October Housing Starts “Tumble”
The Census Bureau has the new home numbers out. “Privately-owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 1,535,000. This is 28.0 percent (±1.2%) below the October 2005 estimate of 2,131,000. Single-family authorizations in October were at a rate of 1,173,000; this is 3.8 percent (±1.3%) below the September figure.”
“Privately-owned housing starts in October were at a seasonally adjusted annual rate of 1,486,000. This is 14.6 percent (±7.6%) below the revised September estimate of 1,740,000 and is 27.4 percent (±5.3%) below the October 2005 rate of 2,046,000.”
“Single-family housing starts in October were at a rate of 1,177,000; this is 15.9 percent (±7.4%) below the September figure of 1,400,000.”
From Bloomberg. “Housing starts in the U.S. tumbled in October to the lowest level in more than six years, as waning home sales and swollen inventories discouraged new projects.”
“‘This is a shocking number,’ said Phillip Neuhart, an economist at Wachovia Corp. ‘The market is going to remain weak well into next year.’”
“The decline was led by a 26 percent drop in the South. Starts also fell 12 percent in the Midwest and 2.1 percent in the West. Construction rose 31 percent in the Northeast.”
“The number of homes available for sale averaged 556,000 a month this year through September. That compares with a 457,000 monthly average for the same period in 2005 and 351,000 during the past 10 years, according to government figures.”
“‘The excess supply of homes on the market is putting downward pressure on prices and that’s making some potential buyers put off a purchase until the negative impact is finished or near finished,’ said David Berson, chief economist of Washington-based Fannie Mae.”
From Reuters. “Many economists had thought the worst of the housing slump had already passed, and data released earlier this week seemed to support that idea, but Friday’s data cast doubt on that view. ‘The raw number (housing starts) looks incredibly weak,’ said econimst Robert McIntosh.”
“Permits for future groundbreaking, an indicator of builder confidence, fell 6.3 percent to an annual pace of 1.535 million units, the lowest rate since December 1997, from a 1.638 million pace in September. Permit applications were down 28 percent from October 2005.”
From CNN Money. “Both housing starts and applications for new building permits tumbled well below Wall Street forecasts - a sign that the slumping housing market has not yet hit bottom.”
“‘Today’s figures clearly reveal that a quick turnaround in this sector is not just around the corner,’ said Anthony Chan, chief economist for JPMorgan Chase Private Client Services. ‘Any real turnaround may not be forthcoming until the central bank reverses course and begins to lower short-term rates again.’”
“There had been hopes from other recent real estate reports that perhaps the slump in home sales and home building had bottomed out. The National Association of Home Builders’ survey of builder confidence for November posted a modest increase for the second month, even though far more builders still saw the market as poor rather than good.”
‘Any real turnaround may not be forthcoming until the central bank reverses course and begins to lower short-term rates again.’
‘Federal Reserve Bank of St. Louis President William Poole this week said…that he is concerned about the number of would-be purchases being canceled.’
The market is overbuilt, and the only cure for that is time, not rate cuts. More news:
‘Mortgage finance giants Fannie Mae and Freddie Mac will have to tell the U.S. Treasury Department more about their funding needs before accessing the debt markets under new guidelines due to be unveiled as soon as Friday, legislative staff said. The new rules will not explicitly limit the companies access to the debt markets but will require much more disclosure than was previously required, the source said.’
Sounds like respiking time is close at hand…
“The market is overbuilt, and the only cure for that is time, not rate cuts.”
Overbuilt is only one dimension of the problem. Another one is a severe mismatch between the new housing stock and the prospective buyer pool — there just are not enough budding CEOs out there to soak up all the McMansions priced over $500K.
This is a direct consequence of high rates of real housing price inflation, as one earns twice the wealth effect by owning twice as much house under such conditions, which tends to fuel McMansion demand. Unfortunately, builders also earn much more by building large homes when prices are rapidly inflating, which explains the McMansion glut currently facing most every large US city, which would only get worse under a reflation policy.
GS, your comment is right on target. I’ve seen lots of this here in Portland, Oregon. Here in Oregon, we have no sales tax, but we have income and property taxes. In general, the property tax is about 1% or so. I see lots of houses in the 400K range… which, even if one could afford the mortgage, will cost $400 a month. Don’t know about you, but that’s more than I want to pay, if I don’t need to.
MacAttack,
I have friends that pay upwards of 12-15K a year to live in “the West Hills”. As they near retirement they have some decisions to make. At the rate of 1K per month in prop. taxes on a FIXED income how much is the “prestige” of living there really worth to you? I know that like yourself, even if I “could” afford it I’d be looking for cheaper digs. Nice view and all but definitely not worth it where I’m concerned.
GS,
How the market works that out is anybodies guess. Lots of duplexes?
I recently toured some large homes in Eastlake, San Diego, with about a third of the house partitioned into a “Studio” unit complete with separate entrance and kitchenette. These units seemed to be geared for extended family members, aging parents (with income of course, not the deadbeat kind) or college-age children.
I definitely think we can expect a lot of single family homes turning into multifamily homes before this is done. I think a lot of wannabe McMillionaires are going to recoil in horror as their fantasy enclaves fill up with the unwashed masses and their secondhand automobiles.
How frustrating it will be: what’s the point of exclusivity if you can’t, you know, exclude people?
“I think a lot of wannabe McMillionaires are going to recoil in horror as their fantasy enclaves fill up with the unwashed masses and their secondhand automobiles.”
That’ll work wonders for the comps…
Not to mention plenty of testy “You are in violation of the HOA regs !!!” confrontations in some areas. If you think people hate HOA’s now — wait’ll you see how people feel about in the tough times!
I live in half of a duplex, w/4 brs, 2 1/2 baths — 1800 sf+; I have to wonder whether our place was built as a 3600 sf+ McMansion back in the early 1980s…
‘Any real turnaround may not be forthcoming until the central bank reverses course and begins to lower short-term rates again.’
I’d be shocked if there isn’t a cut at the December Fed meeting. Think of what the markets would do then. A sort of “Merry Christmas” gift to Wall Street from Ben and gang at the Fed.
“I’d be shocked if there isn’t a cut at the December Fed meeting.”
I would be shocked if there was a cut prior to June, 2007. As Lacker implied Inflation is still rearing its ugly head. Since Japan has stopped buying US Bonds and China wishes to diversify, the Federal Reserve may have no choice but to keep interest rates high to obtain foreign purchases of the US debt.
I agree. And was it Fisher or Poole who recently said that the FED shouldn’t get involved?
The FED has to defend the dollar. And if the bond market thinks it is weak on inflation, then they will stop buying bonds and the rates will shoot up. Since the mortgage rate is tied to the 10-year bond, any attempt to lower the rate by the FED still won’t work to lower mortgage rates; it will actually end up raising them. Plus, many ARMs are tied to LIBOR, and (theoretically, at least) the market sets that rate.
“…Fannie Mae and Freddie Mac will have to tell the U.S. Treasury Department more about their funding needs before accessing the debt markets….”
Some type of behind the scenes workout was implemented to stop the insanity.
There’s a related story on the front page of the L.A. Times this morning:
http://tinyurl.com/v56jb
Apparently the big “Grand Avenue Rebuilding” project, involving at least one 50 story condo building, hasn’t even broken ground yet and is already underwater. The developer’s asking for a 20 year exemption from the city’s 14 percent hotel tax in order to make this development “financially feasible”. Thankfully, at least one pundit quoted in this article asked why it’s fair to ask residents of south and east L.A. to subsidize “yuppie housing”.
I’m left wondering why in this day and age we ought to be subsidizing the REIC, period.
Oh, I’ll bet every other hotel in LA will be just fine with that.
That Frank Geary building is gonna make a fine skating park.
‘Any real turnaround may not be forthcoming until the central bank reverses course and begins to lower short-term rates again.’
Right.
Any real turnaround may come when buy prices are more in line with real incomes and the rent/buy cost ratio is more or less at equilibrium or in favor of buying.
I don’t know whether to be ashamed or proud of being an unknown economist in view of some of the stupid quotes I constantly read from so-called “professionals” who have access to the mass media.
NOOOOOOOOOOOOOOOOO
Keep Building! LOL
‘Single-family housing starts in October were at a rate of 1,177,000′
This is still a high number.
Agree. I just know the next SPIN campaign will be “we have recognized the market slowndown and are adjusting - so its a good time to buy.”
Doctor: You were bitten by death adder snake and have 3 hours to live.
Realtor: Now would be a good time to buy
I bet that is what dinosaur realtors were saying back then, a couple of million years ago.
From Reuters.—>>> “Many economists
Especially when it is piling onto an inventory glut!
It will also have a neat impact on employment, which should help maintain the downward pressure on prices.
“Construction rose 31 percent in the Northeast.”
They are building like mad in the Northeast. I still don’t know if the DC area is in the south or northeast though. I hope they keep building so they have plenty of excess inventory to auction off around this time next year.
I noticed that too, wtf? Md and Va are considered southern states as far as the civil war but, not sure where we fall in a modern economical sense.
Mid Atlantic
NoVA is about as Southern as South Florida is.
The joke on South Florida, you have to go north to get into the south.
VA is definitely in the South for all stats - I think Md, WV and DE also are when Census Bureau only divide into 4 regions. These stats are based on surveys or builders and are seasonally adjusted and are subject to big errors - that dichotomy between the NE and South is hard to figure, though.
BTW, Md was considered a southern state BEFORE the civil war, because like the other border states which did not secede it had a plantation society aned allowed slavery. But it sure as heck wasn’t part of the Confederacy. The first objective of Lincoln was to secure the border states for the Union.
“But it sure as heck wasn’t part of the Confederacy”
…largely because Lincoln threw all the secessionist legislators in jail, and when the courts objected, threw the judges in jail too:
“In the fall, Lincoln arrested allegedly disloyal members of the state legislature (Sept. 12-17, 1861), to prevent them from attending a meeting that could have voted on secession. But Maryland was not really safely in the Union until the November state elections. Federal provost marshals stood guard at the polls and arrested known Democrats and any disunionist who attempted to vote. The special three-day furlough granted to Maryland troops in the Union army, so they could go home and vote, further rigged the election. The result, not surprisingly, was a solidly pro-Union legislature. The next year, state judges instructed grand jurors to inquire into the elections, but the judges were arrested and thrown into military prisons.”
And we’re throwing a fuss about subpoenaing library records…
well, are we in the verge of voting for secession?
Maybe not. But I recall someone saying on the Huffington Post that if the Republicans won this time, it would be per se evidence of massive vote tampering and time to overthrow the government.
Odd how the complaints about evil Diebold machines disappeared when the proper side won.
The Northeast number has got to be driven largely by NYC, where there are currently many thousands of “luxury” condo units under construction. From my Manhattan window I can see a dozen buildings going up right now, and none of them contain a single apartment that will be offered for less than a “phone number”.
For whatever reason, NY waited until the tail end of the boom to really explode, and it seems there’s enough demand overhang here to make the timing of the bust trail the national trend as well.
I’m told most of NYC’s condos are still selling, but the market is clearly softening. I suspect the city will run out of buyers well before it runs out of condos, and by next year the NY situation will look a little like Miami does this year.
“For whatever reason, NY waited until the tail end of the boom to really explode,”
This is true based on my observations here. Where other areas took off in 2000 or 01, I didn’t see indications of the current insanity until early 03. There was plenty of talk before that but that data didn’t reflect a boom back then.
N. Va is considered south on those statistics
“Housing starts in the U.S. tumbled in October to the lowest level in more than six years, as waning home sales and swollen inventories discouraged new projects. This is a shocking number,’ said Phillip Neuhart, an economist at Wachovia Corp. ‘The market is going to remain weak well into next year.’”
Neuhart is talking like a permabear wearing a tinfoil hat. Anyone can plainly see that a bottom is in, the homebuilding industry will now resume a high growth rate, and homebuilder stocks can only go up from here.
GS, I understand your bewilderment, but may suggest to you one thing - you realize, that if you are correct, then there are A LOT of people getting rich off this HB stock behavior. Why don’t you become one of them?
At least it’ll be fun to watch all this happening with some extra skrills in your pocket from going long on the HB futures.
Given the application of Murphy’s Law to gambling, the day I bought those calls would be the same day the big boyz decided to pull the plug on the unsustainable pump’n'dump operations…
LOL, you could be right.
“Permits for future groundbreaking, an indicator of builder confidence, fell 6.3 percent to an annual pace of 1.535 million units, the lowest rate since December 1997, from a 1.638 million pace in September. Permit applications were down 28 percent from October 2005.”
Ignore those misleading statistics. We just saw an article posted here yesterday that assured us the homebuilder confidence was back on the upswing.
The significant thing here is we’re still adding to supply. A lot of people think that once we hit whatever magical bottom we hit, supply will just get absorbed by the 1,000 people moving to Vegas or Florida each day or whatever, but no, total housing stock is never static.
Put it another way: we can roughly call 1997 housing start levels a “normal” market. We have supply getting added at a “normal” rate while demand is below normal and falling. You do the math.
Lereah was on CNBC… he predicted the decline will end sometime next year. Leaving aside whether this is a credible forecast in the first place, the NAR’s “economist” is saying attention buyers, don’t buy for at least a few months and only then make sure lots of other people are buying with you.
So far all of Lereah’s predictions have been 100% accurate — NOT!
NO, he is 180 degrees accurate.
He’s been 100% accurate in his inaccuracies.
That’s a big achivement, if you think about it.
Lehreah’s an absolute genius in what Jon Stewart likes to call “opposite world”
That said, I saw him on CNBC this morning and he looked kind of…pale.
I think what a lot of people fail to appreciate is the sheer magnitude of the supply overhang. It’s gigantic. One stat I blogged about recently: The supply of new homes for sale shot up 85% in the five years through this July. Inventory has subsequently ticked down … by 2.8%. In the 90-91 housing crash, starts plunged by almost 50% from the most recent prior peak to the ultimate trough. We’re only down 34% peak-to-trough so far, even after today’s disastrous number. It’s going to take a LONG time to work off the excess supply with a combination of even lower starts … and lower prices. More thoughts and stats if you’re interested at …
http://interestrateroundup.blogspot.com
I guess it would be out of the question for everybody to get together and Bulid Middle class homes under say $150K.
Imagine a city government saying you can build as many as you like and we will not charge you a fee per house.
Imagine a homebuilder building 1500 sq foot homes, and NOT putting in any luxury appliances.
Imagine we can have who new Levitown communities built right next to a New Commuter train stop, so traffic impact would be minimal.
Let’s Imagine there is competence in the eyes of our Elected officals to forsee such a vision.
Yes affordable homes for everyone…………what a wild wacky crazy concept!
Oh, the builders *have* built tons of $150K homes; they just don’t know it yet.
Pass — good one.
Or, because they do know it, they have to pretend not to know it, and they have to conduct quick auctions as in this morning’s first thread, before everyone else knows it too.
Yep, that is true. I was talking to a friend about a small tract home currently listed in the mid 300’s. I asked him what it would rent for: $1100/mo. Okay, then eventually it will be worth $120-150k in today’s dollars. He thought I was completely insane. But do the math and that is what you get if purchase prices are in line with rents.
Sounds about right to me. My house is 120k and my mortgage PITI (4.875% 15yr fixed) is ~1100/month.
Exactly pass. They built 150k homes and slapped 400k prices on them. They got away with it b/c buyers only cared about yesterday’s low interest rate payment and not the proper value of the property at an 8 or 9 pct interest rate.
Spot on!
LOL. Excellent!
That is actually happening to some degree in Portland, OR around light rail.
150k Houses for everyone? Not everyone wants a 900 sq ft house.
The reason for the slow has already been touched on. Not everybody can afford a 700k house like they are building in the Baltimore area. Several builders are in the process of designing product that would sell in the 4-500k range, but you can’t build them next to 1mm homes, per county regs. Once the prices fall, the inventory will drop and the market will correct itself (mid 2007). Don’t expect any changes with the holidays fast approaching.
150K for 900 sq ft…sure with No granite countertops, all Home Depot appliances, 1 full bath and another 1/2 with shower. Unfinished basement small yard…. or on a slab with a nice back yard, so you can create a huge family room or put a big workshed out back……..and maybe a 1 car garage not 3
Lots of people like me would buy since the mortgage would be slightly more then i pay in rent for 700sq feet 2 bdrm apartment in Queens NYC
I do think there would be a market for what you described ,but I think it needs to be 1200 sq. feet to attract families with children and you got to have a 2 car garage .
With time the first time buyer could upgrade the house .
Right now the flippers and investors would come in and buy up tracts like that and mess up the prices quickly so it will take a while before it’s even going to happen .
“‘The excess supply of homes on the market is putting downward pressure on prices and that’s making some potential buyers put off a purchase until the negative impact is finished or near finished,’ said David Berson, chief economist of Washington-based Fannie Mae.”
Oh, it goes way beyond “the negative impact” of “downward pressure”…the unravelling includes many other factors besides price and inventory. Fannie Mae being one of them.
Looks like our local duo is NOW DOWN TO ONE:
http://bakersfieldbubble.blogspot.com
LOL!!!!!!!!!!!!!
“he wants to spend more time with his family.”
I think Bernie Ebbers said that too.
Can a bunk in Cell Block D be in his future?
LMAO! He is no longer the Broker of record?? And he is setting up a competing business in real estate, BUT its not a competitor??
While I agree that the market is beyond repair by the FED and must go though this bust to correct itself, I believe the FEDs are going to step in and try and delay or adjust the bust. With that said, prices vs income along with demand vs supply will still take a heavy toll economically on the country, and the world.
I can’t wait for them to lower interest rates and confirm what we’ve been saying on this blog. In addition, I’m curious to learn if it works or not. If it does’nt work, falling home prices and lower interest rates will make homes affordable again.
Hyperinflation seems to be the only way out for the Fed. Where else is the $50Trillion to pay for Government liabilities going to come from?
RIP US$.
So the Fed is somehow going to induce employers to give us 20% raises for much of the next decade in order to let incomes catch up with house prices?
How exactly is it going to do that, with wage competition from every corner of the world?
And even if it could engineer that, house prices will then be falling by 20% in real terms, destroying their value as “investments,” which will cause their prices to tank accordingly.
I think we’re safe from this scenario.
Here’s a little amusement for you guys:
http://www.wallstrip.com/theshow/page/2/
Priceless. What will happen to Cramer, what will he talk about, when the market tanks?
Might as well be his ideas on dating…
homebuilder stocks hardly affected. amazing.
These frivolous conga line Lemmings keep cheering every time the housing market contracts to a new low.
It goes something like this: We’ve hit bottom. Yeahhh! Boohyah! Silence. No no no. We’ve hit a new market bottom. Yeahhhh! Boohyah! Silence. No no no. And so the madness continues….
Interestingly, Gates fund has recently bought shares of several of the homebuilders. Buffett has bought more shares in Lowe’s. Either they know something or we know something, but it’s going to be big either way.
Sounds to me like they are either going to be the richest bag holders in the world or interest rate cuts are on the way and they have the inside scoop. One way to avoid a hangover (deflation) is to drink more the next morning (interest rate cuts). God help us.
(The Northeast number has got to be driven largely by NYC, where there are currently many thousands of “luxury” condo units under construction.)
We could get a regulatory impact here, too.
NYC is considering limiting a tax break for new development that allows new construciton to be exempt from property taxes for years and years. Expect lots of developers to rush to get in the ground and vest under the old rules.
Also, hotels are permited in manufacturing districts but housing is not. But Trump appears to be about to get permission to build a “condo hotel” with kitchens in every unit! The Buildings Department will likely try to put a restrictive declaration on the permit to require transitent occupancy, but it will be impossible to enforce. That means a mad rush to build in industrial zones, pushing out businesses, before a new rules can be put in place to close the loopholes — which takes at least one year, maybe two if an EIS is required and litigation slows implementation.
“NYC is considering limiting a tax break for new development that allows new construciton to be exempt from property taxes for years and years. Expect lots of developers to rush to get in the ground and vest under the old rules.”
Finally, I’m sick and tired of subsidizing some ibanker’s glass box.
For those of you who are short or own puts on Countrywide or other mortgage lenders, here’s the kind of thinking you’re betting against:
Stick With a Proven Winner in Countrywide
By Joe Capone
RealMoney.com Contributor
11/17/2006 10:36 AM EST
URL: http://www.thestreet.com/p/rmoney/financials/10322846.html
Quick question: What do you ask yourself about a stock in your portfolio that has gone up 18.5% year to date and has appreciated at a compound annual rate of more than 20% for the past 25 years? Well, besides wondering why you don’t own more of it, two ideas come to mind.
First, after the stunning price appreciation, how expensive is it? Second, is the underlying growth likely to continue?
You may be surprised to learn that, despite the heady share-price gains, Countrywide Financial (CFC) trades at only 8.4 times consensus 2007 EPS estimates. This is well below the 2007 P/E multiples of 13.2 for Wells Fargo (WFC) , 10.5 for Washington Mutual (WM) and 12.0 for J.P. Morgan Chase (JPM) . These are, in order, the top four U.S. residential mortgage originators for the first half of 2006, from Countrywide at No. 1 to J.P. Morgan Chase at No. 4.
Of that group, Countrywide is the most sensitive to housing, but it even trades at a discount to most of the homebuilders. Unlike the homebuilders, though, for which Wall Street is projecting huge earnings declines in 2007, Countrywide is expected to increase earnings per share by more than 10% next year. Its current 8.4 multiple is well below its historic growth rate of earnings (29% compound net earnings growth for the past 10 years) and is below its targeted long-term growth rate of 15%.
The Housing Factor
It might not be surprising that Wall Street questions the sustainability of Countrywide’s earnings. It seems like everyone has proclaimed that the housing market is set for a significant decline, if not an outright collapse. A decline in housing doesn’t necessarily cause a major problem in the mortgage market, but it will likely slow the volume of originations and possibly disrupt the subprime mortgage market.
Countrywide looks well prepared for a slowdown in mortgage originations. It has enacted a $500 million annualized expense-reduction campaign, which it said would be complete by the end of 2006. This is a significant effort, as it represents around 7% of 2006 noninterest expenses.
As well, the company has implemented a $2.5 billion share-repurchase plan, of which it expects to complete $1 billion to $2 billion in the fourth quarter of this year. Buybacks are appropriate when the stock is not highly valued and investment opportunities are relatively limited, as would be the case for Countrywide in an environment with lower mortgage-origination volumes.
The bigger question is whether Countrywide is prepared for a worsening of credit, particularly in the subprime mortgage segment. As with any financial company, there are reams of statistics to examine, but perhaps the most important is its exposure to Pay Option ARMs.
A Pay Option ARM is an adjustable-rate mortgage with an interest rate that changes monthly and payments that change annually. The borrower can choose among various payment options, including one that is below what would be paid in an interest-only mortgage. Such a choice would result in negative amortization, which means that the loan’s principal would increase during this period.
Monthly payments cannot increase by more than 7.5% per year unless the principal balance of the loan is 115% of the original loan amount or five or 10 years have elapsed since the loan was made. In both cases, the loan will become fully amortizing (that is, interest and principal payments will be made like a traditional mortgage). This reversion to full amortization is referred to as a “reset” or “recast” and can result in a very substantial increase in the monthly mortgage payment for a borrower.
Countrywide holds $35.4 billion of Pay Option ARMs, of which $29.6 billion are in negative amortization. This high ratio is not surprising, as the lower-payment option is what attracts borrowers to this loan. To date, the total amount of negative amortization — that is, interest income booked by Countrywide that has not yet been collected in cash — is $471 million, or 76 cents per share pretax. This is significant, and the per-quarter negative amortization could be 20 cents per share for the next few quarters.
That said, there is a meaningful offset. Most critics of these loans assume that a very high percentage of these borrowers will wait until the reset date, experience the huge shock in the monthly payment and default. This is not happening for two reasons.
First, borrowers are becoming more educated about this payment shock and are looking to refinance ahead of it. Second, the low interest rates right now and the tremendous capacity in the subprime mortgage market allow borrowers to refinance. Countrywide posted a fascinating slide on its Web site in its presentation at the Merrill Lynch Banking Conference this week, showing that two-thirds of those loans with resets on or before Dec. 31, 2007, have already been refinanced into other loans. Without a recession (and I’m no economist), the Pay Option furor appears overblown.
Notable Points
Countrywide’s management, led by Angelo Mozilo, co-founder and CEO, has guided the company successfully through several credit cycles. When an investor is concerned about credit exposure, continuity of management is very important. This management team has built a valuable franchise that is inexpensive relative to its peers.
Finally, Countrywide is the largest originator of U.S. residential mortgages, with 15% market share. Bank of America (BAC) is No. 6, with roughly 5% market share.
In a recent conference call, Bank of America said it was likely to consider disruptive strategies in mortgages, like it has with online trading. I look forward to learning more about what Bank of America plans in this product area, but an event occurred last week that piqued my interest.
Countrywide has a bank subsidiary that invests in mortgage loans it originates and provides warehouse lending to other originators, funded by deposits it accepts. Last week, Countrywide announced it was going to apply to the Office of Thrift Supervision for a thrift charter, changing the entity from a bank to a thrift.
There are legitimate reasons for this, namely moving from two regulators (the Federal Reserve and the Office of the Comptroller of the Currency) to one (OTS) and possibly preferring the OTS’ regulation going forward.
There’s another twist: Bank of America is almost at the nationwide cap on deposit market share (9.2%, just under the 10% maximum). This was an issue when Bank of America acquired MBNA America last year. Countrywide has around 0.9% deposit market share. Both companies appear to be trying to grow deposits. If Countrywide is a thrift, the market-share test would not apply if Bank of America were to acquire Countrywide, unless the thrift subsidiary was to be integrated into Bank of America’s bank. Ask your friendly bank regulatory attorney for details.
I’m not saying Countrywide will be acquired by Bank of America, but it isn’t a bad idea. It could happen when Mozilo retires in December 2009, or sooner if Bank of America’s disruptive strategy does not pan out. When a franchise as valuable as Countrywide has been built, if it were to be sold, it should be available to all bidders.
Now, that’s a promote!
I’ve been long that pile of crap in my IRA since 1995. Have to admit, it’s been a winner.
“Countrywide posted a fascinating slide on its Web site in its presentation at the Merrill Lynch Banking Conference this week, showing that two-thirds of those loans with resets on or before Dec. 31, 2007, have already been refinanced into other loans.”
If true…crap. The REIC has sucessfully postponed the reckoning for another 3-5 years.
“On or before 12/31 2007″ is key because most of those loans that reset before then were purchased well in advance of the 2005 peak prices. The window of opportunity to refinance is getting smaller as home prices fall and neg. amortization builds. Negative amortization buyers who purchased at the 2005 peak will not be able to refinance and will face resets in 2008.
Also don’t assume that all of those doing the refinancing are prudently moving into safer products. I would bet that many couldn’t cover the monthly nut even with the neg am. and did cash out refinancing to live off of some equity and delay the day of reckoning by a year or two more. I would like to see what % of those 2/3 took out more cash when they refinanced. My guess is that it is at least 50%.
So people living on the edge refinance. If there is a recession what will happen to many of those on the edge? They’ll have to sell or default. And some who are close to the edge won’t be tempted to (try and) sell as they see their exposure to loss increase?
This may buy some time but unless the economy stays boyant and home prices stabilize (and how will that happen in the face of excess supply?) the trend will remain the same; more and more sellers, fewer and fewer buyers.
Only if those refis are not more onerous on the pocket book than the ARMs were. That said, I personally don’t know how this switch works.
If the refis were from option ARMs to new option ARMs, what basically happens is that you get to start the denial clock running for another 1 to 5 years.
But Northern VA is right — because option ARMs vary in the length of their initial periods (again, 1 to 5 years), the two-thirds that have supposedly already been refinanced probably include the loans with vintages going back to at least 2002. And of course since prices have basically doubled since then, obviously there’s some refinancing room.
The remaining un-refinanced 1/3, I suspect, consists of the short-introductory-period option ARMs originated in late 2004 and 2005. Since prices are basically flat or down since then, if there’s been much or even any negative amortization, these people are already upside down, and can’t refinance.
The question, then, is whether 1/3 of the outstanding option ARMs with resets scheduled before December 31, 2007 will be enough to hole the market below the waterline. Since I believe the total amount of re-setting mortgages was originally over $1 trillion, that’s $333 billion in debt, the service of which is about to become unsustainable. I don’t know what the average option ARM loan size is, but if it’s in the neighborhood of $400,000, that’s close to a million homes nationwide that are potential foreclosures.
That oughta do it.
Not to mention that there are “scheduled resets”, and resets triggered by paying only the minimum each month. Triggered resets will happen en masse to those who don’t have the money, starting in 2007 who bought in 2005–none of these folks have the equity to refinance…
‘David Seiders, chief economist for the National Association of Home Builders, said he believed construction would fall by about 13 percent this year as builders scramble to deal with plunging sales. ‘We had an unsustainable boom in housing in both 2004 and 2005 and now we have a correction on hour hands,’ he said.’
We have had an unsustainable boom in housing related industries! What I have not seen is the number of layoffs in the industry from this downturn. If/since 2002 43% of the US economic growth was realestate related, then how big will this recession become. Obviously the Realtors will be fully employed - just making a hell of a lot less, but the side impacts from the business losses at Starbuck’s, McDonald’s, Applebee’s, etc. (Realtors preferred dining establishments) will result in cascading lack of job opportunities. Where are the teens going to get jobs when ex Reators, mortgage brokers and bankers are glomming these higher paying jobs?
Just heard discussion on housing starts on CNBC…they’re “shocked” and “surprised” by the plunge. After all, wasn’t the worst of it supposed to be behind us already??? Could there be more pain ahead for the housing market??? Gee wiz. I wonder.
Also quoted DL as saying home prices will continue to DECLINE for the rest of the year. Ooops. Now there’s a reason for folks to rush out.
how about the ad campaign - didn’t LIErah just kill it?
Blurb from MVille
I have not heard three rumors of an imminent hedge fund collapse.
I have heard it is due to 1) the bond market 2) bad energy bets and 3) bad commodity bets
I have no clue, but it supports the Treasury market for sure.
One more thing. With VIX and VXO sporting 10 handles, if it were to be true, I guess the market isn’t ready for it . . .
This stock market just doesn’t want to go down. I found this to be bad bad news but the markets haven’t budged. I bet markets will go up through the winter. Cheap money, decent(if not real) economic numbers, and lowering gas/oil for now will keep it all going. Prices around here for homes(NH) are still high and are selling. Bad news or not I bet the status quo will keep on trucking for quite awhile. I wouldn’t be surprised if 2007 is a decent year. We’ve all been somewhat wrong over the last year or two(no massive crashes, sky is fallin). Let’s be honest here…
“This stock market just doesn’t want to go down.”
Is the Mr. Stock Market making his own decisions these days?
Sorry but there’s a bit more to NH than Nashua and Manchester.
Actually, do you have some info or opinions on NH? is the market worse in other parts. I’m actually very interested in what folks in NH have to say since there aren’t many of us.
ME native here. The anectodal evidence from conversations with family is that Coos and Carroll county is “seized up, nothing is selling and prices have begun to shift”. Quite the contrary to your cheerleading.
Cheerleading? Hey selling prices are selling prices. I go to the municipal site that lists sales. they are hi and relatively frequent. Me and my young family have been forced out of the market due to this bubble. I’m hopeful the market goes down but I have be realistic. There just isn’t this awful housing scenario everybody wishes for(including myself). If you take out the nashua and manchester areas you pretty much cut out 2/3 of the state population and 3/4 of the economy.
Do those sites indicate asking v. selling prices? Doubtful. As far as removing Nashua and Manchester, maybe that wouldn’t be such a bad thing seeing as most of them are from Beantown anyways.
I concur about beantowners. Local people like myself get screwed by commuters willing to pay anything and drive anywhere for their lifestyle.
I forgot, they are the actual municpal sell prices. We have been arguing but I believe we are on the same page on housing/markets.
“Prices around here for homes(NH) are still high and are selling.”
This observation also holds for the SF Peninsula.
Not so the SF East Bay.
At least the appreciation has more or less stopped. If history is any guide, price declines start in the outer suburbs and domino their way in. This in part is because most of the new construction is on the fringes, and builders typically lead the way in price decreases because they can afford to (and can’t afford not to). Eventually would-be sellers of existing houses have to follow suit if they want to sell.
“At least the appreciation has more or less stopped.”
Yes it has. In fact prices are down about 10% from their outrageous peak. Desirable homes priced accordingly still sell after just a few days on the market. But the junk sits.
Mad-tiger xlnt >>good homes, good location ,at a fair price reduction do sell and the junk will not sell.
We sold a prime condo with (view), good location at a 5% price reduction in 47 days. The guy below at the same price, no view, bad condition, is still crying the blues?
Memories of 1929
Everything was not fine that spring [of 1929] with the American economy. It was showing ominous signs of trouble. Steel production was declining. The construction industry was sluggish. Car sales dropped. Customers were getting harder to find. And because of easy credit, many people were deeply in debt. Large sections of the population were poor and getting poorer.
Just as Wall Street had reflected a steady growth in the economy throughout most of the 20s, it would seem that now the market should reflect the economic slowdown. Instead, it soared to record heights. Stock prices no longer had anything to do with company profits, the economy or anything else. The speculative boom had acquired a momentum of its own.
Hmmm. A steelworker friend of mine in Ohio is just out of work due to a plant shutdown. For “two or three weeks” (hopefully)…
“The decline, bigger than had been expected, was the largest percentage decline in 19 months and pushed total activity down to the lowest level since July 2000.”
“Bigger than expected” — except here on bens blog. The News Media and their economist friends have one big black eye from their 2006 BS reporting on housing, and if I meet David Leaher somewhere in the future, I’d be happy to add the second black eye for his double crapola.
I don’t know, I kinda feel sorry for D. Lierah. After he posted that powerpoint slide with the polar bear on the front sticking its paw in to test the icy cold water. And the powerpoint used bubbles background I got the impression that secretly he agrees with everyone here. At the same time he is paid to be a cheerleader. You didn’t see K. Rove or Ken Melman coming out saying they were going to be totally decimated in the election. We shouldn’t expect a paid mouthpiece to do so either regardless of his title as economist.
Hi txchick
Yeah. There has been a very concerted effort aimed at pumping up Homebuilders, Lenders and GSEs over the last 4 months in the media through the usual outlets - Barrons, Fortune, CNBC and the like. Totally specious arguments (low PE, favorable price/book) have been thrown about to support the pump case. No mention that the E’s are on a slippery and long slide down and that the book value is going to get marked down significantly over the coming years.
HBs, HLs and GSEs are very heavy in most Value oriented mutual funds and portfolios, which is where the pumping is coming from I guess (people like Bill Miller, Hedge Funds). Even investors I used to have respect for (Nygren of Oakmark and Wally Weitz) have loaded up on these companies.
The media pumping has certainly worked in the short term - the HBs have rallied significantly since late summer, causing shorts considerable short term pain. A friend (who is short the HBs) told me today that the HBs are up today inspite of the terrible starts number !
Question for you - you seem like an astute investor (from posts in the past). Why do youbother with Real Money and the BS that JJ Cramer spews out
? Cramer seems (to me at least) at best a buffoon and at worst a con-man.
I use it as a contrary indicator and sometimes fade Cramer’s posts for trades. I subscribe to about 25 services. That’s just one of them.
A 26 percent drop in the South, and the NAHB index was up two points in the South.
A 31 percent increase in the Northeast, and the NAHB index was up two points in the Northeast.
Not exactly consistent results, unless the builders in the South are pleased that they’re contributing less to the glut.
How can the 2005 numbers be estimates? Is it because they can keep revising them then, to make it fit whatever agenda they have?
Is this such a surprize? If a dealer has a 100 unsold cars why would he order another 100 cars.
This is Nov and Dec coming up always a bad time of year anyhow to sell.
Just this morning our paper reported same week sales at 77 compared to 90 last year hardly a depression. Avg price last year 985 this year 1,150 mill on sold homes so where is the problem the numbers are closed ecsrows btw. I see the typical slowdown that had to come, Jan and beyound it will all play out relax.
How many houses for sale last year? How many houses for sale this year? How many houses for sale in September 2005 and Spetember 2006? How many months supply available? What is the average size house this years sale vs last years sales?
In summary the figures are make believe without any evidence to support your assumption “I see the typical slowdown that had to come, Jan and beyound it will all play out relax.”
I call BS on you.
AZ republic housing sales section 11-17-06 closed sales anybody can see it why because good news bothers you, are you a Flipper waiting for the drop? ain’t going to happen?
Do you want trades people out of work? Agents out of the business? Loan officers out of work? Home Depots broke? Maybe I don’t want that to happen to the US economy do you ?
Its already happened to the US economy - that Realtors, Mortgage brokers, flippers got F’d tough luck on them. That construction workers are impacted as well as allied industries is a result of lack of economic planning. Good news does not bother me. Reality does not bother me either. That the US economy is in precarious grounds is not because of a burst housing bubble, it is because of stupid people who have been misled in believing “housing only goes up”. And as for AZ I will let Ben answer to that. I know how many houses are currently for sale in my area, but I do not have MLS numbers for AZ. And I am not a would be flipper, I have better things to do with my money than invest in collapsing bubbles. Again get your facts, do not compare prices, a house that could have sold for 2MM last year may go up for sale this year for 1.5 MM, artificially raising the average, but dollars per square feet may be a lot lower.
FROM AZ Republic Oct 20, 2006
“…some have cause to be anxious. An Arizona Republic survey shows:
• Most Valley neighborhoods saw home values peak by May or June.
• Housing prices dipped in more than half of all ZIP codes in metropolitan Phoenix during July and August.
• Several areas saw significant monthly drops of 10 percent or more.
Huge supply keeping prices down in many areas
http://tinyurl.com/w8ygf
Again I call BS on your numbers
HOZ You ask for it. AZ Republic real estate page rn19 you got all the zip codes one can imagine. I took what a poster said yesterday about a 10 million dollar home and got the closings not LISTINGS for that area and guess what things ain’t so bad.
72 this week, 90 same week last year, avg1150 mil this week, last week 962,500, last year799,075. Some areas doing better then others but that happens in any market the chicken little nonsense is going down the drain i’m happy, i want a good real estate lots of buyers and lots of business for America. Any other questions?
Yes. Are you a Realtor(r)?
Hardly, yes we have owned property in our lifetime all i want to see is business go forward in the country. I don’t care if a house is $10 or 10 million jobs and growth is what the nation needs. Afforable housing i keep asking what is the price? John Smith can afford it and Bob Smith can’t that is America. Prices come down no problem but to say lets drive the builders in the ground and the sellers broke why? The investors where the problem they are gone now it will shake out.
“The investors where the problem they are gone now it will shake out.”
I agree with the sentiment. But the Realtors, builders and government did not ever say from 1994 - 2005 that maybe one should not buy because housing prices are too high. And now these same realtors, housing contractors, mortgage brokers are crying foul. BS. I looked at mortgage rates and today I can get a 15 year fixed loan at 5.625%, a 30 year fixed at 6.00%. If these rates cannot keep houses selling then there is a flaw in the American pay structure. Over one third of American home owners believe that they may lose their houses not as a result of mortgage payments but as a consequence of rising property taxes and rising insurance. The FDIC this last spring in an article titled “Scenarios for The Next Recession” believes that 10% of all new home purchasers between 2002 and 2005 will lose their home to foreclosure. Over 50% of all working Americans are making less than $18,000/ year. The average American has seen wage deflation over the last 6 years and are making less now than in 2000. These are all facts. Sources available and have been posted on this blog many times.
Hoz> No question i’m concerned because rates are not 7 or higher which can kill a market in matter of fact like you posted loans are in line. The buying public is turned off of course. When you went to a housing area they told you to stand in line like a school kid and shut up i know that. They said buy right now tommorow is to late and when a person went back they did just that raised the prices. Off with their heads i know, but we got a problem now in the country , i hope that it all clears up and that everybody gets back to a sane market and world or else i’m very afraid in 07 08 that like a house of card’s it all crashes down.
I tried to find your dubious link - please post the complete link. Thanks
Hoz all i can tell you is AzRepublic.com look for housing. Look i don’t lie no need to, i’m just trying to balance out the hysteria, I didn’t like what the flippers did either raising prices like nuts but people fell for it why make the country go broke. A price correction is in order yes but a drop the likes we haven’t seen is bad for the US.
How to post a link:
A) click on URL until highlighted - URL begins http:\\ etc.
B) Right click on highlighted URL
C) Hit copy
D) go to http://thehousingbubbleblog.com/?p=1837#comment-271848
E) Find comment and hit Paste
F) Hit “add comment ” button
HOZ>>Yes my wife told me on the phone also like you how to do it. But the page doesn’t have a link to it the paper does but maybe they didn’t post it on the internet. If and when my wife gets home maybe she can find the sales for the week with a link for you i’m not great with this computer sorry.
Hoz i’m sorry about this link thing i looked i don’t see it, but i see the print right before my eves as i type. What can i say> i shouldn’t have called you a flipper i don’t know you i just don’t like the word or the people who have screw up housing.
Builders got mad that investors were making money on their investment so up went the homes, the agents and loan officers got greedy and lied to the many who don’t know real estate.. Housing went south now i want it to SHAKE out. Do i want a guy in Malibu who has a 350k 40 year old junk asking 7 million and hoping to get it and some goof gave him all the money that is what happen. Where these people came from i don’t know if they are blind then tough luck yes. But overall i want business to go forward ask a fair price on a good piece of clean property, and lets get the ball rolling again. take care
Shadow,
An economy, like our seasons, is cyclical. There are growth times and there are recessions. There are actually positive results from recessions in the form of price corrections and a return to fundamental support for prices. That is not to say that there is no pain for there is a lot of pain, but wishing for an extension of an unsustainable leg of the cycle to avoid that pain will only result in more pain. In fact that is exactly what we face today. In certain areas of the US housing was overpriced in 2001 and the downward cycle was due then, but we had two things happen, the dot bomb crash and 9/11. Our gov and the Fed took action to forestall the cyclic reverse out of fear we as a nation couldn’t take another shock (or more probably true, out of fear that they would lose control of their power). Rates went down, indicators were tweeked, everything was happy happy. Banks were eager to loosen up standards and lend more with less risk. Fannie was bundling all these loans and selling them to China anyway. Happy Happy.
NOT
The last 5 years of this market have been a bamboozle, completely disconnected from the economic underpinnings and only kept going by REIC cheerleading/decpetion, lax lending standards, and greed. It had to cycle at some point and it is doing so now. Because this is a very very large mania it will be hard to predict the detailed path, but the overall path from here would be downward no matter how you slice it. It’s going to hurt a lot of us. It should hurt those who were foolish and greedy more only because in a rational world that is the result of taking on risky investments based on emotional principles. The collateral pain in construction is part of it by nature.
The Democrats will have to contend with the imminent cratering of suburbia whether they like it or not. The “housing bubble” is the first leg down for a development pattern that has no future. What’s out there now is a vast over-supply of exactly the kind of houses in exactly the kinds of places that will not have value in an energy-scarcer world.
The overbuilding of McMansion houses is a tragedy caused by reckless and irresponsible behavior in the lending industry and in the government officials who regulate interest rates and the credit supply. The investments are already lost, and the individual carnage is going to be extreme, but the depth of the problem will reveal itself slowly for two reasons: 1.) Both homeowners and realtors will desperately try to maintain the fiction that these properties still have high value, and 2.) Individuals who are in trouble with their mortgage payments will never reveal their dire situation to their friends and neighbors because it is too humiliating. The news about default and repo will only arrive with the moving vans (if the individuals can afford to hire them).
The collapse of suburbia will be the Democrats’ chief inheritance from the “free-market” economically neo-liberal Republicans who were too busy money grubbing at all levels to notice that there was such a thing as the future. The tragedy of suburbia will finish off whatever is left of Reagan-Bush1-Bush2 Republicanism - although the truth is that Bill Clinton did as much to promote this way of life, indeed, to turn suburban development into a new basis for the U.S. economy when manufacturing crapped out.
http://www.dailyreckoning.com/Issues/2006/DR111606.html
The truth of the matter is that Democrats promote these bubbles as much as Republicans. Remember the dotcom bubble of the go-go 90’s? How about Fannie Mae and Freddie Mac buying up all those garbage toxic mortgages that enabled this bubble to keep inflating? Those creatures were spawned by Democrats. I’m not defending Bush or the horrible job the Republicans have done these past few years, but how many Democrats have spoken out against the corruption of the REIC? All the politicians are to blame.
Look politics aside i don’t have a dog in the fight i’m a fence sitter, at this stage i see both parties winging it and they both are agenda driven and that is what puts the county in peril.
Housing accounts for what 25% of GNP a huge number for sure. Loan officers you dupe buyers should go the way of Enron officals but that isn’t going to happen. The flippers will get theirs in the end well really i still think they all walk away with a profit i don’t see a major collaspe the banks and fed’s to the rescue again.
The bleeding will stop, because the builders still have inventory in control unlike the past when they build homes with no buyers on sepcualtion only. I can’t express enough that a housing crisis is bad, the country is showing unemployment better, and baby boomer money in the spring could lift things up. The have and havenot’s yes the margin is widening but the people you vote in have a say in the direction of the country. Clean house on both sides of the isle next time, vote in new blood their is good people out there give them a chance.
“baby boomer money in the spring could lift things up.”
Could you define what you mean by this?
“builders still have inventory in control unlike the past”
I think you need to read past threads on this blog. This is wishful thinking on your part.
“the flippers…i still think they all walk away with a profit…”
Utter fantasy on your part. Spend some time reading the posts and following the numbers…you will find it helpful.
Shadow,
I am a boomer and I am telling you that my money is not coming to the party in the spring unless I see prices DROP by at least 40% in my area.
oc-ed I’ve been buying and selling property for a long time now from Chicago to Denver to LA to Phoenix commerical and residental i haven’t missed the market very often except for Denver where i held to long but still (the boom never happen there) cashed out at 9% profit just 3ks ago btw.. I can tell you that maybe a very few pockets of 40% may occur but the fire sale won’t and can’t happen collectively, unless we have another 9-11 or interest rates of over 7.5%
The risk to the banking business and the overall economy is at great risk.
Pay will increase, jobs will pick up well into 07′, i see a ending to the war in Irag, a Iran and No Korea solution also on 07′.
Health care issues will ease, the Nov election was very imortant and it showed both parties that the power of the people and the apathy they thought existed didn’t happen, the public spoke loud and clear to both you play with us you are out of office.
The home builders still have the upper hand if this shakes out in March as i see it will. Unsold inventory is not built inventory like the 90’s. The back outs yes have occured also though the buyers lost their money and the builders have room to negotiate when things get better. I have a friend who bought in Southern NM and couldn’t make it he lost 21k, the builder just reduce the price of that home 25k and sold it to someone else thus the builder really only discounted it 4k see how it can work and does.
If another rush of buyers happens in March because of the fed and long term rates going down the price inflation won’t happen on homes that is a given but steep discounts won’t either i see 5 to 10%.
Of course if we had a cyrstal ball and we don’t, if you are coming into money in the spring why wait for a drop nationwide, markets are a local thing, just find the house you want and offer 40% off see what happens, if the market is even worse you got a home, if it isn’t like i predict you stay where your at. This real estate business is not rocket science, even in good times their are people who have got to get out, make a study of the area, motivation for the move, and offer on it, this cost you nothing but a offer sheet a agent or yourself if by owner?
Caught this in one of my professional journals I read each day (BNA Daily Report for Executives, 11/16/06, page EE-2).
“Separately, the minutes of the Oct. 24-25 meeting of the Federal Open Market Committee revealed that Fed officials continue to be predominately concerned about inflation. With respect to housing, the Fed policymakers said it was “likely to remain a substantial drag” on growth in the quarters ahead, but they also noted recent data suggest the risk “of an even larger contraction in this sector had ebbed….
“The forecast sees the 30-year fixed-rate mortgage holding steady at 6.5 percent next year. This assumes a continued slight inversion in the yield curve, that is, rates at the short end are higher than at the long end; the yield of the 10-year Treasury note is expected to average 4.9 percent companed to 5.1 percent for one-year Treasuries.”