on their mortgages, so Accredited Home Lenders will have to set aside more money than it expected to for loan loss reserves.”
“‘It will take some time for the industry to work through the current challenging environment, and it is more difficult than we thought,’ Piper Jaffray analyst Robert P. Napoli wrote.”
“Washington Mutual Inc., the largest U.S. savings and loan, said third-quarter profit declined 8.9%, as demand for home mortgages flagged and short-term interest rates climbed, the Seattle-based bank said.”
“‘The biggest risks for WM include aggressive competitive pricing and the possibility that credit trends could weaken significantly,’ analysts Robert Napoli and Brian Hogan wrote, citing potential underwriting mistakes and falling home prices.”
“Washington Mutual blamed part of the 9 percent drop on lower home mortgage demand and costs for the elimination of nearly 5,200 jobs.”
“WaMu, as the thrift calls itself, eliminated 5,191 jobs in the quarter, and has cut 9,742 jobs, or 16 percent of its workforce, this year. The thrift is moving thousands of jobs outside the country.”
“Many cuts were in its home loans unit, where the No. 3 U.S. mortgage lender posted a $33 million loss, compared with a $302 million year-earlier gain. Loan volume fell 34 percent to $37.2 billion and margins on loans sold declined.”
“Net interest margin, the gap between what WaMu earns on loans and pays on deposits, fell to 2.53 percent from 2.65 percent in the second quarter. Many banks’ margins have shrunk because short-term rates are higher than long-term rates, raising borrowing and deposit costs.”
From Business Week. “Think of collateralized loan obligations as the next step of financial innovation that started with junk bonds and mortgage-backed securities. Unbeknownst to many, CLOs are pumping up the entire U.S. economy. By lowering borrowing costs and attracting foreign capital, they’re helping to keep a lid on interest rates. But while financial innovations fuel booms, they also tend to worsen busts.”
“The amount of leverage used in deals right now is greater than the previous record set in 1997, according to S&P. At the same time, loans are carrying lower ratings, with fewer safeguards, than at any time since the late 1990s. The worse mix suggests that in a recession on the order of the one in 1991, default rates would soar more than four percentage points beyond the record 12.8% set that year, says Martin Fridson of a research service.”
“Similarly, CLOs are accepting more so-called second-lien loans. Like second mortgages, these are backed by borrowers’ assets, but their claims on that collateral come second. ‘Second liens could be the potential Achilles’ heel of the current credit cycle,’ says Mark Gold, co-founder of a CLO manager.”
“‘You’ve got classic cyclical behavior happening right now.’ Gold, says: “If you look at the record issuance [of loans] that’s been done, clearly you’re setting the stage for record problems.’”
A must read article on how sleazy and corrupt the current bubble is. IMHO it has been built on fraud, lies,deceit,and greed on many participants.
http://www.oftwominds.com/blogoct06/RE-lies.html
‘Is business based on deception “normal” now?’
For the REIC, the answer is a resounding “yes.”
Kudos to Charles Hugh Smith for a tour de force account of the lies, damned lies and home sales statistics that have been used to fraudulently enrich the REIC at the expense of GFs. This should be required reading for govt policymakers who never seem to quite grasp the magnitude of the problem at hand.
Sadly, in this day and age of excessive greed no one take up the charge of righting these wrongs until, as always in this country, it is too late. The bangsters and hucksters have already made their money. The FBs are just that and the rest of the mortgage moms and howmuchamonth Harrys don’t seem to care. Sheeple continued to be led astray. Not to be overly preachy, but it is the blind (by their greed) leading the blind (by their greed, as well). As usual, expect the whole mess to go nowhere fast until a few honorable and decent banks begin to really push the standards of the past. Oh, I am just so sick after reading all of the info above. Great info, and I know you guys here are honorable, but sometimes I just feel like Diogenes. I know someone uses that name already, but I can still ask, “Is there an honest person anywhere?” Lastly, is there no end to this greed. Hey, I know we all want some level of comfort in our lives, but what about our fellow man? Do we really need 3 hummers and an escalade? Do we need 8,000 sq. ft. homes with driveways that have heaters under them so the ice melts faster? At what point does this greed play out to? What are we driving at in this country? I find it quite strange that someone like Lou Dobbs is riding the war on the middle class horse when he should be talking about how much greed is out there. Let’s face it there is only so much money available and if 5 of us have 90% of it, that doesn’t leave much for the other 5 guys, does it? I by no means am promoting communism, but all thsi greed does come at someone’s elses expense, or even your own.
Sorry for the rant. Just finished looking at a new book that challenged some things for me personally.
What’s the name of the book? Sounds like it had a pretty big impact on you.
And this from “market won’t crash” OCDan (unless there’s two). Remember OCDan, not all that was bought with “cash” most of it is bought with credit. Not all those who appear to be rich, really are. That’s why we know this is going to crash.
No, not me. I have been the doom and gloomer for a while now. I saw this coming 2 1/2 years ago when I was getting all those crazy HELOC flyers in the mail. I told one LO and that it was crazy to lend out all this garbage, but he said he was just doing his job.
That was “Dan”. LOL.
“As usual, expect the whole mess to go nowhere fast until a few honorable and decent banks begin to really push the standards of the past.”
I doubt that decency will have much of anything to do with the return of lending standards, but rather the mother-of-all-bubble-busts, which will result in round after round of recriminations and a recognition that lending standards do actually have a place in screening out bad credit risks, and appraisal standards have a place in limiting the risk of loan loss.
I saw a head line; from the Bank of america earinings release:
BOA will permanently REDUCE mortgage lending!
From my inner hippie:
The U.S complicitly with a few other world powers and weaker corrupt governments has been doing it to the rest of the world for decades now and not too many of us care . World bank, IMF, G-7. The summits with Mexico which ammount to a slave trade for another example. I think the model for the creation of this bubble came from the World Bank. Lend money with stipulations that it is invested in certain ways to irresponsible corupt governments with less concern for what happens to the loan and the debtor nation than for where the money goes…. large pet corporations and middle men. I was in Argentina just before that debacle blew up. I speak and read spanish almost fluently and got real current. Thats exactly what happened. There was a bit of social engineering going on to make Argentineans better consumers of outside goods and services. Anyway I digress. But think about it ….average americans are very rich compared to the rest and its not because we are honest in our dealings or gave a shit about the “sheeple” of other nations. We with our pretty decent access to wealth,are partially benefitting from the result of the trickle down affect of our elites dominating world economics and politics. Now we are seing some shenanigans on home turf and it seems crazy and makes us real angry. I think the greed that caused this bubble and the backlash against it come from the same source. I think all this anger over the bubble is in part due to the interference it causes to our greedy entitlement plans. Who would expect that globaliziation would be good for the American Dream? Forget it, the trickle down effect is getting spread out without an increase in volume. I suppose net that would be good for starvation rates in the world but I expect the global village to be fascist. Get over the bubble and get used to a lower standard of living in the U.S. Or else push for world war.
Tried to give you a nice ..long winded response for my inner hippie. Don’t know where it went. Something like we are not entitled to an endless spiral increasing wealth for being on title to a piece of land with stucco covered sticks on it. But on the other hand all this anger over the bubble comes from the same frustrated sense of entitlement. Hard to march on to wealth and security in our own fashion with all these shenanigans going on isn’t it? Add outsourcing, and retirement plan defaults etc. ect. . Sure is a threat to financial security.
Then I wrote stuff about the G-7, IMF and World Bank and cooperative corupt governments of the weaker nations. How they have been doing this stuff to the “sheeple” from other nations for decades with very strong influence from the good old American elite in favor of pet corporations and middle men. Not too many of us seem to care as long as we are the benficiaries of a trickle down affect of significant volume as an effect of our elites and their military dominating world economics and politics. Moderate wealth is or has been easy here and its not because we do the fair and honest thing in world affairs.
I like real estate investing, and this blog, but it isn’t like the world revolves around the stuff. I, and especially my inner hipppie would rather be poor and have have a more decent world but I also realize the latter is not attained by not sustaining myself and my family within the parameters I find myself in and not really willing to move out of. I do sweat this moral dilema out frequently though.
So what you are saying, in short, is “Don’t worry, be happy, go forth and buy an SUV and a McMansion?”
Not really, How do you feel about those things? How do you feel about your material world?
I am saying that if I don’t participate moderately in the economic parameters I find myself in there will be very unconfortable consequences, One of the most frightening of which is that I will be destitute in my old age in a place where old destitute people are trash. I’d like to keep showing my kids some experiences that cost money. About cars.Excepting one very naive purchase of a new car when I was 19(nissan sentra at 14% from lot) I have Lost $12,000 total to car purchases if you consider the value my current second hand truck still has. . Iam 44. I own very few possessions, I have a valuble collection of tools with which I make my living for the most part. I am debt free. My house, which is under construction , most work by yours truly. It will be 2300 sq. ft…. modest otherwise. This is excessive of course but not hardly a mansion. Its paid for if I don’t get hurt in the next few months. I could have taken my capital and bought in Pt. Loma with a loan and drove whatever car I want. I would downsize to a cave if it would make the world a better place . Thats what I am saying.
I was just about to post this! It really is a must read.
Regarding trends about negative amortization and non-accrual and delinquent loan trends:
Let’s look in detail at Downey because it is a relatively straight forward option ARM lender (close to 90% of their portfolio is option ARMs).
The amount of negative amortization included in loan balances increased from $229 million at June 30 to $277 million at September 30th. This is 2.25% of loans subject to negative amortization. In Downey’s case their option ARM portfolio shrank by $895 million to $12.327 billion. So negative amortization increased 21% despite the fact their option ARM portfolio shrank 7% during the quarter.
28% of their loan interest income is non-cash interest due to negative amortization, up from 26% in the second quarter. Now remember this is loan interest income, not net interest income. If and when the day comes that this non-cash income isn’t there because of problems, it will have a leveraged impact on their bottom line because there is no “non-cash” interest expense. They will still need to pay their depositors and creditors in cash.
Now we know the negative amortization trends have been bad, but the trend in non-performing assets (NPAs) and delinquent loans is very interesting:
Dollars in millions
June 30 2005 Sept. 30 2005 Dec. 31 2005 March 31 2006 June 30 2006 Sept 30 2006
NPA $25.2 $30.3 $35.2 $38.9 $39.3 $66.5
Del Loans $41.7 $46.2 $56.2 $59.4 $64.2 $101.2
All loans delinquent 90 days or more go non-accrual and are in NPAs. So the trend here is accelerating, and, amazingly, Downey only provided (thru their income statement) $9.6 million for credit losses during the quarter. Yet their NPAs and delinquent loans increased by over $64 million in the last quarter.
Some extracts from Washington Mutual’s third quarter report regarding trends in their option ARM portfolio. Again, they missed estimates largely due to weakness in their mortgage business:
(3) Capitalized interest recognized in earnings that resulted from
negative amortization within the Option ARM portfolio totaled
$278 million, $239 million and $86 million for the three months
ended September 30, 2006, June 30, 2006 and September 30, 2005.
(3) Capitalized interest recognized in earnings that resulted from
negative amortization within the Option ARM portfolio totaled
$706 million and $159 million for the nine months ended September
30, 2006 and September 30, 2005.
(2) The total amount by which the unpaid principal balance of Option
ARM loans exceeded their original principal amount was $654
million at September 30, 2006, $461 million at June 30, 2006,
$291 million at March 31, 2006, $157 million at December 31,
2005, and $76 million at September 30, 2005.
From Wachovia’s third quarter. Their acquisition of GDW closed Oct 1. But they did release some results for GDW. Specifically, the deferred interest included in loan balances increased to $1.2 billion. The trend is as follows:
Deferred Interest in Loan Portfolios (millions)
9/30/2004 $36
12/31/2004 $55
3/31/2005 $90
6/30/2005 $160
9/30/2005 $279
12/31/2005 $449
3/31/2006 $666
6/30/2006 $915
9/30/2006 $1,200
From Accredited Home Lender’s announcement today (the stock is currently down 12%):
Increasing turbulence in the non-prime mortgage market has impacted the company’s ability to achieve its previous earnings guidance. The most significant factors underlying this turbulence include:
• Origination volume and loan submissions have not increased as much as the company anticipated and continue to be adversely affected by a combination of pricing competition and product contraction that has been prevalent in the market throughout 2006.
• Whole loan premiums and securitization returns are under more pressure than previously anticipated, caused a decrease in whole loan investor appetite for certain products, as well as changes in credit standards and equity requirements promulgated by the various rating agencies.
• Delinquency from production periods in 2005 and 2006 has risen above previous expectations, which requires the company to further bolster its reserves to prudently value the loan portfolio and potential exposure.
It seems pretty clear that the trouble in the home market is spreading to the lenders at an accelerating rate. It should be an interesting fourth quarter!
Excellent, factual post. Thank you for your research.
The trend is clear-negative amortization, capitalization of interest, and non performing loans are spinning out of control. The question is when will Wall Street sit up and take notice of this alarming and extremely risky development.
Negative amortization is one of my favorite subjects these days. Much more interesting and potentially virulent than the usual HB has a shit load of land on his balance sheet discussion. Appreciate the research.
If you like (sarcasm) Downey, check out their fellow thrift FirstFederal (FED). Almost 80% of their loans were low/no doc loans, 98% ARMS and tons of option ARMs. More negam than Downey. Let me know what you think.
Dude FED is FCK!
Interest income accrued exceeds net income for the six months ending June 30, 2006 and cashflow from operating activities is a negative $49 million. Stock price is up 16% in the last month. I will add them to my “Hit List” for a deeper review. These guys look interesting.
Holy Smokes, great post Joe. This should be a direct post on Ben’s Blog, not a comment.
“28% of their loan interest income is non-cash interest due to negative amortization, up from 26% in the second quarter. Now remember this is loan interest income, not net interest income. If and when the day comes that this non-cash income isn’t there because of problems, it will have a leveraged impact on their bottom line because there is no “non-cash” interest expense. They will still need to pay their depositors and creditors in cash.”
They’ll send each creditor a non-cash check, from these non-cash earnings. Soon, they’ll invent the non-cash cash for creditors who want cash.
My 2008 puts are in cash, thanks.
Excellent analysis. Thanks again.
I posted in another thread, but in case it got lost, it’s worth noting the carnage at RDN as well. Like PMI and MTG, RDN is a mortgage insurer, paying off lenders when borrowers default on high LTV loans. Looks like they had a big, big increase in loss reserves that caused them to miss earnings estimates by a wide margin. Stock recently down just over 9%. Their full report is available here:
http://tinyurl.com/uzzp5
Here’s a seller-in-denial blog that should be fun to mess with: http://www.city-data.com/forum/other-topics/12468-done-playing-follow-leader-realtors.html
Another one of those “I’m not giving away my home” types who blames realtors for wanting her to list too low. Seems to think that the high appraisal value is worth something.
Boy did you find a doozy, Pete!
“…Done with it. We aren’t going to play the game anymore. Every seller has to see this. A realtor tells us to go lower on our selling price. Homes are being dropped to crazy prices. People are you desparate? I am tired of all the negative stuff about real estate and tired of the realtors wanting to make a quick sale. Don’t give your homes away people!!! Stand up and make a difference. Keep your prices at what you listed them at unless you are in a desparate situation. Fight back! We are.
I don’t even care if we have to wait a gazillion days or months to get what our home is worth. We just had a friend get an appraisal and boy what a surprise that was. Its way above what these sellers are selling their homes for.
Nuff said.”
A gazillion days…HAHAHAHAHAHA…ormonths…ROFLMBBO
(BB = Bubble butt)
If you bother to read down even a little you’ll find comments like, “The reason there is weakness in pricing is b/c the market was SO STRONG and people were seeing what they could get for their houses that everyone rushed to get in on it”!
Uh, excuse me? How about affordability was ignored as long as prices spiraled upward but now that we’ve pushed the envelope on virtually every imaginable front it’s fallen apart like the house of cards that it is?
People are you desparate?
Yes they are.
Don’t give your homes away people!!! Stand up and make a difference. Keep your prices at what you listed them at unless you are in a desparate situation.
People are just taking her advice and she is getting mad about it.
that rant was priceless. the seller is incredibly arrogant. as if prices didn’t go both way! She’ll get what she deserves…..
Typical sense of entitlement.
My advice for sellers: Go back to what you were earning in, say, your early 30s, adjusted forward for inflation. What would your life had been like if you had to service a mortgage at the price YOU think your house is worth? With your asking price, you are probably asking for someone to accept a life of poverty to enrich you. Think about that!
WT Economist…
Now THAT is an excellent comment that I’m going to keep in mind when I encounter a seller who thinks their property is “worth” so much…it’s a great way to get them to look at reality.
Not that I’m encountering any sellers…I’m very content to wait until reason prevails.
Great find! What a bunch of complete F-tards. The posters all sound like whining kids. As though they have any control over market forces! Anyone with a sliver of common sense knows that you can only charge what the market will bear. The people commenting on that thread are delusional and in need of an intervention.
Actually you may not have read far enough: some of the posters told her the house was worth only what someone else would pay for it.
Pete posts “Here’s a seller-in-denial blog that should be fun to mess with”
The only mess is in her/his pants! Another “pinebox” prospect!
Many cuts were in its home loans unit, where the No. 3 U.S. mortgage lender posted a $33 million loss
__________________________________________________
They are already losing money at this stage in the cycle? Nice job Sr. Mgmt
Can you imagine what the situation will be like when the financial contagion that lurks at the bottom of the murky waters of the housing bubble surfaces in mid to late 2007. I get visions of the 1950’s movie “The Blob”.
Right now we are the beginning of the movie after the meteor has landed and the lone farmer in BFE is poking the jelly lump.
We are in the middle of the nasty thunderstorm at the start of “War of the Worlds.”
Last night on HGTV they had a real estate expert/professional look at a house for some sellers. What qualifies someone to be called a professional or expert at real estate?
Does it mean they own a home, or sold a home or lived in a home?
I have a few friends who own homes, does that make them experts or older folks who have lived in a home for years does that make them professional home dwellers?
Just wondering if someone has a definitive answer on what makes a person an expert or professional in a field that requires ability to drive a car, open and close a lock box and know a living room from a kitchen or a master bath from a hall bath and most importantly how to spell ones name.
HIVtv
07 show “house haters”
“Renting is Fun”
“Debt-free and fabulous”
“Decorating on a Budget with a HELOC”
LOL…
the only show that makes any sense for the future is “Design on a Dime”.
“‘It will take some time for the industry to work through the current challenging environment, and it is more difficult than we thought,’ Piper Jaffray analyst Robert P. Napoli wrote.”
I like it when these so called analyst eat their own words.
from the fliers that came across my desk this week i can say that the subprime lenders are in a cutthroat competition to get what biz remains.first franklin will be one of my faves until it dies( a division of national city mortgage)how in the name of god can anyone even pretending to do due diligence buy mbs issued by these subprime lenders?
“Think of collateralized loan obligations as the next step of financial innovation that started with junk bonds and mortgage-backed securities…. ”
According J. K. Galbraith, “the oldest rule of Wall Street: Finacial genius is before the fall.”
Wasn’t Milken the last great innovator?
“Similarly, CLOs are accepting more so-called second-lien loans. Like second mortgages, these are backed by borrowers’ assets, but their claims on that collateral come second. ‘Second liens could be the potential Achilles’ heel of the current credit cycle,’ says Mark Gold, co-founder of a CLO manager.”
And what if those assets are leveraged? I don’t understand this. If someone does, please explain.
Speaking of liens, the amount of mechanic liens (here in AZ, those come right after the tax man) are soaring due to small time builders not paying subs. There’s a LOT of that all over the state.
‘The worse mix suggests that in a recession on the order of the one in 1991, default rates would soar more than four percentage points beyond the record 12.8% set that year, says Martin Fridson of a research service.”’
Good thing our economy has become recession-proof since the tech-stock-bust recession a few years back…
GS - I have wanted to ask if you are satisfied that the housing bubble/bust is more or less developing in line with the IMF Bubble Report?
I see most of the data coming out following the trend of the Report with special emphasis on GDP deceleration in Fig. 2.3 which is uncanny. We had the big bump in 1st Quarter 2006 of over 5% followed by 2.6% in 2nd Quarter 2006 and based on the results of the monthly indexes which have come out during the third quarter I am expecting the 3rd Quarter to come in much lower than the 2nd Quarter. We will find out next week but I am looking for 1.5% to continue the trend.
Also noticed in Table 2.2 recovery after the bust is contingent on government consumption but taking into account that government consumption is running at maximum going into the bust I suppose we will be SOL to pull out of the bust within the average time frame contained in the report.
Fridson does independent research….I wouldn’t discount his analysis.
“The company blamed a mergers and acquisition wave. Accredited Home Lenders said a wave of acquisitions has spurred lenders to issue loans without proper regard to prices or credit risk because the lenders want to maintain a hefty portfolio to look attractive to a potential suitor.
So let me get this straight. These folks thought that handing out $500k loans to grocery store clerks would make them look MORE attractive to potential suitors??? Guess they were fishing for suitors that wouldn’t bother looking at the books. Unbelievable.
It’s the YouTube model. Lose money, violate laws, sell yourself to one of the chump media companies due to shareholder pressure.
Well, after their stock price falls far enough, someone might want to buy them out.
It worked for Golden West (California’s biggest sub-prime lender), didn’t it? They were purchased by Wachovia for a hefty price.
“‘You’ve got classic cyclical behavior happening right now.’ Gold, says: “If you look at the record issuance [of loans] that’s been done, clearly you’re setting the stage for record problems.’”
“classic cyclical behavior” = loosening lending standards just as the housing market is going into a tailspin (see p. D1 of today’s WSJ — “More Home Loans Go Sour”)? This sounds to me like a great recipe for a financial disaster.
“Banc of America Securities analyst Daniel Oppenheim said he expects to see land write-downs once Ryland responds to market conditions with lower prices.”
Professional analysts are catching on to this problem only how many months after we started discussing it?
I think Ryland is doing a decent job closing out their current sales and cutting the speculators out of their developments. In the one I am in in Florida, they are negotiating lower prices with their current buyers to keep them at the table, cutting prices on inventory homes, not making a new start until they close an inventory home, and forcing buyers to sign a clause that any profits (as if there are any flip profits left!) made in a sale within a year after purchase must be handed over to Ryland. So they are weeding out speculators at the table, as well as undercutting the pricing that speculators from the last wave are trying to get in the re-sale market (there are abt 30 flipper homes for sale here - prices have been drastically reduced from the bong-hit prices they were trying to get last year, but still, none are selling… the current builder price is lower and most of those flipper homes are bare bones no-option shells that can’t hold up to the lower prices & freebie upgrades Ryland is giving).
That being said - and I’m told Ryland also has less aggressive land positions than most builders - their new orders fell 45% y/o/y in the last quarter - all those flippers gone!!! So what can their revenue possibly next year when those homes are built and sold?? The homebuilder stocks are still just waaaaaaaay overpriced in my opinion - where will the future revenue come from to prop up the current share prices?
“In the one I am in in Florida,…”
Thanks for the objective opinion.
Hey, that’s not fair - i have been posting here on and off for a while & am very bearish on housing - I bought a place for my family to live (with 30% down and a 30 yr fixed mortgage) that is affordable to me - I know you are an experienced voice here - I am not defending Ryland, except in a comparative way - If you read my post, I am questioning whether even the builders in the best comparative positions can survive - and am questioning why their stock prices aren’t falling even further. I may have a vested interest in not wanting Ryland to fail because I live in one of their communities, but that doesn’t change the fact of whether they will or not, nor will it change what I report. I am giving on the ground observations, not trying to cheerlead them. If i saw them doing stupid things like clinging to higher prices & selling to speculators & damn the rest of the world - I would be reporting that (and damning them) as well.
My apology.
No offense taken - i know it’s easy to jump on…
Was your 30% from a move-up equity stake, or was it cold hard saved cash.
It was move up bubble-money that I made on a crazy appreciation in price on a NYC co-op. It is a vast living improvement for my family (2 bedroom closet apartment to 4 bedrooms with a backyard & nice community amenities) - really a no-brainer since my job is allowing me to telecommute & report back to NYC once a month.
Hey Getstucco -
Ease up. I remember your vast discussion with someone about the probabilities of different outcomes happening. They had assigned a non-zero probability that the economy wouldn’t come apart because of the housing bubble (i.e. - soft landing). The concept of assigning probabilities to various outcomes based on models and educated guesses/judgement is very useful and valid. No one has a crystal ball as to what is going to happen tomorrow let alone next year, we have good guesses but no one ‘knows’. Three years ago a soft landing had a non-zero chance of actually occuring - congress, the FOMC, bank regulators, etc… still had a window in which to act. Possible, yes, probable, no. But it was a possibility. That is exactly what sunk LTCM in 98, Amarath this year and will sink many in the furture - they relied tooheavily on what was highly likely to happen not what could happen but was unlikely- like the Russians defaulting on their debt.
“like the Russians defaulting on their debt”
Yeah, I loved that assumption. Gee, it would have taken all of about five minutes of research to find out the Russians are historic masters at defaulting on their debt (and other) obligations. So much for Noble “genius”.
buddhaman: Right on: builders and in fact the whole RE food chain needs sales volume, just were is the new crop of 20% down RE buyers going to come from?
Got buyers..
hey did neither
“‘They’re willing to take a volume hit but maintain pricing and margins,’ said Josh Spencer, a research analyst.”
A builder has a business plan based on completing and selling 5000 units per year. He actually completes 5000 but sells only 2500. Now how long before these folks are BK?
‘ And then there was yesterday’s news: Construction of new homes and apartments rose more than ex pected in September after three months of declines. The Commerce Department said ‘housing starts’ — when builders put their shovels in the dirt — increased 5.9 percent, to an annual rate of 1.77 million units, from 1.67 million in August. Economists expected an annualized figure of 1.65 million starts.’
‘But the headline doesn’t tell the whole story, economists said. The real import of yesterday’s data is that housing permits, a bellwether of future housing activity, plunged for the eighth straight month, dropping 6.3 percent in September. That hasn’t happened — eight consecutive monthly de creases — since 1974. In fact, permits are 27.7 percent below September 2005 levels, said Patrick Newport, an economist at Global Insights who tracks the housing and construction sectors. ‘On balance, this was not as good a report as the headline number implies,’ Newport said.’
‘Newport said weather played a role in the uptick in housing starts. ‘September was a good month for pouring concrete,’ Newport said.’
“‘Newport said weather played a role in the uptick in housing starts. ‘September was a good month for pouring concrete,’ Newport said.’”
A good month for pouring stiff drinks as well
It looks like they take as much Carnauba Wax as they can find and polish the turd then put it out for the unsuspecting masses to consume.
Just came from the annual benifits meeting. Something I noticed, the IRS allows hardship withdrawls from your 401k to prevent the foreclosure of your primary residence. This is what I’ve always thought, people will drain their retirement plans before accepting that they are going to lose the house that they vastly over-paid for and cannot afford. This will be both painful in the long run and just drag out the down turn.
Don’t worry — I am guessing there were enough of the 20-30 year old new age geniuses who saw the light of 0-down I/O ARM financing to serve as the thin edge of the wedge, as these folks also have 0 savings, 401k or otherwise.
The average boomer only has $50k. That would barely pay the RE comission on a CA house. 401k is not likely a big part of the picture, especially if people seek legal council and find out that it’s sheltered in BK. (at least that’s what I’ve been told, I’m not a lawyer and haven’t ever looked into the matter seriously).
Was this a recent change? Sounds like, in effect… 401k money will be readily available to pay off housing debt.
What about a HELOC, that was spent on bling and vacations? Since it’s tied to a house, would a foreclosing lender still be a “hardship” excuse?
I don’t think it’s new. You still have to pay taxes, on top of the 10% early withdrawal penalty charge. In other words, you’d have to be desperate/an idiot to do it.
“you’d have to be desperate/an idiot to do it”
Think so genius?
The meltdown will begin after the elections. Just watch FOX turn it on, if Dems control congress.
You just made me think of something. Will Fox even exist if the GOP isn’t running things anymore? What would be the use?
You misunderstand Fox - they think like a supmarket tabloid - whatever sells they like. RIght now the GOP sells. If financial busts sell, they will be all over it.
yes and no. if FOX could synergize the votes of tree-hugging, pot smoking, baby-killing sodomites with the votes of multinational corporate parasites, you can bet you’d see O’Reilly and Hannity in drag and lipstick (on camera, of course) talking about the genius of Robert Mapplethorpe.
Oh you bet it will start after the elections.
Ah, that would explain why I just received a mailer from my 401k administrator–JPMorgan Retirement Plan Services–outlining, in expensive color graphics–the costs of withdrawing from the plan before reaching retirement age. The investment banks see this coming–if they are not experiencing it already. If there is a run on 401k’s, would it drag the whole market down or create a “savings opportunity” for the wise?
I know more than my fair share of people that borrowed against their 401k to purchase last year.
jb
401k plans that allow borrowing have a repayment schedule, which if not adhered to, will cause the loan to be viewed as a withdrawal– hence, penalties.
I wonder how much “temporary” 401k borrowing is going on to cover rising ARM payments. (Or will). Now there’s a shadow statistic for ‘ya.
Have a somewhat wealthy friend ask the same thing about withdrawls from an IRA (no can do). I’d bet more than a few people will go this route hoping to ride out the storm……can’t be a good thing.
… for the stock market.
Actually, you can withdraw all of your *contributions* tax- and penalty-free from a Roth IRA (because after-tax money is used for contributions). And you don’t have to give a reason — it’s yours for the taking. Not so with the traditional IRA, of course.
Yeah, where are those bozos that keep stating RE money’s going into stocks?? The people losing their @zz in RE are going to be selling stock to cover their losses (or simply feed themselves).
Don’t tell me about “smart money” moving, either; the smart money left RE years ago, otherwise it wouldn’t be smart and there wouldn’t be any money.
“If you look at the record issuance [of loans] that’s been done, clearly you’re setting the stage for record problems.”
Sounds reasonable to me.
Los Angeles county property tax bills were just sent out. How many “OH MY GOD, WHAT HAVE I DONE”s will be said when the FBs open their statements.
‘The Federal Reserve will have to ease monetary policy to adjust to a housing market that is in a steep decline, according to Paul McCulley, managing director of bond giant PIMCO. McCulley said the current inverted yield curve - with short-term Treasury yields above long-term rates - cannot “long endure: either the Fed will re-slope it by cutting short-term rates below prevailing long-term rates or long-term rates will rise back above short-term rates.’
‘McCulley said two factors make it likely the yield curve will be returned to positive territory by Fed rate cuts. One is ‘the FOMC staff’s forecast of below potential growth for the next four to six quarters.’ The second is “that the residential property market will be just as inelastic to rate cuts on the backside of its bubble as it was inelastic to rate hikes while the bubble was inflating.’
‘McCulley said the housing market ‘has gone into severe retreat this year” - a trend that is not surprising given how momentum-driven the housing market is, he said. ‘
“Risk appetite in property markets will not be restored by modest declines in market-determined interest rates,” he said. As a result, policymakers will need to adjust down their estimate of the appropriate neutral real federal funds rate and will eventually have to cut rates.
“If inflation drifts down from the prevailing 2 1/2% rate to 2 - 2 1/4% and unemployment drifts up from the prevailing 4 1/2% to 4 3/4%-5% over the next year as the FOMC is explicitly forecasting, the Fed will be able to ‘justify’ easing to” a funds rate of between 4% and 4.75% the end of next year.”
Cutting rates by the 2nd quarter of 2007 sounds reasonable to me however its not going to help the housing bubble/bust. Might help the banks a bit though and they will need it.
Agree with McCulley that nobody is NOW going to buy houses just because Fed lowers rates. Public now knows homeownership is not the cruise-control route to riches.
PIMCO has a vested interest in talking about rate cuts. In fact, there is NO EVIDENCE WHATSOEVER to point to a rate cut. The EVIDENCE is overwhelmingly pointing toward rate hikes in 2007. Unit Labor Costs will probably start the chain of events.
Furthermore the Yield Curve is irrelevant in the context of overall economic activity because capital moves freely globally.
What is more important is the real interest rate and globally that is still quite loose.
That’s not to say that housing won’t fall to fair value. By definition it has to. But it won’t be because of the inverted yield curve.
If the Fed cut rates to 1% or even 3% again, I would buy a house. It ain’t going to happen because rates will hit 7% before they hit 3%, I assure you, but you would be stupid not to do it at this point.
For all of us out here, seems you have much more to say. I for one am listening…
hedgefund,
I am happy to listen as well. I am but a mere novice to all of this, but I too cannot see a rate cut happening. Wouldn’t that be disastrous for the dollar?
Yes, it would. That’s why the Fed is in a box. If they cut, the dollar implodes; if they don’t, the economy implodes.
“Unit Labor Costs will probably start the chain of events.”
If not rents…
http://www.signonsandiego.com/news/business/20061019-9999-1b19rents.html
Rents can go up, but not nearly enough to catch up with housing valuations.
The main reason is like you say, rents are a major part of inflation.
Thus, rising rents mean rising inflation. Rising inflation means higher Fed rates, possibly stemmed by dollar crisis (speculating here). Then rents don’t go up no more and the all the legwork in housing equilibrium comes from housing values. Boo hoo.
THEN YOU GET YOUR RECESSION BOYS AND GIRLS. Not at these level of rates though, still too stimulative for too many other sectors.
Think 1987 except today its Oct 1986.
You like to sound authoritative, but the fact is that the Street is split on where FF winds up next year, with GS calling for 4% and JPM predicting 6%. Sure PIMCO’s talking its book, but so, presumably, are you.
I’m not authoritative, I’m a realist. Sometimes the easiest path is to actually listen to the Fed. They are all talking about the inflation genie because they are preparing you for what is coming.
The GS boys don’t make their living on this sh!t, I do.
No respectable macro fund I know of is predicting rate 125-175 bp of rate cuts. None. Please note the word “respectable”.
MAYBE you get a 25 bp cut and that is so far fetched, I don’t want to even discuss.
“the Yield Curve is irrelevant in the context of overall economic activity because capital moves freely globally”
Yeah, the rules are different now.
“In “The Yield Curve as a Leading Indicator: Some Practical Issues,” which appears in the July/August issue of the New York Fed’s “Current Issues in Economics and Finance,” Estrella and Trubin try to quantify yield-curve signals and provide “practical guidelines” — rarely a priority in econometric research — on interpreting the spread in real time.
For “maximum accuracy and predictive power,” the authors use the average monthly spread between the Treasury 10-year constant maturity rate and the secondary market three-month Treasury bill rate expressed on a bond equivalent basis. “All six recessions since 1968 were preceded by at least three negative monthly average observations in the 12 months before the start of the recession,” they wrote. ”
Yield-Curve Recession Indicator Flashes Yellow
By Caroline Baum Sept. 5 (Bloomberg) -
“Though many detractors cite an inverted yield curve as an imprecise indicator, one form of inversion does have a perfect track record.
“That’s the type that results when the Fed, as it did at the end of June, knowingly inverts the curve by raising the fed funds rate to above the prevailing 10-year Treasury yield,” Ms. Sonders wrote.
When this happened in 1973, 1978, 1980, 1989 and 2000, the economy landed in recession within 18 months. In the other instance, in 1981, the economy was already in recession. ”
You can bet against the yield curve…..maybe “this time its different”.
I’m not.
I think the point is that we’re in ear where foreign demand exceeds Treasury issuance YoY, and this distorts the yield curve in ways that are difficult to evaluate. I believe we heading into deep severe and that recycled Asian surpluses are not going to save us, but I won’t trade on signals that I can no longer distinguish from noise.
It seems like rates are staying put for a while. Bernanke is getting the deer in the headlights look.
I agree. He’ll probably stand pat and keep that look until the impact of the skidding economic escalade finally splatters his pansy a$$ all over the road for all to see.
I’m with McCulley on this one.
The near term scenario is turning out to be a bun fight between hedge funds and bonds - bonds will prevail, of that I am sure.
By June next year I see the fed rate at 3.5 - 4%.
This is in line with McCulley’s statement that housing is doomed irrespective of rates.
This scenario allows the Fed to sink housing (and with it the derivatives), and concentrate on recussitating the broader economy, which just maybe will be succesful.
Yes, the Fed will cut rates with inflation expectations running at 2.3%, real rates at 2.4%, expanding manufacturing, expanding services, 4.6% unemployment, 83% capacity utilization, 4.9% Unit Labor Cost increases.
LOL. 175 bp of rate cuts next year. Yes sirreee.
Unit labor costs can be revised down to whatever number is politically expedient. This is what the BLS does best. LOL. The same applies to most other gubbermint stats. REEEELAX. Don’t worry — be happy. Have some Kool-Aid.
Conspiracies and the like are useless to discuss. If there are conspiracies then you need to learn how to live with it and make money off it.
I’m plenty in the cool-aid. Long European and US stocks, short some overvalued EM and long gold. How’s that?
posted “By June next year I see the fed rate at 3.5 - 4%.”
If so get ready for the 2 US Dollar’s to be worth 1 Euro.
“overvalued” EM? Interesting.
Are you really involved with hedge funds?
I work for a large lender, and was talking to one of the sales people from our ELOC group. She says their business has fallen off a cliff and she has absolutely nothing to do all day.
From Marketwatch:
Countrywide Reports September 2006 Operational Results
8:00 AM ET Oct 11, 2006
- Delinquencies in the servicing portfolio rose 35 basis points from August 2006 to 4.50 percent at the end of September.
This is a 7.7% monthly rate of increase. If it continues at this rate there will be over 10% delinquency rate in the servicing portfolio this time next year. I believe the rate will acclerate. The rate at which delinquencies are turning into foreclosures is also growing quite rapidly now. The meltdown has begun.
“‘They’re willing to take a volume hit but maintain pricing and margins,’ said Josh Spencer, a research analyst.”
Once they’ve mostly worked their way through the current high-cost inventory, I’ll bet they change their tune to, “…willing to take a margin hit but maintain volume.” And that, ladies and gents, is what will absolutely torpedo used-home sellers, IMHO.
hi chip,
Like your insight but the statement you are quoting seems off some how.
“‘They’re willing to take a volume hit but maintain pricing and margins,’ said Josh Spencer, a research analyst.”
Can the company really keep prices and margins up just because they think it is a good strategy? Buyer’s will decide. If The fully landscaped beauty in a established neighboorhood is a better buy…why are they going to hold Ryland’s prices up for them?
I agree the market is getting torpedoed and the two ships (reseller’s and builders) will be watching one another sink.
Hard for the Fed to cut rates if inflation continues to be stubborn…
Note the PCE numbers:
Six-month PCE inflation, annual rate
Mar.06 Apr.06 May06 Jun.06 Jul.06 Aug.06
Trimmed mean PCE 2.4 2.4 2.6 2.8 2.9 3.0
http://www.dallasfed.org/data/pce/index.html
What i don’t get about Ryland is why they’re intentionally leveraging their balance sheet at this point in the cycle. “The Company repurchased 1,850,000 shares of its common stock during the third quarter of 2006 at a cost of $75.1 million. For the nine months ended September 30, 2006, the Company repurchased 4,700,000 shares of its common stock at a cost of $250.1 million.”
Their net debt/Captial moved from 37.8% in Q2 to 43.2% in Q3. Is this really a smart move? It made their EPS numbers better, but they better be right that prices will stabilize, or they may be in trouble if they keep this up. Thoughts?