Market Conditions Remain “Very Difficult”
Some housing bubble news from Wall Street. “Lennar Corp., one of the nation’s biggest homebuilders, posted a fourth-quarter loss on Wednesday in contrast to a profit a year ago as revenue tumbled 15 percent and it absorbed big charges related to the housing market slowdown. Lennar also said it expects housing deliveries will decline more than 20 percent this year as it tries to unload inventory.”
“Lennar lost $195.6 million in the three months ended Nov. 30. The latest quarter includes write-offs of option deposits and pre-acquisition costs of $111.1 million and valuation adjustments of $382.8 million.”
“The dollar value of Lennar’s backlog plunged 42 percent to $4 billion. Further, Lennar reported that it does not intend to purchase more than 24,000 home sites that it had under option to buy.”
From MarketWatch. “Lennar Chief Executive Stuart Miller in a statement Wednesday said market conditions remained ‘depressed’ through the end of the fourth quarter. ‘We have continued to build out our inventory, deliver our backlog and convert inventory into cash.’”
“Lennar’s gross margins on home sales fell in the fourth quarter partly on land charges and the use of more sales incentives. The company said the average sales price of homes delivered in the fourth quarter fell to $302,000 from $338,000 a year earlier. Sales incentives offered to homebuyers averaged $47,300 per home in the fourth quarter, up from $10,600 the previous year.”
“‘We have not changed our outlook that the housing downturn should be extended by continuing price declines in the spring selling season, but we do believe Lennar is strategically better positioned than its peers, Deutsche Bank analyst Nishu Sood wrote.”
“‘We note that it is likely management’s [2007] outlook may be more optimistic than ours with regards to pricing; nevertheless, this guidance reflects the aggressiveness of Lennar’s strategy to date,’ the analyst said.”
“‘We think the guidance may be difficult to achieve, as the high level of homes for sale will likely continue to pressure home prices, absent a sharp improvement in demand,’ wrote Banc of America Securities analyst Daniel Oppenheim.”
“Miller during Wednesday’s conference call said market conditions remained ‘very difficult’ through the end the company’s fourth quarter. ‘While it is not our custom to comment or update our view of the market in the middle of quarters, I will say that we have not yet seen improvement in market conditions to date as we’ve gone through the seasonally slowest time of the year,’ the CEO said.”
“Residential Capital LLC, a real-estate financing company owned by General Motors Acceptance Corp., said it will eliminate 1,000 positions by October to reduce costs as the mortgage lender grapples with ‘the continued deterioration’ in the subprime mortgage sector.”
“ResCap estimated that it would incur about $10 million in severance and related costs associated with the workforce reduction. Also as a result of the job cuts, it expected to save $65 million in the full-year 2008.”
From Reuters. “A GMAC spokeswoman said the parent company had begun an effort to integrate ResCap more closely about a year ago in a bid to cut costs across its lending operations.”
“In its filing with the SEC, ResCap cited slower mortgage originations, a weakening trend for U.S. home prices and weakness in the sub-prime sector of the lending market as reasons for the job cuts.”
National Mortgage News. “A ‘couple of hundred’ mortgage banking firms could fail in the next year or so as the industry works out its excess capacity, according to the chief economist for the Mortgage Bankers Association.”
From CNN Money. “Americans continue having difficulties paying their mortgage obligations, with December foreclosure rates above the 100,000 mark for the fifth straight month. The number of homeowners entering into some stage of the foreclosure process in December was up 35 percent from December 2005, according to RealtyTrac.”
“Adjustable rate mortgages, especially sub-prime ARMs, continue to drive the spike in foreclosures: Many of those loans are due to reset in 2007 and many of the loans written in 2006 are performing less well than previous years.”
“Other factors are involved. One is that the housing market turned, removing one avenue of escape for some homeowners facing foreclosure. Another contributor is that some lenders tried to maintain business in a slower market. To do that, some relaxed their underwriting standards, approving more marginal borrowers for loans.”
“Interest rates were also higher for the year. Doug Duncan, chief economist for the Mortgage Bankers Association, estimates that $500 billion to $800 billion in loans outstanding are to borrowers who may face difficulties. ‘Some of that,’ Duncan says, ‘would go into foreclosure.’”
“While it is not our custom to comment or update our view of the market in the middle of quarters, I will say that we have not yet seen improvement in market conditions to date as we’ve gone through the seasonally slowest time of the year,’ the CEO said.”
In my industry (telecom), this kind of statement would cause our stock to drop about 3-5%. However note the Lennar’s stock is now up 4% today. Manipulation, anyone?
Talk is cheap…..this company will have to post real numbers in 2007 and the fact that this is their first losing quarter in 10 years says A LOT more that verbage on a conference call from the three suits.
yes, but if with every disastrous announcement they call for a bottom and promise an improvement in the next six months, then the stock will rally every time. People really are that stupid - today is proof!
Does anyone have any good information on what is going to happen to lending standards when all these brokers go belly up? Obviously the standards are going to tighten up but how much and for how long? Lending standards are going to have a far greater effect on the housing market than any other economic reason. The economy is doing ok (not great but not bad either) and while housing sales are down houses are still selling. If things keep going the way they are I don’t see the market crashing hard anytime soon, just deflating at a little faster rate than most analysts expect. But if lending standards tighten nothing will sell since very few people can afford houses at today’s prices without exotic financing and those that can afford it will be less tempted to buy a depreciating asset unless they really have too.
I think the answer to your question is that in areas where subprime is a big part of the market (CALIFORNIA!) pricing will be hurt much worse by the lack of access to this aggressively underwriten debt. It is the only way most people could afford to pay high prices in recent years, and when it is gone, so are the high prices.
But ,the borrowers can’t afford the toxic loans either for very long so it was all based on real estate going up every year . These sub-prime borrowers and speculators ,crooks, whatever ,could only hold for short term on those loans that are now adjusting up to 8 % interest and above .
What the sub-prime lenders expected was that real estate would go up and than the sub-prime borrower would re-finance into another loan to avoid the piper or sell . That’s why they were paying a hefty commission to loan agents to stick a pre-payment penalty on these loans .
What a deram for the loan business to be able to refinance sub-prime borrowers every 2 to 3 years to get those commissions and get a piece of the action with real estate going up . Now all the sub-prime lenders have is a bunch of stuck borrowers that can’t sell or can’t refinance because real estate didn’t go up .
In that home loans are suppose to be 30 year notes and the borrower should be able to qualify long term these loans where not appropriate for a long term home loan .The low down payment requirements where a joke .
To give people investor loans without regard to the fact that the property doesn’t even come close to cash flowing is also another error of these lenders ,(but of course they could sell off to the secondary so it was all about fraud loan packages to get commissions ).
So these cra-p loans inflated the demand and the market prices and now they are going away and the demand won’t be there and it will crash the market IMHO .
When I read reports that over 50% of the borrowers in recent years went on these sort of toxic loans is when I get scared about what the fall-out is going to be .
sorry… deram =dream
“What the sub-prime lenders expected was that real estate would go up and than the sub-prime borrower would re-finance into another loan to avoid the piper or sell .”
I am not sure that the lenders really cared what the borrowers did. It had to be obvious to them that they could not afford the loan. They just wanted the transaction. But they didn’t consider the borrowers intentions, or options. However, they probably did take into consideration that, since property was increasing in value so rapidly, that upon default, they would be able to recoup their money. These scumbags deserve to get burned.
Hard money lenders in the old days would expect to get at least a couple of refinances out of a sub-prime borrower before that party sold or went down the tubes .
I agree with you that the current sub-prime lenders thought that the up market would take care of defaults .
Blue,
We are about ready to kick off our web site where people can report mortgage fraud. If we get good participation and financial support from the blog-o-sphere, we can freeze the fraudulent loans from being sold on the secondary market. We will be 1000xs more effective than the FBI at PREVENTING and stopping mortgage fraud. I can not tell you how idiotic and cumbersome the FBI is about pursuing this stuff. It would make your hair stand on end. I have taken enough of their incompetence and abuse. We will go straight to the rating agencies and the MBS buyers, who will refuse the fraud loans before they even get into the pools. They will send them back to the originators, thereby making them go straight.
I will need a lot of support both in fraud submissions and initial funding for the young man who is going to run the program. This thing will be up and running in a few days, with any luck.
Paladin
Wire Paladin, San Francisco
“Gunfighters don’t charge by the bullet.”
This is a great idea whose time has definitely come! In terms of financing the page, why don’t you just go with the 2nd biggest bubble of all time (Google)? Google ads should be able to pay all expenses and then some. I have no doubt that you will get a standing ovation in blog-o-sphere and I have a few submissions I would like to make once the page is up. What’s funny is that all one has to do is think about some of the people they know, and I’m sure they can come up with examples of recent re-fi’s that there is no way the house could have appraised and yet the FB got off the hook somehow (fraud?) I also know a few cases where the LENDER went back in and doctored the income statements after the fact and the FB didn’t find out about it until they got a hard copy of the docs later (sheesh!) This kind of crap must stop now!!! And then there’s things like the Elk Grove RE/Pot ring (haha.)
The economy is doing ok (not great but not bad either)…
Not even ok. The economy is just another FB scenario. Everyone looks at the McMansion with the Hummer & Bimmer out front and assumes everything is going great; meanwhile, the occupants are living paycheck to paycheck and barely making the negAm payments on their POARM.
Oh, good lord, it isn’t “manipulation.” People are selling on the rumor and buying on the news. There is no way a publicly traded security such as Lennar could be manipulated to that degree in a profitable way. Expectations were worse, I take it, than the disclosed data. Builders with decent amounts of cash should end up surviving and may even do well if they can pick up assets on the cheap from the medium and small market cap builders who end up insolvent.
One thing that I find amusing is how the only somewhat honest information about real estate comes from the after-the-fact SEC disclosures. They illustrate what a bunch of lying whores the industry “economists” or even the dataquick types are. The LA Times and all the other cheerleading media should recognize this and stop quoting the self-interested parties who are under no obligation to be honest. They do a disservice to their readers by publishing pieces ghost written by PR agencies.
jdd, I agree with your position and admire your efferts, but you’re dealing with a lot of the concrete-bunker, trilateral commission, bavarian illuminati crowd on this board.
Or perhaps the “crowd on this board” is a little less naive than average?
Meanwhile in UK the illuminatis are having just a great time sucking all the blood that is left in the real estate racket.
Real nice gimmick this investment scheme. “Buy to rent.” and wait at least 100 years to recuperate your investment. British scuuuumbags bankers.
“MONEY MORNING. January 17 th 2007.”
************************************************************************
Life is being made more difficult for potential homebuyers by the banks and building societies. The latest surprise interest rate rise has seen them somewhat unsportingly yank their fixed-rate deals off the shelves.
This may seem like good business sense - but the banks really are profiteering out of the Bank of England’s hike. You see, when they launch these fixed rates, they’ve already borrowed the money to fund them - so they’ve already locked in their own rate. Now, unless the rush to remortgage has exhausted the funds for all of these fixes (and we doubt that - rates only rose a few days ago, and most people we know are pretty slow - unsurprisingly - when it comes to things like remortgaging) then what they are planning to do is relaunch the offers, but at a higher rate - which means much more profit for them.
The other option has been to push up arrangement fees. For example, Abbey has kept its two-year fix at 4.99%, but the arrangement fee has jumped to £999 from an already very hefty £799.
(We could happily go on for hours about how lenders are ripping us all off with soaring arrangement fees, and of course, exit fees - but personal finance isn’t really the main focus of this email. However, MoneyWeek editor Merryn Somerset Webb is launching her own weekly personal finance email which will deal with mortgages, credit cards, savings, and many other subjects - it’s something that anyone who wants to make the most of their money will want to read. To sign up, click here: http://www.electricmessage.co.uk/mailer/signup.php?sid=217)
Anyway - so home loans are getting more expensive, making life tougher for both people who feel overstretched and want to remortgage, and of course, for first time buyers. After all, once upon a time, £799 could have formed a useful chunk of deposit - now it’s just the price of buying a loan.
But there’s always the buy-to-let market, isn’t there? We’ve been arguing for a while that buy-to-let as an investment (or a pension, as most people like to call it these days) makes very little sense. Rentals have not risen anywhere near as rapidly as prices, and so yields have fallen. In fact, it’s really not hard to find landlords who will readily admit that the rent they are being paid does not fully cover their interest-only mortgage payments - and that’s before repairs are factored in. And this situation is by no means unusual - according to a recent survey, a third of buy-to-let landlords bought their properties in the past year.
Most probably reckon that house prices will only go up - who can blame them? They’ve been rising since 1996, they’ve seen lots of people make a lot of money in that time, and despite all the good arguments made by housing bears like ourselves, prices have kept rising.
And of course, when it looked like prices would actually start falling, back in mid-2005, the Bank of England cut rates. No wonder many people believe that “the Government will never allow house prices to fall”.
But buy-to-let investors should go into the market with their eyes open - and this clearly isn’t the case. Buy-to-let is a highly leveraged investment - it’s like spread betting in a way. You put down a small amount of money to get exposure to a large amount. If the underlying asset price rises, your returns soar correspondingly. But if it falls, you could be wiped out.
As Tom Stevenson points out in today’s Telegraph, we all happily take this bet on the property market. But “I would, for example, never consider taking a £100,000 bet on the gold price with a £5,000 down payment. Why? Because that sort of gearing is a great way to lose your shirt.
“Gearing is a two-edged sword - and the one in three buy-to-let investors who have been in the market for a year or less are in grave danger of finding out that it works both ways.”
As he points out, rental yields are at five-year lows, with a real return of likely near 4% - a lot less than you could get in a decent savings account. Also, the BoE is clearly worried about inflation. It’ll be interesting to see what today’s consumer price index figure comes out at - if only to find out whether Mervyn King has to write a letter to Gordon Brown or not.
But the point is that now “interest rates of 6% or so are not fanciful. That will mean that even the most assiduous buy-to-let switcher will see an outflow of cash every month unless they have owned the property for a while or put down a significant deposit.”
That will make property much less attractive as an investment, and also put a lot of pressure on those who have recently bought to sell. It becomes much harder to think of an asset as a “long-term investment” when it’s costing you shedloads of cash to hold on to it in the short term.
It is manipulation, just not in the way you are stating. The stock is not being manipulated by the PPT or hedge funds or anything. What is happening is that the heads of Lennar are manipulating the sheeple by painting a very rosy earnings outlook for 2007, when they know for a fact that its not reality. This is called pump-and-dump and is very real and is also illegal. So don’t say this isn’t manipulation because it is.
I see all builders are acting very well KBH, PHM etc
The lenders aren’t doing as well.
National Mortgage News. “A ‘couple of hundred’ mortgage banking firms could fail in the next year or so as the industry works out its excess capacity, according to the chief economist for the Mortgage Bankers Association.”
Can anyone post the whole story on this? What an admission from the MBA.
I am sure none of those will be subprime lenders, right?
I am NOT surprised one bit that Residentail Capital is laying of lots of people. They would really dip into the subprime market and were known for doing 2nd mortgages that I thought were nuts. That said, their interest rates were high to account for the risk…but I sometimes no amount of money will account for a really bad risk.
SoCalMtgGuy
http://www.housingbubblecasualty.com
Lennar stock up 5% - got to be the bottom. Time2buy.
Has there ever been another protracted topsy-turvy period in stock market history when stocks consistently moved in the exact opposite direction that fundamental developments based on current news releases would predict?
The Nasdaq in the summer of 2000 was like this. A lot of tech stocks (INTC comes immediately to mind) made their highs in August or September of that year, and most of the better names held up until Apple crapped out in late September.
Yes, which shows why so many people in general are just *stupid* in that we never learn from our mistakes, even if the mistakes are recent. Never mind learning from past generations’ mistakes - we don’t learn from our own!
Yep… The sheeple are about to be sheared. When? If I knew I’d make a fortune in shorts. But its about to happen.
Man… 100+ sub-primes gone. The implode-o-meter will have to be updated multiple times a day!
Got popcorn?
Neil
I have been thinking lately about Calera’s (Eli Wallach) speech to Chris Adams (Yul Brenner’s character) in the film The Magnificant Seven describing the local townspeople, “if God did not want them sheared , he would not have made them sheep”.
Anybody else have any other movie quotes that come to mind during this bubble?
“Face it Flounder, you f*cked up, you trusted us”
Animal House-1978
“Do you feel lucky, punk? Do you?”
“you want the truth! you can’t handle the truth!”
Ya gotta love Jack
While I am by no means a stock beginner, let alone expert, this is exactly why I do not invest in the stock market. Of course, not all stocks behave this way. However, I would really have to someone and trust them before I would pull the trigger. GS, your comment is spot on. WS reeks of manipulation. How the hell does Goldman Sachs give outs millions upon millions in bonuses last month without this kind of manipulation? Hey, if Company X started at say a buck and went to say $100 over the year and split 5 times and made everyone a ton of money and showed that it was within all the fundamentals and had everything going for it, then maybe some yahoo would deserve the bonus. However, it seems that WS has just become a bunch of salesman making HUGE, AND I MEAN HUGE, commissions and bonuses just for peddling stocks. On top of that, you can’t even trust most, I said most, not all, of these peddlers. Snake oil salesmen, I say.
I’m not doing much of anything except a little intraday scalping. This is not my kind of market. I don’t trade the long side nearly as well as short.
I had the managing director of a major WS firm tell me with a straight face that they never do a trade “flat” - i.e. every trade is done with some level of insider information
I completely believe that, which is why I have no respect whatsoever for the “ability” of people like this Hedgefundanalyst guy and all the respect in the world for the daytraders who manage to make a living simply following the tracks of these people in the intraday charts. That’s trading ability. Knowing what is going to happen and getting on the right side of that takes more ability than the average lettuce picker in California.
txchick57 - I am sure you are very good at what you do and I respect that you are able to make a good living at it. But to say that the guys on Wall Street prop desks and hedge funds are making their money on purely insider information is bunk. For every SAC Capital there are hundreds of guys out there putting in the work and grinding it out above board.
Seems to me like the way to get ahead moneywise on Wall Street would be to implant a couple bugs in these mega-WS company firms’ boardrooms (or at the least, the rooms where the investment decisions are made). Would be far more fruitful than any amount of market analysis would be and you know what the strong buy will be before the buy is made.
Plunge Protection Team.
We are on the verge of the whole shebang falling apart, maybe a month, maybe a couple, who knows?
In my mind, there are few safe harbors in which to safely dock your wealth and gold has no peer, at this point and time.
Seperate yourself from the 99.9% of our fellow citizens that will have bubkis… (soon to be worthless paper & electronic investments)
You know, its funny. First, I kind of became interested in the housing/economic meltdown because it was so obvious to me and watching reality interfere with egos is just plain fun. Now, the way the stock market keeps rising and bad loans keep getting sold I am for the first time becoming a little scared that the undwinding could be a little more catastrophic than I originally thought. Never been the type, but it might be time to start getting together some nice guns with plenty of ammo and some other survival sh*t…
Ha ha - funny you should mention that. Just to close both ends of the loop - I’ve invested a fair amount in SWHC and RGR. (Smith & Wesson and Ruger). I figure when the excrement really hits the rotating air mover, they’ll do fairly well, or at least be less susceptable to the downturn.
I know this an RE blog, but I am fascinated by the resiliency of cash. I realize that it is of course just fiat money and that it is really also just a medium of exchange. I also realize that very very very few if ever time markets exactly. However, how in the world does the dollar still afloat. Every fundamental leads to its demise.
Let’s review, shall we.
1)Gov’t way in debt. Will never pay this off.
2)In order to get more investors, said gov’t will have to pay higher interest, but that means more debt, which is just a vicious cycle.
3)Gov’t prints more money, devaluing said currency, therefore begging the question why invest in the dollar? Inflation sucks.
4)Well, gov’t offers higher interest to get those investors, however this leads us back to point #2.
5) I realize the gov’t could just stop running deficits, curtail spending, and pay off the debt in about 10 years. However, the impact of that on the economy would not be very pleasant.
6) Lastly, get rid of Federal Reserve. Stop paying interest on money printed. Inflation is bad enough, but having to pay interest on something the constitution grants congress the power to do is mind boggling. With the Fed you get double whammied, inflation + interest on the money. Ouch!
Bottom line I keep asking myself is when this the called the dollar is finally going to give way, and therefore, what should I keep on hand? I really think a depression is the only way this can play out, but I have this sneaking feeling that the gov’t can keep this economy humming along a little more. What to do, what to do, what to do?
Right now the main thing keeping the value of the dollar high is the Chinese government’s policy of pegging their currency to ours. Every day they buy lots of dollars then turn around and use those dollars to buy our treasury notes. This also keeps our interest rates low. If they ever changed their policy, the dollar would most certainly fall. However, once the dollar falls low enough, the cost of goods and services emanating in the United States becomes relatively cheap by international standards and foreign investment would pour in and establish support for the currency. Bottom line: the sky is not going to fall.
We are in uncharted terrritory and what used to be, isn’t.
You should study up on the Asian currency crisis and what happened in Argentina. Granted, we will have more exports as the $USD depreciates but other countries investing to support the dollar is a pipe dream. We will get a whole new currency backed by something real before that happens. Once the Euro becomes the global reserve currency its “Good Night Irene” for the dollar.
If I am not mistaken, both problems were caused by a loss of liquidity. In Asia, the governments have long been currency manipulators. These governments were borrowing huge sums to buy foreign currency and prop up their own currencies to foster economic growth. When they became unable to borrow, they were not able to continue to buy without getting out their printing presses. Without the buying their currency devalued; printing money would have had the same effect. The same problem occurred in Argentina, but they weren’t buying currency, they were trying to support old debt and entitlement programs without enough tax revenue. Basically, they were both Ponzi schemes that unraveled.
…they were trying to support old debt and entitlement programs without enough tax revenue.
Hmmm… who does that sound like???
And how is this any different, other than the fact that the Ponzi scheme is now much larger and is more global?
Not true…the Chinese RMB is not pegged to the US dollar anymore and has appreciated 5% VS the US dollar this past year…thus the rapid rise in Chinese assets.
My understanding is that the RMB still has a “limited peg” to the dollar — the peg is against a “basket” of currencies that’s dominated by dollars. It does fluctuate against the dollar, but the Chinese government strictly limits the amount of the fluctuation.
Oh, and fructu Eulopeans, too.
Thomas,
That is my understanding as well. My initial analysis was a bit simplistic as I thought a detailed explanation of “limited float” and “currency baskets” would belabor the point.
On that note, I heard currency traders were concerned that the Chinese were adjusting their currency baskets away from dollars and were considering allowing greater fluctuation against the dollar. The Chinese are afraid to allow it to float too much or their export market in the US will shrink and hurt their economy.
How long are the Chinese going to continue to purchase our debt? Collapses (like the sky) happen, look at history, we’re not immune.
http://money.cnn.com/2007/01/17/news/economy/bc.economy.usa.inflows.reut/index.htm
Interesting that the inflow in November (latest data available) was 2/3 coporate bonds, 1/3 Treasuries.
“Overall capital inflows hit $74.9 billion, with corporate bonds seen back in demand.”
Japan unloaded $2.2billion and China only bought $1.5billion U.S. Treasury securities.
“Japan, the largest holder of U.S. Treasury securities, was a seller of government bonds in November. It held $637.4 billion in securities, down from $639.6 billion in October.
Meanwhile, China, the second largest holder, held a total of $346.5 billion of Treasuries in November, up from $345 billion in the prior month.”
Fractional Banking is an amazing and terifying thing. It is a misperception that the Private Entity known as the Federal Reserve needs China or any other form of investment to continue to create money/debt and in all cases throughout history it has been rolled to the taxpayer.
Before the Great Depression the Reserve Bank of the Time(we are on our 3rd) sent notice out to the Financial Institutions to basically make them aware that they were going to suck the liquidity out of the system. The Institutions balked and were quite upset, the reserve reassured them by saying “don’t worry you will own 1/2 the property west of the Mississippi and 1/4 of the property in the South”.
Just for fun some of the board members went down to the exchange to watch the mayhem, they even took friends and family members with them. Most of these Reserve members expressed regret at what they had done.
IMHO the only reason the current private business known as the “Federal Reserve” has not pulled the plug on the current cycle(which they always do…yes ALWAYS, they control things via the cycle, that’s what they do and how they make money and throw the debt to the taxpayers) is because of the twin defictits and the war(War = greater debt creation and larger profits for them).
Fractional Banking its history and where it has us is fascinateing. It is believed that 1 in 100(US Citizens) know that the Federal Reserve is a private organization and that 1 in 1000 truly understand how they work.
I am educated enough to know that I as of yet do not completly understand it, but ignorance is only a lack of knowledge which gives one the oportunity to discover the knowledge and enlighten ones self.
Prior to the 1929 stock market top, the Federal Reserve became concerned at the level of speculation. They as you say tightened rates with the discount rate at 6 1/2%. After the crash in the fall of 1929 (Dow fell from 383 to 198). The Fed then cut rates, probably to bale out the specialist who held huge inventories of stock from the crash. The market advanced to 298 into the spring of 1930.
The FED cut rates from 6 1/2% to 1 1/2% into 1932. Inspight of this attempt to “print money” the stock market fell to 42 and deflation reigned.
The FED does not print money as so many on this blog state.
They can make credit easier and control qualifications for buyers. If fear sets in the banks will not lend on properties worth less then the loan. Thus deflation and a downward spiral.
A lack of knowledge concerning the prior depression and the illusion that the central bank can create money (by itself) is rampant in this country. It provides a false illusion of control for the bulls (Greenspan put idea) and fear of a sell out by the FED (helicopter Ben) for the bears. It just isn’t so.
There is even less control in a nation with a debtor relationship with others. In that situation they can not control their interest rates for the currency will get clobbered. Artificially high rates are necessary to protect the currency. This removes the ability of the FED to do its part to raise the money supply that is lower interest rates.
This is not just a housing bubble.
Is the Fed currently concerned about speculation? At least hypothetically speaking?
—————————————————————————————
Fed can’t pop a developing housing market bubble: Mishkin
By Greg Robb
Last Update: 1:00 PM ET Jan 17, 2007
NEW YORK (MarketWatch) - The Federal Reserve shouldn’t try to prick a housing market bubble, but should be prepared for possible sharp reversals in prices to ensure they do not do serious harm to the economy, said Fed governor Frederic Mishkin on Wednesday. “Because subsequent collapses of…asset prices might be highly damaging to the economy, as they were in Japan in the 1990s, should the monetary authority try to prick, or at least slow the growth of, developing bubbles? I view the answer as no,” Mishkin said in remarks prepared for delivery to the Forecasters Club. But Mishkin added: “I do think that central banks can ensure that sharp movements in the prices of homes or other assets do not have serious negative consequences for the economy.” Mishkin was talking hypothetically about asset bubbles. While he said there has been an extraordinary run-up in U.S. home prices over the past decade, he added it was “extremely hard to say whether they are above their fundamental value.”
Very good Google Video on Frctional Banking(Part1 and Part 2)
http://video.google.com/videoplay?docid=-8753934454816686947
http://video.google.com/videoplay?docid=-2665915773877500927
Just amazing
Cash is resilient because it is the world’s reserve currency, the global economic touchstone. Such things die hard, very hard. However, when they do die, they go out in spectacular fashion. Keep the popcorn handy.
You can’t have worthless housing and worthless paper at the same time (unless all value resides in some other hard asset — gold anyone?).
aladinsane,
Should you be correct about the end of paper and electronic investements, what makes you think you’ll be able to do any kind of transaction at all? Are you going to haul a bag of gold around?
If you really believe this is the “end” better to get a few shotguns and a ton of ammo. Oh, and find a nearby cave…
aladinsane,
Should you be correct about the end of paper and electronic investements, what makes you think you’ll be able to do any kind of transaction at all? Are you going to haul a bag of gold around?
If you really believe this is the “end” better to get a few shotguns and a ton of ammo. Oh, and find a nearby cave…
We are merely reaching the end of our financial system’s worthfulness, a sea change, if you’d like.
There will be a period of incredible unstability, more than likely brought on by a bought of hyperinflation, and all the rules that we used to play by, will be replaced by short term machinations, until we finally come up with something workable.
In all likelihood, those with cash in the bank or healthy stock portfolios, will have nothing, just like most of the rest of our countrymen.
You can seperate yourself from the herd, there is still time.
The Fed does not want hyperinflation either. Money owed to the big banks and credit card companies will be paid off with worthless paper.
“Lennar lost $195.6 million, or $1.24 per share, in the three months ended Nov. 30 compared with a profit of $581.2 million, or $3.54 per share, a year ago. The latest quarter includes write-offs of option deposits and pre-acquisition costs of $111.1 million and valuation adjustments of $382.8 million.”
Wow, $776.8 million dollar swing in profits in just 12 months and they admit we are not at the bottom yet!!!! If they report more of this in 2007 their stock should be up to about $80 a share by 2008.
One thing the media is missing on these writedowns is that the property almost certainly goes right back up for sale. Yesterday Centex walked away from 37,000 lots!That’s a small citys worth. And my link in the Florida comments said it was concentrated in FL, CA and DC.
All told, probably well over a $billion worth of land has been dropped in the past few months. Who says they aren’t making any more of it?
They may not be making any more, but soon they may be giving away what they were previously hording.
As strange as it seems, this is one of the reasons the stock is going up. The have been shedding non-performing assets and reducing their obligations. Getting rid of their land holdings increases their return on equity, and dropping the land option payments reduces their future cost and thereby increases their profitability.
Builders really don’t care about the price points they sell at, they only want to make a consistent profit margin and maximize volume. By reducing their land basis quickly, they will be able to increase volume while selling profitably. Of course, that will destroy the resale market in the process, but that isn’t their problem.
IMO, one of the big difference between this decline and the one California experienced in the 90’s is going to be the behavior of the builders. Last time, they held these assets and failed to properly adjust to the market. This time they will aggressively lead the market down.
I have seen evidence of this in Irvine. The Irvine Company just came out with new pricing in its Portola Springs community a full 15% lower than July 2006. It is documented at the Irvine Housing Blog.
I have not seen the numbers, but even if these “homes” are 15% lower, what is the going price? If that junk was going for 750K last year, that still means they are in the $630K range. With subprime dying, who is going to buy that crap even at that price? We still have long way to go in So Cal!
From the post at Irvine Housing Blog:
PRICING (Portola Springs - Decada)
Phase 1? (July 29, 2006)
Residence 1 - From $691,490
Residence 2 - From $723,420
Residence 3 - From $742,325
Residence 4 - From $779,080
Phase 2A (Effective 1/13/2007)
Residence 1 - From $580,000
Residence 2 - From $602,000
Residence 3 - From $628,000
Residence 4 - From $648,000
I agree we still have a long way to go, but this is about 1/3 of the way there.
I am afraid your explanation holds no water. If yesterday the options to buy land were shown on the books as an asset, and today the company announces the options will expire worthless, then I guess the value of the company went down. This is not rocket science.
GetStucco, I recommend you listen to IrvineRenter.
GetStucco,
The book value of the company certainly does decline, but the assets which remain are more productive. That is what turns on Wall Street.
Look at it this way: imagine Company X owns 10 properties each worth $10 dollars. They have a book value of $100. 5 of these properties lose $1 per year, and 5 properties make $1 per year. The return on assets would be zero. Now imagine Company X sells the five losing properties and takes a one-time write-down. Their book value will have dropped to $50, but they are now obtaining a 10% return on their assets. Investors do not like to buy a company with high book value and a zero return on assets, but they do like a company with a lower book value and a positive return on assets. This is why homebuilder stock prices are recovering.
Great explanation.
“Their book value will have dropped to $50, but they are now obtaining a 10% return on their assets.”
Unless the number of shares changed, the value of corporate assets per share dropped, no matter what the investers like. Not rocket science.
And JimmyB, thanks for the suggestion. You sound very much like the REIC experts quoted in the MSM: “It is this way because I say so.”
Disclaimer: I am not particularly bullish on homebuilding stocks. I don’t currently own any, nor do I plan to buy them any time soon. I am just trying to explain why these stocks can be rising while the value of the product they produce is falling.
Sorry, GetStucco, but over the last 6 months, I’ve frequently read your comments and IrvineRenter’s comments, and, although you say many good things, in my opinion, IrvineRenter is generally spot on. I wouldn’t bet against him.
Same disclaimer. But I still claim that if you write down the value of a company’s assets, and don’t change the number of stock shares, then the average value of assets per share goes down. Is there a logical flaw with this argument that I am missing?
And as for the claim the return on assets is higher, that is just fine, provided the stock price initially corrects to reflect the writedown. But that isn’t happening, is it?
So the value of a share of stock becomes higher when a craptastic “asset” is recognized as craptastic and the heretofor phony number for “book value” is now adjusted for reality.
So if I’m selling my car that needs a valve job (without telling people it needs a valve job) its worth more to buyers when I TELL people it needs the valve job?
The mere full recognition of a problem within a business may or may not impact the price of the stock. Too many other factors come into play. Getting rid of something CALLED an asset but understood to be a liability won’t change the actual value of an entity now will it?
“provided the stock price initially corrects to reflect the writedown. But that isn’t happening, is it?”
Keep in mind that stock markets are forward looking, and homebuilding stocks in particular are often 6 to 9 months ahead of the curve. If you look at KB Home’s stock chart, you will see a top near 80 in June of 2005. Then the stock sold off 50% over the next year to a low near 40. During the selloff, KB Home continued to report record earnings. The stock price dropped 50% despite record earnings because the market participants foresaw the problems on the horizon and priced in the write offs which the company just reported, so the stock price correction to reflect the write offs occurred 6 months prior to the announcement. Right now the stock price is rising in anticipation of renewed earnings growth and increased volumes. IMO, the market is pricing in too much because it isn’t anticipating a 30%-40% reduction in home prices. The connection between sub-prime lending and current home prices is well understood on this board, but not so well by Wall Street. For current homebuilder prices to be justified, the sub-prime market must not melt down and take future builder’s earnings with it. Builders can still build profitably even after huge reduction in home prices because they will simply adjust their land basis.
The real point I wanted to emphasize in my post that started this whole thread was not the stock prices of builders, but how the builders quest for increasing sales volumes will drive down home prices. Anyone who believes the builders give a crap about resale prices of existing homes is deluding themselves. They will destroy the resale market to achieve sales volume and meet their earnings numbers.
JimmyB,
Thank you for the kind words.
“Keep in mind that stock markets are forward looking, and homebuilding stocks in particular are often 6 to 9 months ahead of the curve.”
If the homebuilder stock price curve were an EKG, I would say the patient is brain dead. The EKG does not respond to stimulus, in the form of current news stories which imply steadily eroding fundamentals.
Don’t tell me you sincerely claiming that you believe investors already priced in all subsequent bad news as of last May? In that case, where can I buy one of the crystal balls they use to predict the future with perfect foresight?
- “IMO, one of the big difference between this decline and the one California experienced in the 90’s is going to be the behavior of the builders.”
Nice point. But, I believe that this surge will be corrected by the fundamental math….disposable income to debt ratio. Math is still math and you can screw the numbers for a while (100% no down financing), but when the “Funny Intro” is over it’s back to ‘Can you afford this payment?’. At some point this non negotiable truth will prevail.
Here is another way to look at it;…@ about 5 units to the acre (all you get after roads, sidewalks, parks etc., they just let go of 7,400 acres of dirt…@640 acres to the square mile, thats 11.5 square miles of land….
“One thing the media is missing on these writedowns is that the property almost certainly goes right back up for sale. Yesterday Centex walked away from 37,000 lots!…”
That is another key point. These entitled or improved lots the builders are dumping don’t disappear. Some investor will hold these for a while, and when volume picks up again, the builders will simply buy the land back. When people talk about a shortage of land (besides sounding stupid), they conflate land with lots. There are many areas with constraints on available land that have a glut of available lots. There is no shortage of lots for any extended period of time in any market.
Did I miss the mention of the incipient soft landing in the articles linked in above, or is the REIC searching for a new moniker?
“Correction followed by slower, sustainable appreciation” is the new soft landing.
This sounds right. But the correction will not end until after 2010, and the sustainable appreciation will not build any substantial momentum until after 2015.
‘It’s not a soft landing. It’s harder than a soft landing.’
Robert Toll
It’s a baby bear bed landing!
Its a “normal cycle.”
“The dollar value of Lennar’s backlog plunged 42 percent to $4 billion. Further, Lennar reported that it does not intend to purchase more than 24,000 home sites that it had under option to buy.”
Translation for the option-illiterati: Those who bought puts on the homebuilder stocks are not the only saps who lost 100% on their option investments.
Well, the Intel Jan 22.5 call writers are cleaning up. As they always seem to do around the earnings report.
The Exodus from Florida begins due to high housing costs. Who will buy all those overpriced condos and stucco boxes now? Maybe the Arabs and Russians.
http://tinyurl.com/2auhlw
i watch the russian tv channel when i go to my inlaws’ and last year on RTVI they were pushing homes in Florida every time i came over for a visit
So if my math is right in one year the average home value (price - incentives) declined from $327,400 to $254,700 for a one year decline of 22%? But my Realtor told my real estate only goes up?
That’s the real story - the willingness of builders to aggressively chase the true price point of the market.
a 1% decline according to WAPO in Arlington County VA
how come I can buy anything I want at 10-12% off ?
1% off ASSESSED values. Do you really think a government entity that’s become addicted to ever rising revenue streams based upon property taxes from bubblicious housing is going to immediately slash property assessments in real time. Home owners are going to have to challange there assessments one at a time and take years before they reflect reality. The only other factor that will bring assessed values back down is lower priced sales, but lower priced sales go hand-n-hand with fewer sales so the critical mass just is not there to bring assessed values in line with prevailing real values.
Anyone else just catch Mishkin’s comments? Essentially he tossed around phrases like “collapsing housing bubble” like everyone knew it all along. This is HUGE.
Yep. Well, remember after the last meeting, they threw in the word “substantial” and everyone grabbed onto it. Bet you we hear soon about all this being “priced in.”
Bet you we hear soon about future helicopter drops being “priced in.” Because one interpretation of what Mishkin said was that he is greasing the skids for respiking the punchbowl later this year.
Trouble for commerical property as well in Colorado:
N. Colo. overbuilt, under the gun
Regional observers tell a gathering “we need to be nervous” about the vacant retail and office space.
By Aldo Svaldi
Denver Post Staff Writer
Article Last Updated: 01/16/2007 10:02:20 PM MST
Greeley - Northern Colorado’s economy has rested on a foundation of strong construction spending since the early 1990s.
That foundation could be sinking.
Forecasts from Colorado State University call for 6,100 new jobs in the region this year - which would represent a 2.8 percent gain from November’s payroll count of 216,800 jobs.
But that may not be enough to shore up an overbuilt real-estate market, observers told an audience of nearly 600 businesspeople gathered here Tuesday.
At that rate of job growth, it will take five years to absorb the currently available supply of vacant retail space, four years to absorb the available office space and nearly 10 years to absorb industrial space.
Northern Colorado and Britney Spears have a lot in common. They both are train wrecks. At least, corn prices are up.
If the government quits subsidizing ethanol, you can see corn prices plunge too.
They also have large, abundant, eye-catching protruberances adjacent to generally flat territory. Except Northern Colorado’s are all natrual.
ot, But some of these realtors are ridiculous
http://washingtondc.craigslist.org/nva/rfs/263994902.html
I like the picture of the dog! Does the dog come with the property! It is a truely a one-of-a-kind dog! On a nice cul-de-sac!
I once saw one on craigslist in my area that had a picture of two children, hand-in-hand, running through the backyard. I hope it was a stock photo and that these morons didn’t really put a photo of their own kids online…
It looks like one of many houses in the neighborhood I grew up in.
“Rare” 4BR/2½ bath in Reston? Who are they kidding, that’s every other house in Reston. What should that thing really be worth, like $300K tops?
This blubububbubulblubble has a LONG way to go.
Hee hee! I was laughing, too!
“…rare 4 Bedroom/2.5 Bath Colonial…”
That’s all I see around NoVa!!
As for the dog, do I have to feed it if I buy that rare gem?
(Maybe I can feed it some squirrels.)
Rare two bedroom condo with flat screen for HALF A FREAKIN MILLION dollars (free flat screen t.v.)
http://washingtondc.craigslist.org/nva/rfs/263961265.html
It says the bathrooms will rival any spa! What kind of spa are they talking about, because those look like a million other crappy bathrooms (no pun intended). Must be referring to one of those happy ending spas???
4000 sq. ft! They must be including the carage in the calculations.
Dow Jones report Jan 10th…questioning the earnings reports of the HomeBuilders….
There could also be an upcoming “spike” in impairments for builders set to report financial results after wrapping up their fiscal years at the end of December, “due to the added rigor of year-end accounting reviews and the desire to minimize next year’s fiscal write-offs,” Sood added.
“Unfortunately, as declining home prices extend the housing downturn and continue to depress the builders’ earnings, we think the stocks could be under pressure as expectations of an impending recovery unwind,” Deutsche Bank cautioned.
Here’s the scoop on Lennar. 5K more OI in the January 50 puts than calls. That’s all you need to know.
http://www.cboe.com/DelayedQuote/QuoteTable.aspx
17,558 OI in the January 50 puts
12,252 OI in the January 50 calls
You are so right on that one. Let’s see how many of these housing stocks close on expiration day above the strike with the one with the most open interest. High open interest at a strike price is like a magnet on expiration day. It amazes me how many stocks close within a half a point of their strike price with the most open interest.
“That’s all you need to know.”
Au contraire. There is an identification problem with that number, as we cannot tell who bought and why.
For instance, if I were a deep-pocketed hedge fund, I would be tempted generate large open interest on deep-out-of-the-money positions that looked attractive from a fundamental standpoint, but then gradually find GSF (”greater smart fools”) to gradually take them off my hands as the expiration date approached. It would be very helpful if I had inside knowledge that the price would be held above a floor (which in turn exceeded the strike price). What better way to fleece GSFs?
Nah, these positions are hedges or writes for “income” is my guess.
Another one on the rate increase train:
http://www.itulip.com/forums/showthread.php?t=832
Beige book. housing weakness almost everywhere
http://www.federalreserve.gov/fomc/beigebook/2007/20070117/FullReport.htm
And one more
Technical Analysis
Housing ‘Recovery’ Built on Wishful Thinking
By Dan Fitzpatrick
RealMoney.com Contributor
1/17/2007 11:06 AM EST
URL: http://www.thestreet.com/p/rmoney/technicalanalysis/10332912.html
Lately I have been getting a lot of requests for an update on the homebuilders. Over the past year or so, I have written about this industry group more than I want to remember and have had a pretty good handle on the health of the industry.
For example, last September I wrote a piece about the inevitability of the recent rash of writedowns in asset values. Prior to that article, I observed that the prolonged bull market has created a lot of high-ranking executives with absolutely no experience in managing a downturn in housing demand. I haven’t seen anything that prompts reconsideration of that view.
I just haven’t bought into the notion that the housing industry has bottomed. The market anticipates future developments, and I’ve heard the same sentiment over and over again: The market will improve in late 2007. I don’t believe that. I think that the widespread optimism for a late-2007 recovery is a big pile of wishful thinking. But I do believe that this optimism will be enough to buoy the stocks into the latter part of the year, at which time the market will realize that it was a bit too optimistic.
Once the “late 2007 recovery” is off the grid, will the stocks then sell off? Probably not. The forecasts for a housing recovery will simply be pushed out for another six to nine months. And who wants to sell the group then — when a recovery is, once again, right around the corner? I think a bona fide recovery is still a ways off. After all, homebuilders are finally getting around to simply dropping prices rather than parking BMWs in the driveway with college tuition checks jammed in the glove box.
With that being said, one undeniable truth is this: I have been out of sync with the homebuilding stocks. My analysis of the industry has been pretty solid, but I have not made you any money. I never really embraced the rally that began last July and have been on the wrong side of the “be right or make money” equation.
Now that I have that off my chest, I feel better. So let’s look at the charts of the homebuilding stocks without thinking about the lousy state of the business right now. One theme persists through all of these charts: The stocks are right at support. If you’re a bull, buy ‘em now. If you’re a bear, sit tight and wait for support to break down.
This weekly chart of Hovnanian (HOV) shows a rising wedge created by higher highs and lows. At some point, the bulls will fail to print a higher high, and that’s when HOV is most likely to roll over. But the stock is at support right now and offers a low-risk buying opportunity. And if you’re long, consider the December high as the benchmark for the next rally. Without a new high, HOV is likely to break down from the current channel.
Centex (CTX) is also climbing in a series of higher highs and lows, but its channel is a bit more constructive than that of HOV. Because support and resistance are generally parallel to each other, it will take less buying pressure to print a new high than in the wedge formation we just saw in Hovnanian. If you’re long, try keeping a stop back below $50. That gives the stock a bit of room to move without risking too much capital on the trade.
Pulte Homes (PHM) has been in a steady uptrending channel with well-defined support and resistance. Since July, the stock has been printing higher highs and higher lows. I see the upside for the next advance to be right around $35 — which is right where the stock peaked in October and December. I’d keep my stop back below the November low, just in case support breaks down.
D.R. Horton (DHI) has been stair-stepping higher in a series of 10% moves. I’ve drawn the short-term support for the stock at around $26. As long as DHI stays in the channel, you want to be long. But if support breaks down, I’d move to another neighborhood.
Toll Brothers (TOL) has been climbing higher in a fairly tight range and is now at the bottom of the channel. I think $30 is a critical level and needs to be respected. Notice how the $30 level has acted as support in early 2006 and as resistance last October. So far, the stock is holding up at $30. Until that changes, I’d stay long.
Be careful out there.
WTF?????? http://www.marketwatch.com/news/story/home-builders-sentiment-rises-highest/story.aspx?guid=%7BD7F70782%2DD1FD%2D4425%2DAC0E%2D727EA91561B5%7D&dist=bnb
Home builders a bit more optimistic in January
Housing market index rises to 35, highest since July
The NAHB/Wells Fargo housing market index improved to 35 in January from an upwardly revised 33 in December. It’s the highest level for the sentiment index since July. A year ago, the index was at 57. The index bottomed at 30 in September.
How much more life is in this thing???????
35 is at best anemic mediocrity, its just spin doctoring. Home builders still think it sucks, just slightly less that in September.