“The Ill Wind Is Not Pleasant”
Some housing bubble news from Wall Street and Washington. Paul Muolo, “Speaking before the National Association of Home Builders last week, Countrywide Home Loans chief Angelo Mozilo voiced his concern that some states may dictate ’suitability standards’ that could force mortgage bankers to make loan choices for borrowers, a proposition he finds alarming.”
“Preliminary survey numbers are starting to roll in, and it’s looking like the third quarter was a challenge for many lenders. Meanwhile, according to exclusive research conducted by NMN, payment-option ARM and interest-only loan production now accounts for almost 30% of industrywide fundings.”
The Washington Times. “The Commerce Department released dataMonday, on U.S. personal savings. The savings rate, personal savings as a percentage of personal disposable income, was minus 0.8 percent, 0.5 percent and 0.2 percent in July, August and September.”
“‘With housing prices falling and household wealth shrinking, savings should continue to improve,’ economist Peter Morici, of the University of Maryland, said. ‘Home purchases will be viewed as less of a near-term speculative investment, and individuals will be more likely to spend less on new homes.’”
From Bloomberg. “U.S. economic growth cooled to a 1.6 percent pace in the third quarter, the weakest pace in more than three years. Most of that slowdown came from a drop in construction spending and a wider grade gap. ‘We are feeling the effects of the housing bubble bursting and while the ill wind is not pleasant, it is not likely to be long-lasting,” said Joel Naroff, president of Naroff Economic Advisors
“Markets around the world are awash in excess cash, fueling a frenzy of investment from London to Tokyo that may lead central banks to push interest rates higher than investors now anticipate.”
“‘Interest rates in the main economies have still not been raised enough,’ says Tim Congdon, visiting fellow at the London School of Economics and one of the ‘wise men’ who advised the U.K. Treasury in the 1990s. ‘here is a buoyancy in asset prices one gets with high-risk monetary growth.’”
“Tim Drayson, global economist at ABN Amro Holding NV in London, says major central banks will all have to tighten credit more than investors now assume. ‘Money supply on a global basis is growing quite rapidly as is overall credit growth,’ says Drayson, a former U.K. Treasury economist. ‘We don’t see much evidence that monetary policy around the world is restrictive.’”
From MarketWatch. “The U.S. economy is strong enough that further interest-rate increases wouldn’t push it into a sharp downturn, said Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, on Monday. ‘The economy is resilient enough to withstand further tightening,’ Lacker said.”
“Lacker said he was not far out of the mainstream of Fed officials. ‘I’m unhappy with inflation where it is now and I’ve heard several other members say the same thing. So I think there is a broad consensus,’ Lacker said.”
From Reuters. “Bank of Canada Governor David Dodge rapped the government housing agency last summer for fueling inflation with new mortgage insurance products, according to a letter released by the central bank on Monday.”
“Dodge told CMHC President Karen Kinsley he was dismayed with a June press release announcing the agency was offering mortgage insurance for interest-only loans and for amortizations of up to 35 years. ‘At a time when the housing market is already overheated, further fuelling demand through CMHC actions would only put further upward pressure on prices and thus make housing less, not more, affordable for Canadians,’ Dodge said in the letter.”
“The central bank explicitly said high housing prices were a key risk to its inflation outlook in July, when it updated its monetary policy report.”
“CMHC’s press release also hinted it would look for ways to reduce the cost of accessing financing for house buyers, a development Dodge said would be ‘very unhelpful’ at a time when housing prices are rising faster than all other items in the consumer price index. Dodge’s concerns dissipated after meeting with Kinsley, central bank and CMHC officials said.”
From theStreet.com. “Land writedowns, along with continued aggressive discounting of homes, helped cut Pulte Homes and Centex’s quarterly earnings in half last week. But another looming hit to gross margins has yet to fully materialize in the homebuilding sector.”
“Homebuilders enjoyed record profit margins because they were generally building on cheap land that was priced before the boom. Builders are currently ‘working off all their old cheap land, but eventually they’ve got nothing but the more recent stuff,’ says A.G. Edwards analyst Greg Gieber.”
“‘If you look at land controlled by homebuilders, either owned or optioned, of the group I follow, 35% of those lots were priced in 2005,’ Gieber says. And a year ago, land prices remained high. Now builders are taking charges and walking away from options on that more expensive land, as Pulte and Centex did last week.”
“But much of that newer land is still on the builders’ books. This creates a tough dilemma for the companies. They can either build on their most recently purchased land and possibly lose money as housing prices fall or go flat over coming years. Or the companies can continue to write down their land and walk away from option contracts, as builders like Pulte and Centex continue to do.”
Fortune/CNN Money:
‘The real estate market has never offered such opportunity for graft. Since the housing market started to soar in 2001, mortgage fraud has become the fastest-growing white-collar crime, according to the FBI. Last year crooks skimmed at least $1 billion from the $3 trillion U.S. mortgage market.’
‘Now that the market is slowing, fraud is only rising. As business dries up, there’s increasing pressure on lenders, brokers, title companies and appraisers to be profitable. That means loan and title documents aren’t scrutinized as carefully as they might be, and courts - many of them so low-tech they resemble Mayberry - can’t keep up with the volume of paper. Then there’s the mad rush to sell, particularly by people who paid high prices for homes and suddenly can’t afford the mortgages.’
‘It’s like a tasting menu for con artists and grifters, so tempting that in some cities drug dealers have turned to mortgage fraud, plaguing lower-income neighborhoods with crooked mortgages rather than crystal meth. ‘It’s an easier, more surreptitious crime,’ says Gale McKenzie, a U.S. attorney in Atlanta.’
For me this is all the more reasson to stay clear of real estate right now. This will all shake out, but in it’s own time.
Check this story out about mortgage crime: Even gave Me the shivers!
the Bonnie and Clyde of Mortgage Fraud
http://money.cnn.com/magazines/fortune/fortune_archive/2006/11/13/8393072/index.htm?source=yahoo_quote
Douh! Never mind! Me dummy. It’s what your’ all discussing!
‘It’s an easier, more surreptitious crime,’ says Gale McKenzie, a U.S. attorney in Atlanta.’
________________________________________
I am starting to fear the fraud on the way down will be much worse than on the way up. The BMW’s, credit cards and McMansion payments will put more pressure on these crooks.
These will only add to the size of the bust.
It was always there. It’s just more scrutinized because the house of cards is toppling. Added to that the easy money is drying up and many people got used to the pay they were getting. Now they are more are finding more fraudulent ways to get deals done.
Now the spotlight is on them wheras before a blind eye was the solution.
there will be more fraud on the way down, though. Many brokerages surfaced in the last 5 years solely on refinancing. They rarely did purchases. Now 10-15 lenders are chasing each borrower for his/her business and the borrowers who need help are the most f’d.
Therefore every deal is precious but harder to get done without:
a) An exception granted by the lender (if you have good rapport with your account executive); or
b) Fraudulent bank statements, pay stubs, VCPA letters, etc.
“b) Fraudulent bank statements, pay stubs, VCPA letters, etc.”
Yea, this is great news to the midnight shift at Kinko’s.
But you’re spot on it was always there that’s why I get a chuckle sometimes out of the soap box sermon’s about mortgage fraud. If you think it was bad on the way up look out brother on the way down. Especially with things being so out of whack.
mrincomestream …..I don’t get much of a chuckle out of the fraud that has taken place and the attempts that will be made by people because of the market . The problem with fraud is someone always gets hurt .I’m all for regulations that keep innocent people from getting hurt .I don’t care if it’s protecting a retirement account or preventing people paying higher taxes because of fraud ,I want it addressed all the more because of the market being so out of whack .
Wiz-
I think you misunderstood. I was referring to people who get on their soap box and scream bloody murder about mortgage fraud as if it’s a new thing. Like LoonOfficer said it has always been here. The spotlight is on so folks think they have discovered something new.
Mr income scream , The fraud has always been there but in this market the potential is even higher in this real estate cycle IMHO . We have people like Casey getting loans these days so how easy will it be for a real crook .
Agreed, this coming cycle is going to bring out all sorts of creativity.
Speaking of Casey — how is that kid staying out of the booking room? Half the world knows about his shenanigans. It seems to me a bit like check kiting and bragging about it.
So , right now the first thing a lender has to do is make sure the appraisal is valid and you don’t have a crooked realtor/seller inflating the price so they can give cash back to a straw buyer or even a greedy one .
Because sellers might not be educated to the fact that inflating selling prices to give cash back is fraud ,maybe lenders should require the seller and buyer to sign a form prior to closing of escrow that this was not done as well as the escrow company ,(escrow companies know what checks they cut ).Also if referral fee check or any sort of non explained check is cut the lender is entitled to be notified .
The industry has to get serious about preventing fraud as desperate people do desperate things and the crooks are always around looking to cash in . Also RE Brokers should be made to report any commission checks on a deal that exceed standard amounts or maybe the escrow company .
“Also RE Brokers should be made to report any commission checks on a deal that exceed standard amounts or maybe the escrow company .”
How do you determine what is a standard amount? Are you suggesting some law that takes away the aspect of commissions being negotiable
No , Im not . You can make 15% if you want ,but if you kickback money to the buyer from your commission ,while the appraisal was raised in order to do so, than it’s just another way to defraud the lenders .
Standard amount would be 5 to 7 % IMHO .
If a agent isn’t pulling shit than he has nothing to worry about .
No Mr. Incomescream , you can make a 15 % commission if you want , but as a example, if you inflate the appraisal and kick back money to the buyer from that 15% commission , than its amounts to fraud to the lender .
So, I was just suggesting that amounts that exceed the standard 5 to 7 % commissions should be looked at as possible avenues of fraud to the lender ,that’s all .
(Mounts high horse). Is it possible for dissenting voices on this blog to be aired without juvenile name calling any more?
You make valid, provocative arguments but there is simply no need to undermine them with such playground theatrics.
(Dismounts).
Excuse me . Who called anybody a name and what playground theatrics are you talking about . I was asked a question by mrincomestream and I answered it . It is I who appears to have a dissenting voice on this issue of lender fraud and just how destructive it has been so I feel like I should be able to post my opinion on it .
If the spelling “mrincome sCream” was a typo then ignore my post. I saw it twice and thought it was neither a coincidence or necessary.
Totally a typo . I’m not the best at typing but I can assure you that I was just getting my 2 cents in on a issue that I find important . Mrincomestream and myself don’t dislike each other .
Ahhh don’t begrudge Wiz, much to his annoyance I enjoy, respect and look forward to his posts. He’s a veteran of the industry. Who knows what he’s talking about it. I just happen to believe that most of his solutions would require mass federal intervention. His previous career was smacking sense into guys like me and he’s been in it long before being PC was status quo so I’m sure his responses to me are kind. I’m sure if he was still active and I was one of his horses I’d be checking his forehead for fever and calling the paramedics if all he did was call me mrincomecream LOL.
My typing sucks as well so maybe I’ll just stop assuming the role of bloggilante and mind my own bizniz.
(Clicks heels and rides off).
Gee, I thought Mr Income Scream was a complement.
Kind of like when Chappelle screams “Im Rich Beache” at the end of his show. He was just giving income his “profs”!
Mr. and Ms. Scammer confirm our understanding of the loose lending environment:
“Hell, one of the owners of a bank was in my office the other day, and he told me that as long as the borrower makes his first mortgage payment and the bank sells the loan to his secondary investors before the loan goes into foreclosure, he really doesn’t give a crap whether the loans contain fraudulent documents or not.”
And therein, with that statement lies the whole problem with the lending institutions and the heart and soul, ah yes, the very essence of the Housing (lending) madness.
It’s madness, I tell you. Madness!!!
Mozilo’s comment is interesting - that states shouldn’t dictate what types of loans borrowers can get. OK….then how about forcing you to hold most of the garbage you underwrite. How good do those loans look now?
I believe chargebacks on defaulted loans would go a long way to holding those responsible accountable. I strongly believe the ability of originators to sign up loans with no hope of long term preformance and then turn around and dump them has been largely responsible for the recent loose lending standards and fraud.
If there is strong demand on the MBS market for the garbage, more power to CountryWide.
I still don’t entirely understand how this all plays out in the case of mass underperformance of the subprime loans. Who is the trustee after the mortgage is packaged and sold? What is the trustee’s responsibility vis-a-vis the holders of the securities associated with that loan?
Emceee , when you find out , let me know. I have been trying to figure out a way to trade the default tsunami which is coming. Several have insisited that the countrywide’s and Wamu’ of the world will come out fine , as they have little exposure to previously written crap-paper. Someone has to be holding the bag. I believe that there is someone, beyond all the far-flung mortgage backed carve-outs that are sprinkled across hedge funds and pensions, that will get burned by this. I just find it hard to believe that a sh*t-storm of this magnititde could be effectively hedged away so easily. Though I guess that the markets are efficient in this regard more than others it seems.
The secondary market needs to wise up . Maybe they shouldn’t buy notes unless the jerk lender takes back the defaulting loans for a longer time than the current notes ,(how about 5 years ).
Or maybe they shouldn’t buy the notes unless the lender is willing to take back notes that default because of fraud in loan applications .
Something has to happen because as long as lenders just make nice looking loan packages for the secondary market and don’t care if the loan applications or appraisals are false, we are in trouble .
I believe this sort of “don’t give a damn ” original lender underwriting was the largest factor in the housing mania run-up .
Please , somebody agree with me ,we can’t have our financial systems running like this .
If the losses are big enough, the bond holders will certainly sue the lenders who originated underperforming loans. I believe that the big lenders have more liability than most think because of this.
Here is how a securtisation works.
1.) Loans are originated.
2.) The loans are held on a “Warehouse line”
3.) The loans are bundled into a trust.
4.) Bonds are sold in tranches with different credit ratings depending on how senior they are.
5.) Several tranche’s are rated junk, as they are the first loss tranches.
6.) The money from the sale of the bonds is used to pay down the warehouse line.
7.) The trustee’s passively administers the trust, by supervising the loan servicer and making payments to the certificate holders.
====
The trust is structures so that in the event of prepayment/defaults the tranches are wiped out in a certain order. If there is more than expected credit loss, then the first loss tranches will be wiped out and losses could creep into the investment grade tranches.
Subprime pools require lots more over collateralisation and credit enahncement than higher rated pools.
If you wanted to play this, you could short the subprime lenders but they are already pretty cheap, and sub prime REITs pay out huge amounts of dividends. That could stop though.
Unfortunately I agree with Mozilo. I do not want the states or the Federal government to enact new laws that will cost the rest of us increased bills for few if any results. Why should I expect new laws to make any meaningful difference other than hiring a few relatives when the states and fed cannot even enforce the current laws on the books?
a new victim class for the left
along w fatsos,drunks and bums
my, you do have a way with words!
There is a difference between the government dictating standards and the mortgage originator using sound approval standards. If a lender does not use sound underwriting standards, they will pay in the long run: losses on buybacks, losses on servicing portfolios, lawsuits from bond holders and victimized borrowers, higher costs to issure future bonds, which will cause them to have uncompetitive rates and lower loan production.
issue not issure.
Thank you Mr. Sensible lender for your sensible statements that I didn’t see until after I made my post .I like your post better .
But Hoz . If the financial institutions don’t get this crazy underwriting within reason we will have taxes raised for bail outs and a possible depression if we stretch this bubble any more by putting people on loans they can’t afford by easy underwriting .
Prudent underwriting and accurate appraisals will only help the regular loan applicant who can afford the payments and want to buy a home .
Alot of the regulations are already in place, but they have been ignored in this easy money real estate cycle .
I don’t like regulation so, in a sense I agree with Mozillo. However, Housing Wizard’s point is valid; in the 90s taxpayers paid for lending stupidity.
Compromise? Mozillo can keep all the different products but they have to be scaled to offset the risks. Example; a very well qualified borrower can do a no doc, variable, interest only loan but not a marginal borrower. The problem in real estate now is the speculation driven building and price run up due to dangerous loans to marginal borrowers.
A case can be made in financial planning (for a solid borrower) to using one of the new mortgages vs a standard one. This doesn’t represent much risk to anyone but the otherwise well qualified borrower, who (of course) is entitled to take risks with other people’s money as long as they largely have the wherewithal to pay it back.
The problem today is that so many were given loans who never had the wherewithal to pay the loans back as they were all dependant on further increases in housing prices.
Hence the bubble, hence the popping once the musical chairs price appreciation game ran out.
Right jag…. I have gone on adjustables before in my investment days ,but I qualified .I don’t say get rid of loan product but make sure the borrower is qualified for the loan long term and the lender and buyer is protected by what the loan risk is by sticking to underwriting standards . If a lender is relying on real estate going up to offset the risk it’s just plain stupid .
Simple Bachelors degree educated hw here: Just curious if anyone here thinks those holding the MBSs understand the lack of quality but don’t really care as carrying our debt still suits their overall needs? I find it hard to believe that none of them lurk here.
When I think of the increase in China’s cash reserves in the last few years I’m wondering (as a layperson) if perhaps a proportion of defaulting loans is considered the cost of doing business.
Good question . I don’t think the lenders expected a crash of the real estate market to the degree that is happening .So while a certain amount of defaults are expected ,I believe the amount of defaults will exceed
the projected amounts .If the defaults are manageable I will be happy, but I’m really concerned about it .
“Homebuilders enjoyed record profit margins because they were generally building on cheap land that was priced before the boom. Builders are currently ‘working off all their old cheap land, but eventually they’ve got nothing but the more recent stuff,’ says A.G. Edwards analyst Greg Gieber.”
Gieber is wrong about this. It doesn’t make any difference whether builders build on the old “cheap” land or the new “expensive” land already on their books . In the end it all falls through to the P&L. The only decision that matters is whether they choose to build at all.
His point is that the home builders’ 2005 earnings were temporarily boosted due to the sudden rise in home prices and the low costs basis of the land they were building on (since the land was purchased years earlier at much lower prices).
Much of the low cost land has been flushed from inventory and now they are building on the more expensive 2005 era land. In addition, they’ve got to reduce prices from 2005 levels and offer incentives.
What boosted their earnings in 2005 will now crush their earnings going forward. Especially those builders with the greatest 2005 era inventory of homes, land, and land options. e.g. Centex.
How much do they pay for the options if they don’t execute them? If house prices go down, shouldn’t land prices fall until (the value of developed land) - (the cost of development) = (the cost of undeveloped land) + (small profit for developer) ? At least until the value of the land is greater for farming than development.
‘With housing prices falling and household wealth shrinking, savings should continue to improve,’ economist Peter Morici, of the University of Maryland, said.
Alas, that increased savings will come straight out of consumer spending and place even more downward pressure on the GDP.
yep
” he savings rate, personal savings as a percentage of personal disposable income, was minus 0.8 percent, 0.5 percent and 0.2 percent in July, August and September.”
there is your consumer driven recession possibly starting right there. people are actually (dis)saving a little bit more each month.
What I see is a barbelled problem:
Roughly, people are either spenders or savers. The spenders have been totally flushed out in this game either by speculating outright on homes, flipping or by maxing out on the biggest McMansion. These people aren’t going to be able to spend because they are either going to be squeezed by higher rates on their debt or defaulting on the debt outright.
Most savers have probably been appalled at the escalation of housing prices. While they might not have saved more (as their own properties appreciated) seeing the value of their homes decline will only give them incentive to save more.
The outcome is rapid, FORCED, shrinkage of spending by spenders at the same time rapid, VOLUNTARY, increased savings by savers. I can’t see how this does not impact the an economy lead by “the consumer”.
Good points jag .
“…companies can continue to write down their land and walk away from option contracts, as builders like Pulte and Centex continue to do.”
What I find startling, is that while these huge builders are writing down land, smaller builders keep paying through the nose for land here in western Washington. I think they are delusional with greed, and will most certainly go bankrupt. It is amazing they cannot read the writing on the wall. I guess they are buying into the “But it’s special up here” BS.
Another story about how real estate is not going to fall much and more or less rebound in 2007.
More RE propaganda from the Federal Reserve.
U.S. Home Prices May Fall
But Drops Will Be Mild
By Brian Blackstone
From The Wall Street Journal Online
U.S. housing prices may decline “a little” within the next year, but any such drop is likely to be mild and inconsistent with a bursting housing bubble, according to a paper written by a Federal Reserve economist.
Based on an analysis of housing futures and options and derivatives of housing-related company shares, “market participants expect home prices to decelerate sharply or actually decline a little within the next year,” wrote J. Benson Durham, an economist with the Fed’s monetary affairs division. However, the anticipated drop in prices “is mild compared to some estimates of the purported overvaluation of the housing market,” he added. The paper, dated September, was posted on the Fed’s Web site Thursday
Full story http://tinyurl.com/ymubyf
Of course prices here in Sacramento seemed to have already declined 5 to 10 %.
Propaganda will only go so far towards making record new home for sale inventory magically disappear.
U.S. Home Prices May Fall
But Drops Will Be Mild
Somehow, the UK has managed to keep things propped up pretty well. prices have fallen somewhat in the south, but overall, a very different picture from what we see here… I somehow doubt the Fed has many rabbits left in it’s hat, given the magnitude of the problem.
I couldn’t disagree more strongly!!
The UK South, and especially the South-East around London, is exactly where prices in general have kept rising.
Different story in parts of the Midlands and North,particularly with respect to new-build flats (= condos).
I’m firmly convinced the Fed knows that real estate is f*%ked, but can’t admit it publicly. In fact, one of the governors was recently quoted that rates my still be going up because there’s too much cash out there creating similar bubbles in hedge funds, private equity, etc. The quote here refers simply to the backwardation of the traded futures, which are showing like 6-7% declines by next summer.
Remember, however, that the Fed is not a unanimous organization. Hope all read the Marketwatch article on the Fed’s Richmond, VA president, Stephen Lacker, and his speech today.
Here is the money quote, if one is seeking a prediction on the future of the FOMC rate: “I’m unhappy with inflation where it is now and I’ve heard several other members say the same thing. So I think there is a broad consensus…The difference of opinion has to do with assessment of risks and assessment about the outlook,” Lacker said.
He’s saying that if the economy starts going down, those ‘other members’ will start to vote independently of Helicopter Ben. And that vote is not to cut interest rates, but to raise them.
But Lacker may do the right thing for the wrong reasons. “But Lacker dismissed fears of a “catastrophic collapse” in the housing market, saying that the fundamentals of income and job growth remain favorable. Outside of housing, Lacker said the economy remains “in good shape.” He said that the overall outlook for spending “looks pretty good,” with no sign that the weakness in housing is forcing consumers to rein in their purchases.”
When the US economy is driven by housing spending, those ‘reined in’ purchases will start to leave their mark. Perhaps not in this month’s statistical release, but those losses will start to gouge the overall economic growth as this Fed-induced disaster looms larger.
Still think it is amazing that this one guy in Richmond, never elected or publicized outside of financial circles, holds the key to our national economic situation.
“He’s saying that if the economy starts going down, those ‘other members’ will start to vote independently of Helicopter Ben. And that vote is not to cut interest rates, but to raise them.”
Volcker’s shadow is very long.
What a leap! Taking the current specific projection ‘an analysis of housing futures and options and derivatives of housing-related company shares’ and moving that to a projection of the general is nuts. I suppose that the ‘housing futures’ are rock-hard notions of value and immune to any future adjustments. But I thought markets are adjustment vehicles…
Let’s play devil’s advocate for a second: Because there is cause for great concern here.
Its easy to say that the Fed is spouting ‘propagand’a and trying to make housing look better than it is. But lets just say for the sake of argument that they’re not doing that at all.
Remember: There *is* one way to keep housing prices from dropping at all. Its called “inflation”. If a house is sticker-priced at a million and only worth $500,000 in today’s dollars it *should* fall to meet the waterline of demand. BUT, if tomorrow’s dollars are only worth half as much as today’s dollars, well then… the sticker price would stay the same and anybody holding dollars (and not gold/silver) will be the big losers.
I frequently brush-off optimistic projections from the real estate industry as being utter b.s. But I have to admit to getting a little nervous when the people making the optimistic projections (the Fed) are actually holding the controls to actually make their projections come out right!
The question of the real estate bubble isn’t just about real estate. Its also about the dollar. And its 100% certain that if the banking industry itself starts to look threatened with bad debt and illiquidity, the Fed will come to their rescue with an ocean of freshly printed cheap dollars.
Which brings me to a question for the board: You’re all pretty short on real estate (as am I), but how many of you are in gold, silver and non-dollar assets? Because real estate is certainly f’d. But the question isn’t whether or not real estate is f’d, its “Is real estate *so* f’d that the only answer is massive inflation?”
IMHO that’s the scary part of the equation.
Bingo. But of course, the specter of massive inflation, which will inevitably lead to hyperinflation, carries with it downside which far outweighs any perceived upside. Hyperinflation destroys currencies, goverments and finally, countries. Not to mention many innocent people along the way. If the Fed decides that’s their only course of action for the short term, in the long term we’re all toast. On the other hand, in the long term we’re all dead, so the sins of the father will be squarely visited upon the heads of all your children. The ultimate rock and hard place conundrum.
Nicely struck, Greg C!
Well the difficulty is that it appear that they have no control over where the money actually goes. We’ve just gone through a HUGE inflation of the monetary supply since 2001and yet because of global wage arbitrage, we haven’t seen a wage/price spiral. Instead the money has flowed into RE. If it now flows back into capital markets, it will raise stock prices and increase the cost of buying future revenues while bringing increased returns to current holders of equities. All of this without adding to the ability most wage-dependent Americans to buy anything or service existing debt.
“Homebuilders enjoyed record profit margins because they were generally building on cheap land that was priced before the boom. Builders are currently ‘working off all their old cheap land, but eventually they’ve got nothing but the more recent stuff,’ says A.G. Edwards analyst Greg Gieber.”
Darn it! I told them not to use the FIFO method of Accounting. Now, it looks like margins and cost are 45 angular degrees from each other and compressing… Pretty soon margin is going to fall right through cost and then what… minimize loss?
No, no… it was the FIDO method. All dogs, all the time. Now their hungry and at the door, looking to eat their masters.
i like FISH. First In, Still Here.
It seems likely that most publicly traded homebuilders will end up with at least a year or two of losses. With margins falling hard and volume likely to go much lower before it bottoms out, gross margins are going to be under extreme pressure. Having managed a good sized business through such a period, I can confidently state that these homebuilders will be unable to cut corporate overhead nearly fast enough. These homebuilders are ultimately likely to retrace all of their gains in the last 5 years. Homebuilding is, after all, a highly cyclical business.
A must read from Mother Merryl on the housing market. Pretty cut-throat in its outlook.
http://www.billcara.com/ML%20Oct%2026%202006%20D%20Word.pdf
“Pretty soon margin is going to fall right through cost and then what…”
Declare BK? Or is it different this time?
Posted earlier :
‘Homeowners with adjustable-rate mortgages worry about rising interest rates, but many believe they will be able to refinance their loans if necessary, according to a study released Monday. Wells Fargo’s third annual homeowners study also found that homeowners expect their properties to appreciate, although they apparently are aware that price increases are slowing.’
‘Woo Ho said that one surprising finding was that younger homeowners — especially those born since 1964 — view their homes as a good investment as well as a place to live. Overall, 72 percent of those surveyed said that the equity in their home was their most important investment, she said. ‘That’s a shift,’ Woo Ho said. ‘A home is now considered a major part of homeowners’ financial portfolios.’
Just paid $700 on Friday to repair a heater in my investment.
Paid 12K for a roof, 10K for windows and 3K for paint this year. Deferred maintainance is a bitch. Some ‘investment’ - like paying the bank to hold your money.
do you live in a 16th century castle?
I was wondering the same thing 12k for a roof sheesh.
Don’t get the comment. You see that as high, or low? 12K for 38 squares of 50/y comp is a hell of a deal, at least in CA.
Neighbor of mine got a quote of $10k on a simple 2000 square footer. He had a very simple roof compared to ours. The problem locall is roofers seem to have a problem keeping insured so owners don’t have a lot of options if you want your roof done by someone who won’t sue you if there’s an injury.
$12k for a roof is not bad at all. They can go well over $20k here in Washington if they need new sheething, etc.
Yeah, the work comp rates for roofers is about 100% here in the peoples republic of kalifornia. That means that if you pay a roofer $20/hour, you pay state fund $20/hour for the ins. But the roofer only gets about $14 of his share…
“Speaking before the National Association of Home Builders last week, Countrywide Home Loans chief Angelo Mozilo voiced his concern that some states may dictate ’suitability standards’ that could force mortgage bankers to make loan choices for borrowers, a proposition he finds alarming.”
‘Suitability standards’, eh? Didn’t they used to call this ‘underwriting standards’ back in the olden days?
Mortgage bankers have always, albeit indirectly, made loan choices for borrowers. If powerhouses like Countrywide wanted their retail and wholsale divisions to push a particular loan product they just increased the financial incentive for their workforce.
When Countrywide rolled out their Flexsaver ARM (a HELOC in first position…. unlike other HELOCs which are traditionally 2nd mortgages/trust deeds) workers in the call centercould make more per deal by originating them. Therefore everyone tried to sell them.
Similarly, lenders love brokers to sell the Option ARM so they price them with up to 4% ysp (dependant on which lender’s pricing you are looking at). Therefore a broker can make much more on the same loan amount if he sells one loan product instead of the other (i.e he can make more on an option ARM than he can on a 30-yr fixed). That is why we have seen the run-up in ARM loan origination: It has been more profitable to the lender and originator alike.
Ammendment: “Mortgage bankers have always, albeit indirectly, INFLUENCED loan choices for borrowers”
You were right the first time.
(It was another pre-emptive strike at the peanut gallery. I’m sure you understand, ;-))
My neice works for Countrywide. I dont know exactly what her job is but she takes calls. And she wins prizes. IPods, DVD players. She gets bonuses based signing the caller up for other CW products.
Sounds like she works the retail side at a call center as a loan specialist. I could be wrong but that’s what it sounds like.
So true loonofficer , good post ,( I hope I spelled your name right ).
Ya got me. Ha!
“The Commerce Department released dataMonday, on U.S. personal savings. The savings rate, personal savings as a percentage of personal disposable income, was minus 0.8 percent, 0.5 percent and 0.2 percent in July, August and September.”
The widening gap…
“‘With housing prices falling and household wealth shrinking, savings should continue to improve,’ economist Peter Morici, of the University of Maryland, said. ‘Home purchases will be viewed as less of a near-term speculative investment, and individuals will be more likely to spend less on new homes.’”
Ergo new home prices will be likely to continue falling.
Arithmetically then, should the savings rate for October be plus 0.1% What a deal!!!
Well, yes. Gary Schilling (Forbes columnist) has been beating the housing bear drum for a couple of years, and his forecast of disaster includes Americans becoming “savers, like the Japanese.” Hey, our grandparents did, in the Depression. Even though we are all bombarded with Buy Buy Buy every day, people might wake up because they have to.
Well, yes. Gary Schilling (Forbes columnist) has been beating the housing bear drum for a couple of years, and his forecast of disaster includes Americans becoming “savers, like the Japanese.” Hey, our grandparents did, in the Depression. Even though we are all bombarded with Buy Buy Buy every day, people might wake up because they have to.
Slightly off thread, but spent the weekend in Miami and got a couple different takes on the market which I thought I would post on the most recent thread. Strictly anecdotal.
(1) Was chatting with a guy yesterday during a bike ride and complimented him on his new top-end bike. “I’ve had a pretty good year,” he said. “In fact I’ve had a few pretty good years.”
Turned out he’s a mortgage broker in downtown Miami. Claimed business was good, this was best year yet. Said most of the condos (huge narrow 40-50 story Brazilian-style high rises on north side of downtown) were pre-sold. “Yeah, to the banks,” I ventured. “No, most of them are 20%-down mortages. I see the paperwork, it’s solid.” Buyers? Him: Europeans, New Yorkers, South Americans, all over. They can ride out a downturn. People have said the roof is caving in for the last two years and it hasn’t happened yet.
Guy seemed totally optimistic and upbeat. Also mentioned that some people buying as a currency hedge. I admit - the hot money looks to Miami, and in that sense Miami is different. But it’s still hot money.
(2) Friend of mine now working at NW 24th and 2nd Ave. - what used to be euphemistically called midtown but was really an urban pseudo-out slum between downtown and the designer district, but now is booming as the skyscrapers creep northward. She has a different take.
Says there are lots of degenerates around. Says the big talk is the new Performing Arts Center being built, but there’s no parking and at night it’s dangerous - lots of sociopaths. Meanwhile, her brother-in-law lost his lawyer job in the city and had to move north to PBC for work where they are building some colossal house, but they are stuck with a house in South Miami they can’t sell, plus a condo on Marco Island - she said her b-in-law was getting suicidal (admittedly, part of it is her sister - hope they’re not reading - hey, don’t worry it’s not you!).
Oh, and another big deal is there’s a shopping center coming downtown and a big anchor is. . . Target! Hey, whoopee doo! Right, $50 billion worth of luxury condos at a mill or so a pop, and it’s all hunky-dory because there’ll be a Target. Of course, you can’t walk there, or park anywhere, . . . mortgage prison, indeed.
Also, I did drive around some of the nicer neighborhoods in Coral Gables, South Miami, and the Grove and didn’t notice an overwhelming number of houses for sale - but certainly no less than previous visits, either. Bottom line - Miami is incredibly overbuilt, but there’s no doubt that people still do want to live there.
“But it’s still hot money.”
Wonder how much of it is “hot” in the other sense.
Good point on land.
Builders using land purchased before the boom means they can still build homes at much lower prices and make a profit just not super profits. So prices of new homes will go much lower because builders will not stop building even when prices are falling.
Builders in the Elk Grove area near Sacramento are still starting several new tracts. No slow down here even with sale of new homes falling and price declines
Conrad,
Which builder do you work for?
No builder here.
Do not misunderstand me. I just think that builders are going to crash ( most builder stocks are down 50% from their highs of last year) and they are going to drive prices down, way down. Land prices are going way down. Some builders will have big losses next year. Builders will race to the bottom in a classic over supply where no one makes money. Boom and then bust. Boom is over, bust is here.
Their book values are inflated due to incorrect land values, if marked to market value the book values would be much lower. If they were smart they would have stopped building last year or at least put projects on hold, especially in CA.
Sorry I misunderstood your previous post. Do you know why the builder share prices always go up on bad news?
Expectations, stocks will go up or down based on expectations of traders on wall street. So in the case of bad earnings or news for a builder stock earning were bad but not as bad as expected. Same for good earnings a stock may have increased earnings 50% in a quarter, but they had expected 75% so the stock will sell off.
Lately HB stocks have increased in price because they are expecting the bottom is in. Hopeful expectation on their part. There was a story in Barron’s lately about how Hb stocks were selling near book value so there was some buying, but I think the book values are ficticious.
May be a good time to buy June or Sept puts. Hold til after the spring flop in housing sales.
Here’s an update on Rusty, our rescue dog who lost his home because he chased the realtors away from his prior owner’s house. LOL. Smart dog.
http://www.fbrnetworknews.blogspot.com/
Which In Turn Crazy Quilt:
http://www.xanga.com/home.aspx?user=russwinter&nextdate=10%2f30%2f2006+23%3a59%3a59.999
From Matrix — the Five Stages of Housing Grief.
http://matrix.millersamuel.com/?p=937
‘Builders FirstSource Inc., Dallas, TX, a supplier and manufacturer of structural and related building products for residential new construction, reported third-quarter sales declined 11.5% to $569.9 million, and profit was $17.3 million, down from $27.8 million in the same period last year.’
‘Our third quarter results reflect the current challenges facing the homebuilding industry as many homebuilders work through excess inventory,’ said CEO Floyd Sherman. ‘Our sales were down only 11.5% year-over-year despite an estimated 20.6% decrease in housing starts in our markets and a 14.3% decrease in nationwide commodity lumber and lumber sheet good prices.’
‘Economic growth will continue to slow through the rest of 2006 but should return to near normal growth during 2007 and 2008, according to the latest economic forecast released by the Mortgage Bankers Association. Total residential mortgage production in 2006 will be $2.46 trillion, the fifth-highest level ever, but will drop another 14 percent in 2007 to $2.1 trillion and remain unchanged at that level in 2008.’
“but should return to near normal growth during 2007 and 2008,”
Ain’t it grand that everything returns to near normal so quickly in the 21st century?
and they were a big “katrina” supplier
A good trend in Las Vegas:
http://www.lasvegassun.com/sunbin/stories/consumer/2006/oct/29/566675799.html
“But much of that newer land is still on the builders’ books. This creates a tough dilemma for the companies. They can either build on their most recently purchased land and possibly lose money as housing prices fall or go flat over coming years. Or the companies can continue to write down their land and walk away from option contracts, as builders like Pulte and Centex continue to do.”
Luckily builder stocks always go up.
… until they stop going up, that is …
http://tinyurl.com/8cqwt
This all transpired in the South East market where the values involved are not insanely high. I cannot imagine how rampant this is in SoCal and the magnitude…it’s scary.
Bank of Canada Governor, David Dodge: “At a time when the housing market is already overheated, further fueling demand through CMHC actions would only put further upward pressure on prices and thus make housing less, not more, affordable for Canadians.”
Check it out. This Canadian guy actually gets it!