“Ongoing Weakness In The Industry”: CEO
Some housing bubble reports from Wall Street and the Washington Post. “Construction activity in October plunged by the largest amount since the recession in 2001 as home building fell for a record seventh consecutive month. It was the biggest decline since a similar 1 percent drop in September 2001.”
“Residential construction fell for a seventh month in October, the longest stretch of weakness on record. The 1.9 percent drop in this category in October was the biggest decline since July.”
The Chicago Tribune. “New-home sales data startled investors this week, declining more than expected, and leaving many economists speculating whether the housing downturn would drift through the economy.”
“‘The absolute number of homes on the market has peaked,’ economist Ian Shepherdson said. ‘But that is not enough; home builders need to reduce inventory drastically. There is a long, long way to go.’”
“‘The housing downturn is a very big deal for the U.S. economy,’ because of how it spills into multiple industries, economist Stephen Roach said. Among them: a contraction in construction, cutbacks in buying such things as furniture and appliances, mortgage finance companies and real estate brokers struggling for business, and what’s called ‘a negative consumer wealth effect.’”
“Although jobs are firm, Roach is not impressed. In the last 58 months compensation has climbed only 16 percent versus the usual 23 percent during a typical economic expansion. ‘With the home-building sector now moving into recession, a renewed cyclical shortfall of labor income should be increasingly evident in the months ahead,’ he said.”
From Bloomberg. “H&R Block Inc. posted its worst loss in at least 17 years during the second quarter because of a slump at its mortgage unit, which the company is trying to sell. The company’s net loss almost doubled to $156.5 million in the quarter ended Oct. 31, compared with a loss of $81.2 million a year earlier, H&R Block said.”
“The mortgage unit lost money in the quarter after H&R Block wrote off $102.1 million linked to home loans during the first quarter. ‘Ongoing weakness in the mortgage industry’ reduced profit in the second quarter, CEO Mark Ernst said.”
“Revenue from the company’s mortgage business was almost halved to $140.6 million, because of lower originations and higher provisions for loan losses. The unit had a pretax loss of $39.0 million, versus pretax income of $46.2 million a year earlier.”
“The mortgage bond market is beginning to buckle under the weight of the worst U.S. housing slump in six years. Yields on so-called sub-prime mortgage securities rated BBB have risen to 6.52 percent on average from 6.28 percent on Sept. 5, data compiled by Bank of America Corp. show.”
“About 3.3 percent of the $160 billion in sub-prime loans made this year through July have payments that are more than two months late, the highest ever for mortgages in their first year, according to New York-based Fitch Ratings.”
“‘The higher delinquencies do set off an alarm for many people and make us more conservative,’ said Alex Wei, a senior VP at Delaware Investments, which has about $100 billion in bonds including mortgages.”
“When the housing market was setting records in sales and prices last year, securities backed by floating-rate sub-prime mortgages returned 3.9 percent including reinvested interest, almost double the 1.97 percent gain for investment-grade corporate bonds, according to Merrill Lynch. Sub-prime mortgage securities have returned 1.38 percent in the past three months, less than half the 3.63 percent return for corporate debt.”
“Sub-prime lenders are paying more in interest on the bonds they sell to fund mortgages. Interest expense for New Century Financial Corp. rose 29 percent to $375 million in the third quarter from a year earlier. Accredited Home Lenders Holding Co.’s jumped 62 percent to $138 million. Fieldstone Investment Corp’s payments climbed by 57 percent to $91 million.”
“Late payments are accelerating after lenders began to require less documentation for loans and financed more homes without down payments, Bear Stearns analyst Gyan Sinha said. About 38 percent of the most common sub-prime mortgages this year were for the full value of the home, up from 31 percent in 2005 and 21 percent in 2004, according to Bear Stearns.”
“Sinha said 45.5 percent of the loans this year required ‘low documentation’ of borrower income and net worth, up from 44.5 percent in 2005 and 40.1 percent in 2004. The data reflect ‘common methods of allowing first-time homebuyers to borrow more than they can afford,’ Sinha said.”
“Sinha said 45.5 percent of the loans this year required ‘low documentation’ of borrower income and net worth, up from 44.5 percent in 2005 and 40.1 percent in 2004.”
This speaks volumes to me as to the state of lending in this country. In bubble areas, I am willing to bet this is a much higher figure.
“Sinha said 45.5 percent of the loans this year required ‘low documentation’ of borrower income and net worth, up from 44.5 percent in 2005 and 40.1 percent in 2004. The data reflect ‘common methods of allowing first-time homebuyers to borrow more than they can afford,’ Sinha said.”
It just amazes me that they make these statements like it is no big deal. The level of fraud and deceit is mindblowing, but they just ignore it as common. It’s like they are sitting on the beach watching the Tsunami rolling in and saying “Wow, they waves surely are picking up today. Hand me another beer.”
Nice mortgage fraud link. http://money.cnn.com/2006/11/29/news/newsmakers/bc.spitzer.lawsuit.fraud.reut/index.htm?postversion=2006112916
This is only in reference to sub-prime loans, right?
2-year T-bill is signalling recession dead ahead…
http://www.bloomberg.com/markets/rates/index.html
Per the recession calculator index at Polical Calculations the odd of a recession are 54.6%. Although I like the results, the calculation methodology could be BS for all I know.
http://tinyurl.com/qkqb2
looks like a tsunami wave to me, would that make our economy Phuket?
Phuket was nearly 100% recovered from the tsunami within a year. (I know, I was down there in Nov ‘05). The housing bubble’s taken a year already to pop and is only just beginning.
Where is Gekko? Is he hanging out with LV_Landlord?
No, he’s out buying Hugo Boss suits, $5K watches and sushi with his “net worth”. Geez, what a blowhard. Barely over a million in NW and acts like he’s Bill Gates. These days, $1M does not make you “rich.”
Especially in NY. That is pauper status!
Sweet - I’m making 5.25% interest on my current CDs and the 30 yr fixed in down to 5.65%. Very Interesting.
“…leaving many economists speculating whether the housing downturn would drift through the economy.”
As if there’s any question????!!!
Number of CEO’s that have left their positions is alrealy surpassed last years record….
http://www.cartoonstock.com/lowres/jmg0055l.jpg
Stock market is dropping like a rock except for homebuilders. I guess a recession is bullish for homebuilding?
http://tinyurl.com/fzeuw
How long can builder stock prices remain in denial?
“Although jobs are firm, Roach is not impressed. In the last 58 months compensation has climbed only 16 percent versus the usual 23 percent during a typical economic expansion. ‘With the home-building sector now moving into recession, a renewed cyclical shortfall of labor income should be increasingly evident in the months ahead,’ he said.”
The way the market sees it:
A correction has already been priced into homebuilder stocks. TOL is down about 50% over the last 14 months.
A recession would mean lower interest rates, which would theoretically support home builders.
I tried to tell the folks here back in the summer that the builders were probably buyable. That wasn’t popular but that’s how it works. Doesn’t mean I agree with it or like it but good money has been made being long those suckers for the past few months. There was even a trendline break a few weeks ago to shake out all the new longs and you saw how long that lasted.
I’m up on my XHB etf which I bought back in April against the advise of everyone — probably +15%-20%. It’s up 48 cents a share today on an otherwise down market.
For the same reason I didn’t jump into tech stocks in 1999/2000, I can’t justify buying any HB stock, regardless of reasons why they might go up. I simply cannot get comfortable with the fundamentals (from a market or balance sheet standpoint).
Until there is some strong evidence that the housing market has bottomed, there is significantly better affordability, and the HBs have cleaned up their balance sheets (ie. gotten rid of or written down their expensive land), I’m content to watch.
Txchick you are a chartist as I understand. What is your opinion of Monday’s intraday trading pattern for the Dow and S&P?
I saw a big drop and then straight flat lining, followed by another big drop (though smaller) and then straight flat lining, etc., etc. The flat lining almost seemed like interference to me as it was sooo flat and for sooo long. Maybe options or stops popping on the way down caused the flat lining or was this extremely visible PPT activity or just normal?
Doubt you’ll see much in the way of real movement until the year end performance numbers are safely locked in. I’ve been scalping futures on the indices but it’s just beer money until the motivated bid disappears.
I’ll see your point comparison and raise you -
TOL is up 250% over the last 4 years, and up 40% over the last 4 months, the latter on no positive news, only pure conjecture that the housing marking is “looking like it will reach a bottom soon”.
IMO there’s pure market manipulation going on right now with HB stocks. Either that or just stupid denial - like an 8-year-old covering up their ears and going “LA-LA-LA-LA-LA” when their momma tells them to clean up their room.
PUMP and DUMP from the same slimeballs that brought you the dot.com crash. Wall Street is for suckers. Nobody wins except the insiders. Nobody
Maybe analysts firm have banking relationship with HB and need to pump to sell debt for HB.
“A correction has already been priced into homebuilder stocks.”
The market either must be very blind, or else have perfect foresight, then. Because the builder share prices have been steadily trending up since June 2006 against an overwhelming flood of bad news which continues up to the present.
Can the Yen carry trade create that much liquidity to carry the market?
The rise and fall of the equity market is pretty tight with the Yen/USD exchange rate. When the Yen strengthens the US equity market falls and when the Yen weakens the US equity market rises. Presently the Yen is strengthening.
http://tinyurl.com/y83fja
“A recession would mean lower interest rates, which would theoretically support home builders.”
This is a nice story to help Wall Street sell stocks, but I am afraid it holds no water, because it confuses cause with effect. If interest rates are dropping because the economy is hunkering down for a recession, then builders of McMansions will have a very hard time finding suckers willing to pay over $500K for their stucco boxes.
I agree with you, but market apparently doesn’t. Homebuilder stocks still jump on any news that interest rates are/could be falling. I’m of the opinion that falling interest rates won’t save the day, but that is a contrarian view not widely held by Wall Street.
In the first half of 1975, when the Dow had hit a December low of under 600 (right, 600, not 6000), there was a continuous opportunity to make money on REITs if you bought them just before a Fed rate drop was announced and sold them within a couple of days after. Never mind that the REITs weren’t actually making money.
It looks like the big boys are trying to squeeze the little shorts like me, there is a hell of a lot of upward momentum in the HB stocks, grrr. From a logical / fundamental point of view, the stocks should be in the toilet (HOV @ $5.00, …) She will blow a gasket one of these days but when ?
She will blow a gasket one of these days but when ?
————————
When we’ve all given up our shorts and decide to go long.
” “The absolute number of homes on the market has peaked,” High Frequency Economics economist Ian Shepherdson said Wednesday.”
And Ian bases this statement on….whaaaaaaat? What leads you to this conclusion, Ian?
Sometimes I’m lead to the conclusion that reading the mainstream print mdeia is less than worthless. Reporters, how about digging a little deeper and asking “experts” TO BACK UP THIER OPINIONS WITH REASONING AND FACTS.
Would it have been too hard to ask Ian why he feels that inventory has peaked, and to include that reasoning in the story?
Forgive me, I’m ranting, I need to spend some time back in the real world…
He was misquoted. He really said “The absolute number of homes on the market has peaked until the next month.”
See how missing three key words can really make someone look stupid. Damn media. Always causing problems.
Right, I believe they are still building at a rate of about 500k more homes than they sell, annually.
How much is the actual inventory and what are the real sales?
Stated inventory is 558K but doesn’t count the cancelations of contracts, ~40% of sales, so the actual inventory could be almost double. Also when a home is sold and canceled and then resold again this is probably counted as two sales.
So actual sales are lower and actual inventory is higher.
The whole method of calculating inventory and sales seems totally bogus.
The absolute number of homes listed will peak in the spring, about the same time David Lereah is admitted into the emergency room with a plastic St. Joseph figurine firmly lodged in his rectum…
No wonder the HB’s are doing so well today… Great news all around…
“Late payments are accelerating after lenders began to require less documentation for loans and financed more homes without down payments, Bear Stearns analyst Gyan Sinha said. About 38 percent of the most common sub-prime mortgages this year were for the full value of the home, up from 31 percent in 2005 and 21 percent in 2004, according to Bear Stearns.”
More than a 1/3 of subprimes are borrowed up to 100% of the value, 45.5% with no documentation, and median sales prices are decreasing, the economy is slowing. I wouldn’t feel too secure if I’m one of these investors. I don’t see too many of the 100% stated income loans for 600 fico score borrower loans anymore. It looks like standards do serve a purpose afterall.
It really blows me away. A 600 FICO probably means you have some late payments, high credit card debt and probably some collection activity. There may be legit cases where a person got hit with high hospital bills at some point but has high income and otherwise a solid track record, but really Stated income loans at 100% .. You just have to wonder just how badly this will all end.
“The mortgage bond market is beginning to buckle under the weight of the worst U.S. housing slump in six years. Yields on so-called sub-prime mortgage securities rated BBB have risen to 6.52 percent on average from 6.28 percent on Sept. 5, data compiled by Bank of America Corp. show.”
“About 3.3 percent of the $160 billion in sub-prime loans made this year through July have payments that are more than two months late, the highest ever for mortgages in their first year, according to New York-based Fitch Ratings.”
There it is ! I’ve been waiting to read that sort of a comment for a long time ! There HAS TO BE some relationship between giving every person that can fog a mirror outrageous amounts of money to buy a house and the default rate ! There HAS TO be. And now it is becoming evident.
“‘The higher delinquencies do set off an alarm for many people and make us more conservative,’ said Alex Wei, a senior VP at Delaware Investments, which has about $100 billion in bonds including mortgages.”
Guess what happens next, people ? SUB PRIME LOANS CEASE TO EXIST !
Seriously, after we see the current sub prime MBS holders get killed by foreclosures, who is going to loan money to people to buy a house when they can’t make the payment for the first few years and need subprime to get started ?
Suddenly borrowers are going to require 25% down and regular interest rates, just like they used to !
And guess what happens to housing demand when that happens ? !!!!!
We haven’t seen anything yet as far as a correction in housing is concerned. We haven’t even seen the tip of the iceberg because lending practices are still loose. Just wait until they tighten up.
And the ironic thing is that most of the current sub primes haven’t reset to the higher rates yet ! Some have, but most of those were probably refinanced recently or the house was flipped. About 80% of the existing sub prime loans are still in the sub part of their life !
And just as most people are thinking they will refinance to another sub prime loan, the industry is going to tighten credit like crazy and they will be forced to finance to a regular rate and pay the penalty to refinance.
The whole housing market is going to collapse from the LENDING side of things, not from the MARKET side of things.
This is going to get really, really ugly.
“The whole housing market is going to collapse from the LENDING side of things, not from the MARKET side of things. ”
There have been a few threads over the last month or so that lead me to believe that this thing will break wide open when the banks finally cry uncle. It is fascinating to watch the unraveling begin knowing what’s coming next (due to blog readership).
And just as most people are thinking they will refinance to another sub prime loan, the industry is going to tighten credit like crazy and they will be forced to finance to a regular rate and pay the penalty to refinance.
OR… They wont be able to refinance because they dont have any money to bring to the table to pay that penalty.
Tweedle Dee: Good point about the whole market going to collapse due to the LENDING side of things. I agree. Most of the FB’s will be foreclosed because they wont be able to refi (Lending) or sell (Market).
tweedle,
I’ve waited a long time my damn self. There is no yield in the world that could motivate me to throw money at sub-prime now! And it’s just starting.
What’s sad is that a lot of the people that are current on their mortgage payments don’t even belong in a sub-prime loan anyway! These hosebag MB’s portray themselves “the new financial planners”! The public feels that their job is to “get you the best possible loan” when the truth is EXACTLY the opposite! The crappier the loan the better they “got” paid. I talked w/ a MB earlier this week and he was bragging about how he wrote a loan w/ FIVE POINTS in it! Yeah FIVE! I can’t wait to see these guys take in the shorts.
Yep, the more the MB’s screw Joe6pack the more they make. No wonder a lot Joe6packs got screwed. With A__holes like Ameriquest and other subprime lenders paying their brokers more for higher rate loans, a lot of simple folk got screwed while the CEO of Ameriquest is on the Forbes 400.
Two ways to make big bucks in this world, screw a lot of people or offer a vastly superior product or service.
Or be able to hit a ball far with a stick, throw one through a 10-foot-high metal ring or run into other people really hard for three hours.
LOL!
You’ve hit on one of my pet peeves.
Very well stated comment.
I had a manager that fancied himself as a “new financial planner”. He would write letters to people the company did for, even those not his borrowers, to talk to him about investment advice. Not that I think the strategy would be that successful after they actually spoke with the guy, but you get the point.
I haven’t done a subprime loan for anyone in a while, but I do start to see some semblance of stricter underwriting standards creeping in. It’s too late for these SP bondholders. It will be interesting to see how these originating lenders try to fob off on the brokers that sold them the loans. It will be amazing to see them cry “fraud”, when it was so apparent, but they looked the other way because of all the fees the loan amounts generated for all involved.
“Guess what happens next, people ? SUB PRIME LOANS CEASE TO EXIST !”
I hope you are right, tweedle. It makes sense to me, but perhaps some of the mortgage guys could shed some light. If banks actually had to hold onto this crap then I have a feeling this market segment would cease to exist ASAP.
“If banks actually had to hold onto this crap then I have a feeling this market segment would cease to exist ASAP.”
That is the part that I don’t get. Who the heck is holding these sub prime MBSes ? You can now see that the asset backing the MBS isn’t there to back it anymore. And you can see that the homeowners are going to default like crazy. So someone is going to get royally screwed. The question is who ?
And when that happens and MBS holders learn that lesson, won’t that be the end of sub prime loans ? I mean, who wants to buy a BOND that has a good chance of not returning the principle ?
Somewhere someone must be sweating bullets over this issue, yet we never hear a thing about it. That Bloomberg article is the first I’ve read and I’ve been watching.
Subprime MBS are issued with subordinated classes and over collateralization that take the losses first. So those that bought the Class A bonds (AAA rated) will do ok unless foreclosures get really bad. They have about 15-20% support before they takes losses. The subordinated classes will do badly. A lot of this is bought by hedge funds so they can worry about it, I’m not.
More Fed Fretting
12/1/2006 1:15 PM EST
URL: http://www.thestreet.com/p/rmoney/revsharkblog/10325471.html
Chicago Fed President Michael Moskow is out with hawkish comments that are pressuring the market once again. He states that the risk of inflation is greater than the risk of slow growth, and expects 2007 growth to be below 3%.
The economic data have been consistently negative and market unfriendly for a while, but we had enough buying momentum to overlook it. That may now be changing.
GetStucco, you get your 1 down day and you get to proclaim, “the market is dropping like a rock”.
You and anybody is a fool to short this market. It’s an indisputable soft-landing in the economy. Go look at 1994, that was far worse and it was still considered a soft-landing.
It requires a crowbar to bring this economy into recession at this level of interest rates.
No recession or stock bear market until the 10 year bond hits 6.5%.
You heard it here.
blah blah blah
don’t you have your check yet? Isn’t it time to go out and buy the world?
Don’t they have to sell to book profits? What if some smart funds head for the exit first?
Yeah, that worked out well for Japan.
Suzanne, what a nonsensical statement. I’ll wager that you don’t even know what it means, you probably got it off some sky is falling chatroom.
“Go look at 1994, that was far worse and it was still considered a soft-landing.”
You are a complete idiot if you think it looks like 1994 again.
You’re a complete idiot who is always wrong. How much money have you left on the table, Stucco? Probably advised people not to buy houses in 2000 because of the “coming deflation”.
Now you’re trying to scare people again.
C’mon admit it, which short-seller do you work for?
BTW, my Vanguard long-term treasury fund is doing very well this week…
BTW, anybody who ignored your stupid advice and steered clear of risky bets in the stock market or hedge funds has no reason to be afraid.
GS is mostly right on!
You are now on record. Thanks! Look at LIBOR based rates - they are still at their summer highs. No Help for the FB’s and their ARMS!
Crispy&A-hole,
Please put me on record. LIBOR is useless in and of itself.
The majority of all ARMS are tied to it. Clearly you have no understanding of the debt markets. You have shown your cards - you are a charlatan, at best!
Keep it clean friend. Differing opinions make a market. You know this.
Usually when someone states the word “indisputable” in regards to the markets and their future direction either the person is a moron or desperately needs that indiputability to be true.
You are getting a great dip today HFA. Matter of fact that’s the second big dip we have had this week. Hope you are loading up with both arms!
Markets cannot go straight up. This has been an inredible rally since July - a 5% correction would set us up for an even bigger rally in 2007. The ducks are lined up here.
Don’t fight the Fed.
“Dont fight the FED”
I think I remember that Shill Abbey Joseph Cohen parroting that phrase ALL THE WAY DOWN on the NAZ!
hedgefundanalyst says:
“It requires a crowbar to bring this economy into recession at this level of interest rates.”
The so call crowbar you speak of is called “DEBT”
Red ink……….like the color shown here………
http://finance.yahoo.com/
Can anyone who posts here please remind me what kind of ridiculous fees hedge funds charge their clients for money-losing advice these days?
2 and 20
Oh, and as a group, they have underperformed the indices this year. Might explain the vertical rises in said indices in the past few weeks.
And if you’re OK at it after a couple years, you can get away with 2 and 25.
Also, one hired Chelsea Clinton a few weeks back. I doubt anyone here is less experienced or savvy with money than Chelsea is.
Andre Agassi?
Hey guys,
What’s with all the red ink?
http://finance.yahoo.com/
Whre’s the PPT?
They are fervently pushing on a string, but it won’t budge…
Does anyone know how much profit the big HB’s make on each house at the moment? I would think it’s still reasonable, like 25%? They can probably follow the market down another 20%. Seems like a better choice than selling the land at a loss and laying off most of their workers? This is of course bad news for the FB’s that will start losing money if the prices drop 2%.
“I would think it’s still reasonable, like 25%?”
Did you subtract off the value of free cars and vacations?
The fact that they can throw in those things and even mortgage buydowns (recently I have seen 1% percentage point for the life of the loan, not just the first year) shows that they could still have reasonably deep pockets. True, the shareholders are not going to be happy with the less than stellar performance, and that’s probably what’s priced into their stock price now.
“The fact that they can throw in those things and even mortgage buydowns shows that they could still have reasonably deep pockets.”
That seems a bit besides the point for valuation purposes. It is a bit like saying the value of my household possessions will hold steady even if I burn the legs of the chair I like to sit in, provided that I own lots of chairs…
Well…, to get back to the question: how much profit on the sale these days? I wouldn’t be surprised if they made a killing 1-2 years ago. Say 40% profit in a cookie cutter development if they bought the land 5 years ago. Since then “official” prices have dropped 10-15%, saleries have increased 10% (?) and material expenses have gone up 20%?. So a “$500k” house would now cost maybe $340k instead of $300k and sell for $425k. Still good business, even if you throw in a cruise and a granite counter or two.
Don’t forget the low cost of illegal immigrant labor…
Those cars and vacations are as “free” as those doors and windows.
Bruce Toll must be diversifying his portfolio!
Sold 11/15/06 -11/16/06 500,000 $28.64 - $29.20 $14.40M
Sold 09/26/06 -09/26/06 355,000 $28.99 - $28.99 $10.29M
Wow — it looks like the brothers Toll are losing the faith there…
is the correction begining ?
res construction is 6.5% of gdp- can you lose 20% and have it not matter
how about 20% of the 9.8 % of employment component in RE