“Last Year Was Clearly A Turning Point”: CEO
Some housing bubble news from Wall Street. “KB Home posted a net loss of $49.6 million for the fiscal fourth quarter on Tuesday, as it took $343.3 million of pretax charges for abandoning land option contracts and writing down the value of inventory, a consequence of the U.S. housing market downturn.”
“Net orders fell 38 percent in the quarter to 6,059, KB Home said. The cancellation rate was 48 percent in the fourth quarter, up from 31 percent a year earlier.”
“‘Last year was clearly a turning point for the U.S. housing market,’ said CEO Jeffrey Mezger. ‘During the second half of the year, an oversupply of unsold new and resale homes, reduced affordability, and greater caution among potential homebuyers heightened competition among homebuilders and sellers of existing homes, prompting the aggressive use of price concessions and sales incentives.’”
“‘Our results were further affected by declining land values and the resulting charges we recorded in the fourth quarter to reflect lower land values,’ said Mezger.”
“The Company’s housing gross margin decreased to 11.7% in the fourth quarter of 2006 from 27.1% in the prior year’s quarter, in large part due to pretax non-cash charges of $152.7 million for inventory impairments and $88.3 million for land option contract abandonments, as well as an increased use of price concessions and sales incentives. Excluding the non-cash charges, the fourth quarter 2006 housing gross margin was 18.8%.”
“‘As the year progressed, market conditions worsened, cancellations increased, net orders declined and margins came under pressure,’ said Mezger. ‘The result was a 2006 year-end backlog substantially below the year-earlier level. At a minimum, this will likely result in a year-over-year decrease in our unit deliveries through the first half of 2007 and potentially longer.’”
The Dallas Morning News. “In the midst of the biggest housing slump in over a decade, industry watchers are already trying to figure out where the business will head when the downturn is over.”
“Fort Worth-based builder D.R. Horton Inc. has been one of the biggest buyers of building companies, acquiring more than a dozen firms since the early 1990s. During last month’s earnings conference call, analysts asked Horton’s officers if they were shopping again.”
“‘The only reason we would want to do that is if we felt like we would need to add to our current land and lot inventory, which at this stage in the game we absolutely do not,’ CEO Don Tomnitz said.”
“National Association of Home Builders’s Gopal Ahluwalia said that top homebuilders are holding about six years of land inventory. ‘Now, with the decline in the housing market, that is causing more trouble,’ he said. ‘A lot of builders have disposed of land.’”
“Some homebuilding execs may be short on the experience to find their way through the current downturn, said industry consultant Michael Kahn. ‘If they came into the business after 1993, most of them have no idea what a down cycle really means,’ Mr. Kahn said.”
“Some equity investors are also considering purchases of public homebuilders whose stock is depressed. ‘We’ve been dealing with a number of private-equity groups that are looking to get into the business,’ Mr. Kahn said. ‘They are headed for a disaster,’ he said.”
From Bloomberg. “ResMae Mortgage Corp., a U.S. home lender to people with bad credit, filed for bankruptcy protection and said Switzerland’s Credit Suisse Group agreed to buy its assets to for $19.1 million.”
“‘Despite the earlier successes and persistent efforts of ResMae’s management team, the subprime mortgage market has recently been crippled and a number of companies stopped originating loans as U.S. housing sales have slowed and defaults by borrowers have risen,’ ResMae said in its Chapter 11 filing yesterday with the U.S. Bankruptcy Court.”
“Closely held ResMae is at least the 20th mortgage company to be sold or closed as delinquencies surge and the market for home loans to risky borrowers contracts at the fastest pace ever.”
From Reuters. “On Monday, Moody’s Investors Service said delinquencies of 60 days or more on securitized prime jumbo mortgage loans rose to 0.323 percent in November, the highest in 2006. That was also 8.7 percent higher than the 0.297 percent in November 2005, when the rate reached a ‘temporary apex’ following Hurricane Katrina three months earlier, Moody’s said.”
“On Friday, Countrywide said foreclosures rose to their highest level since at least 2002, while delinquencies held near a five-year high.”
“Early this month, Friedman Billings Ramsey & Co. said the default rate on subprime loans that were packaged into bonds reached their highest level this decade.”
“Then on Wednesday, in a report titled ‘Inferno,’ Credit Suisse analysts said the 60-day delinquency rate for second-quarter loans that were six months old had doubled from a year earlier to 5.7 percent.”
From CNN Money. “Some experts estimate that rates for subprime mortgage loans could rise a half to three-quarters of a percentage point because of the higher default rates, and that could top a full percentage point if the default problem gets worse.”
“‘Market forces in general will exert discipline on the process,’ said Sandler O’Neill analyst Mike McMahon. ‘Investors in lower-rated (mortgage securities) will demand higher yields, or alternately they’ll pay less for the securities, which will force the underwriters of this product to demand higher quality mortgage loans.’”
“McMahon and other experts say either move is likely to stop some potential home buyers from getting the financing they need to buy a home, money they might have been able to get in recent years.”
“‘At the margins what this is doing is making mortgage credit less accessible to some people,’ said Bose George, an analyst who follows New Century and other subprime lenders. ‘Maybe it’s a cohort that shouldn’t be borrowing in the first place.’”
From MarketWatch. “The number of U.S. homes entering the foreclosure process because of nonpayment on mortgages rose to 130,511 in January, 25% more than in January 2006, according to Realtytrac.”
“There were 14,728 foreclosure filings in Texas. Detroit had the highest foreclosure rate among cities: one for every 124 households. Greeley, Colo., had a foreclosure rate of one in 173, while Atlanta had one for every 214. Foreclosures doubled in Detroit and rose by 25% in Atlanta compared with December.”
“‘January’s foreclosure number represented the highest monthly number we’ve seen since we began issuing this report two years ago,’ said RealtyTrac CEO James Saccacio.”
This will be a interesting week!
still getting calls from encore, resmae and freemont reps touting their 80/20 stated products; guess the credit people haven’t made it to their cubes yet. sheez.
Interesting week..Wall St. Jr. reported Bank of America has began offering credit cards to illegal immigrants. B of A said “generally before they have not be able to get major credit cards”. One can only hope these illegals run their debts to the max. Then they can skip or stroll down to Mexico with smiles on their faces while Bank of America greedy exec’s/ underwriters wonder what went wrong? To bad for the stock holders. O’ well, lose some, win some.
Trust me, they’ll max out those BA cards, then run to the border.
I would never go back to Bank of America again.
Part of the proceeds from my house sale (ha ha!) I sent to another bank for their higher interest rate via cashier’s check.
Guess what? The BofA cashier’s check didn’t clear! The receiving institution said that the check had been presented for payment, but the account it was being drawn on was closed! The photocopy of the check I received back (which is legal tender also due to Check21) showed BofA’s payment stamp on the backside, showing it indeed had been presented for payment. BofA insisted the check was good, but still would not allow me to have access to my funds for 90 days! So, $27,000 without interest for 3 months! I contacted the FDIC and BofA agreed to pay a nominal interest rate on the funds, but I still had to wait for 3 months until I had access to the money. I promptly closed my accounts at Bank of America afterward. Needless to say, I won’t do business with them again.
I had a CD mature at WA MU yesterday and I wanted to fax them wiring instructions to wire the funds to my bank. The lady said they did not have a fax machine at her office and that I would have to mail them a letter in LA CA. I said surely they have a fax machine somewhere in the building and she said no. It could take days for them to recieve a letter by mail. I asked her if they were having problems with all the sub-prime loans that have made and were maybe short on cash and did’nt want to cut loose of my funds. I never had this problem before except with institutions that were having “difficulties”.
When my boyfriend worked for the CA treasury dept., BofA (formerly known as Bank of Italy) was the leading institution for filed complaints, predatory fees inquests, fraudulent lending practices. I believe they paid a lot of fines because of this - I can’t quite remember.
I banked with them once and never again. I like my nice stable local credit unions.
yes I do not get their strategy there. So people whom have no permanent address in the U.S. get credit run it up and then leave? They break the law but they will pay you back? even if they do not leave their wages can’t be garnished because they are working for cash… I really don’t understand their logic in establishing an unenforceble claim by giving credit.
I GET IT they will have STATED INCOME credit cards now!!!
All of them make 100k+ in cash standing on the corner.
Do you think one of us taxpaying “legals” could get one of these cards… you know.. without giving them a correct SS#. Can you say funny money!!!
Maybe BoA is taking a play from old “Helicopter” bens playbook. You know the one where he drops ca$h money from the helicopter.
What benefit do us “legals” get in this country anway? The right to vote? I’d love to be able to stroll into any hospital in america and get free healtcare. I’d also LOVE to not have to pay taxes or into SS. Maybe we should all renounce our citizenship and become “illegal”.
Maybe we need to rename it from B of A to “Banco De Mexico”
Se Hablo Englisha
“Wall St. Jr. reported Bank of America has began offering credit cards to illegal immigrants.”
That is hysterical. It is not surprising that such a sleazy bank would try to make money wherever they can, but this is almost desperate. Of course, should this go awry, they will just “penalize” their good customers. I will spare the details, but I have gone round and round with B of A on several occasions, as well as Cingular, Dish Network, Qwest, GMC to name a few. All over issues which were out of my control, but involved my hard earned money, some amounts trivial, some not so. The bottom line is, none of these large companies could give a rats @ss about their customers. They seem to operate from the mentality that they will just keep attracting new customers to replace the ones the’ve lost, rather than provide a quality product and experience. I have to believe that, long term, this will come back to haunt them. After all, there are a finite number of prospective clients in this country/world.
I agree. I ended up with BofA by default (they bought the bank I had my accounts with). In the past 2 years I had nothing but problems with them from using my debit card to a home equity line I was going to take out to do some remodeling on my paid off house.
Anyway, after the last problem I pulled all my money out and then they jacked up the rate on my credit card (I had everything with them). I just balanced transfered the balance to another card (0 interest) and put their card in the shredder.
I went from having a checking, savings, credit card, and line of credit with them to nothing.
BofA sucks… and yet stockbrokers keep saying they’re a good buy. I just take one look at their balance sheet and think, what are they smoking?
When my Amtrak Guest Rewards MC stops accruing points in May (AGR decided to terminate their relationship with BofA about 6 mo. after BofA took over MBNA … coincidence?), it’s going to be time to say sayounara.
My bearish dream is that BofA goes bankrupt within 3 years. Hey, BCCI went down; BofA is not too large to fail.
Indeed a very interesting week. But March will be even more interesting.
I think ‘March Madness’ is getting ready to take on a new meaning.
‘Excluding the non-cash charges, the fourth quarter 2006 housing gross margin was 18.8%.’
Still plenty of room to build and cut prices, IMO.
KB Home typically won’t take on a new deal unless the gross margin is greater than 20%. This nets them between 5% and 8%.
IrvineRenter: based upon your industry experience, do you believe that one of the large national builders could wind up going under?
Doncha love all this happy news at a time when the crucial “spring selling season” is getting underway? I’m sure it is giving what buyers are left a lot of confidence to wade into the shark pool.
and this guy gets it
“Some homebuilding execs may be short on the experience to find their way through the current downturn, said industry consultant Michael Kahn. ‘If they came into the business after 1993, most of them have no idea what a down cycle really means,’ Mr. Kahn said.”
“Some equity investors are also considering purchases of public homebuilders whose stock is depressed. ‘We’ve been dealing with a number of private-equity groups that are looking to get into the business,’ Mr. Kahn said. ‘They are headed for a disaster,’ he said.”
Of course they are. But they pay themselves up front “fees” when they do these deals so their investors will be the ones to take the hit. Ever wonder where your pension is invested?
Don’t look under the bed!
I see some very juicy litigation work coming down the pike for big law firms, defending these PE firms and hedge funds when this all goes into the dumper and some even nicer fees for securites plaintiffs’ firms.
Anybody got a kid in law school? Tell them to take all the bankruptcy, corporate finance and securities classes they can.
yeah, yeah.. how come the lawyers always come out well when things go down hill;-)
When things go up, lawyers also do well.
The ultimate middlemen. But you know what? WHen we go to buy a house (in about 2010-2012), I’ll be using a real estate attorney for the transaction.
Lawyers drive Benzes for a reason. Using one can save your ass. Smart people know this, which is why all big $ commercial real estate deals are handled by lawyers, not by realtors.
–Shannon
PS - Firefox’s built-in spell checker wants me to capitalize “realtor.” It’s not a proper noun. Hell, it’s not even a proper profession.
“Lawyers drive Benzes for a reason. Using one can save your ass. Smart people know this, which is why all big $ commercial real estate deals are handled by lawyers, not by realtors.”
I agree 100%. The broker can bring the parties together, but when it is time to handle the details, they are better off standing in the corner, out of the way. Realtors should do same. Open the house, answer any basic questions, and then go away. Their cut should be minimal. Re: Firefox spell check on realtor, your comment is priceless.
Seriously good advice.
Speaking of pensions, last week the mighty pension fund covering Chicago’s public school teachers announced it was plowing $1 Billion more into hedge funds.
Good timing, huh?
That is just sick. Sick sick sick. They could do just a well with a freaking Vanguard index fund and a simple timing system.
Hey there tx.
I’ve helped quite a few people set up IRAs for their children but hesitate to get the parents into actively trading because with the extra 18 years of compounding already working for them they don’t need to blow it by over trading.
Is there a simple system besides the “Sell in May” system?
Depends on how much work they want to put into it. Sell in May works pretty darn well.
Thats about as much as I’d trust some of these people with. Thx.
What about Calpers?
This is my big fear too!
txchick: what is your opinion on Vanguard versus Fidelity, if any? I use Fidelity but have this feeling that Vanguard might be better. Thanks!
Pensions have to swing for the fences in order to fund the future promises they otherwise can’t keep. Plain vanilla investing that earns 8% in stocks per year and 5-6% in bonds just won’t cut it, and they will be underfunded if they take the conservative route. The huge demand for hedge funds/private equity is in part based on a broken/underfunded pension system.
I’ve been reading that hedge funds aren’t promising much more than that either.
The nice thing about hedge funds is that they provide outsized returns, at least up until the day they stop providing outsized returns.
I read there are too many hedge funds to keep the returns up. Too many funds chasing too few profitable trades.
‘‘Investors in lower-rated (mortgage securities) will demand higher yields, or alternately they’ll pay less for the securities,’
Txchick, do you have a link we can use to track the demand side for these MBS, a nice Wiley Coyote style chart perhaps?
I’ve been reading that hedge funds aren’t promising much more than that either.
And I’m glad they’re not swinging for the fences with my money. I’ll do that myself thank you very much.
be happy you’re not paying union dues then…
That’s right, Garcap — aim too low and the corporation may have to make contributions, instead of letting Wall Street do the heavy lifting needed to raise fund balances to the level of pension promises.
Well, there’s the demographic issue, but there’s also the fact that pensions are being run stupidly (3 year horizon instead of 50 year) with too much turnover in management and too much green management, and the old conservative outlook (which once held that stocks were too risky) was replaced by pensions making big bets in telecom and internet stocks. We all know how *that* went.
Many of the pensions suffered serious losses in 2000, so, like a drunken gambler, they are trying even more desperate bets to make up for lost time. It’s all so freaking idiotic. There are century old private foundations which are perfectly solvent or even doing well … it all comes down to pension management irresponsibly throwing money after products which are not appropriate for pension funds.
I’m not really talking about the demographic issues per se, just general underfunding resulting from silly investments, low interest rates, you name it.
The point is that underfunding (whatever the cause) doesn’t breed conservatism on the part of the pension managers….they want to get aggressive with their investments to get out of the hole. All very risky, of course, but “everyone is doing it” so pension managers probably won’t get fired if it doesn’t end well.
I know a couple high school teachers who recently moved to fancy private schools in part because they know that their pension isn’t going to be there for them when they retire 25-30 yrs from now. Sad.
That gets right to the point of something I mentioned here yesterday, and will keep repeating for the foreseeable future:
The U.S. private pension system increasingly is morphing into a mechanism for transfering the accumulated wealth of working Americans into the pockets of Wall Street playas.
Word, bro.
But of course since that’s petering out, Wall Street is pushing to “privatize” social security.
“Ever wonder where your pension is invested?”
You make a good point TxChick. Those who knock you for actively trading the market (Gekko et al) and think investing equals simply making a monthly 401-k contribution are in for a rude awakening. People need to at a minimum actively watch the guys watching their money.
I was just reading the Feb. 26 Forbes and there is this column by Kenneth Fisher that says, “…there won’t be a housing disaster. We won’t have a landing at all, soft or hard. Right now the US and global economies are both accelerating.” Then he goes on to recommend loading up on home builder stocks and says to ignore the S&P 500 earnings growth that indicate a slowing economy.
http://members.forbes.com/forbes/2007/0226/110_print.html
In another part of the magazine there is an article deriding the “Mortgage Nanny” ie lenders who actually require documentation.
http://members.forbes.com/forbes/2007/0226/040_print.html
I don’t pretend to be smarter or richer than people who write for Forbes or run investment companies, so is there something that these smart and rich people know that I don’t?
Yes, they know that access to the powerful movers and shakers of the economic world requires them to toe the party line and mouth the official mantra of the day.
Forbes publishes BOTH Ken Fisher AND Gary Shilling. Often with quite different prescriptions. Gary Shilling has been preaching “housing bust” for a couple of years now, with many of the arguments and observations that you’ve seen on this blog.
I think Forbes’s real deal is, you can’t ever sue them because they always have at least two commentators exhorting opposite actions.
So they are always right. Cool.
Perhaps they publish both sides of an argument so their readers can make independent yet informed decisions. I hardly think they are presenting both sides of the argument to avoid a lawsuit…what would a reader sue Forbes for if it were wrong on a controversial issue, anyway? Being imperfect?
Maybe Forbes should start up their own subprime mortgage comapny and give out 100% no doc loans to people with 500 credit score. I’ll believe them when they do that.
“We won’t have a landing at all, soft or hard.”
It could turn out to be a water landing, which plunges into the ocean and stays there…
Or maybe the market will be in perpetual free-fall like an orbiting satellite? Then there would be no landing.
I like that, conjures up a burnup on re-entry motif that fits nicely with the situation.
All orbiting satellites eventually tumble back down to Mother Earth’s bossom.
It’s difficult to imagine the timeframe that be involved before a satelite in a geostationary orbit fell to the earth. I’m guessing 1,000s of years at least. Perhaps not until the sun goes red giant.
Isn’t there a saying “any landing you can walk away from is a good landing”? Leaving the keys on the kitchen counter only makes it better, I guess…..
- Great article in todays LA Times on the real estate meltdown in the Inland Empire….it is toast.
http://www.latimes.com/business/la-fi-foreclose13feb13,0,5503897.story?coll=la-home-headlines
Here’s a little schadenfraude nugget to nibble on:
“That was also 8.7 percent higher than the 0.297 percent in November 2005, when the rate reached a ‘temporary apex’ following Hurricane Katrina three months earlier, Moody’s said.”
So… the nationwide rate is 8.7% higher than the aftermath of a major city being destroyed by flood. Ergo… this is worse than a nationwide hurricane or flood?
.’., it is an unnatural disaster.
“the subprime mortgage market has recently been crippled”
good riddance
What isn’t 100% clear yet is what impact this “crippling” of the credit pimps will have on the spring selling season. Let’s say this takes an extra 20% of sub-prime out of the mix entirely and handicaps those that would otherwise be going for 100% financing AND forces them to pull back on the amount they can borrow.
This spring rally could very well be a bust.
LOL
If you go down to the bottom of the KB report, you can see that the main reason their numbers weren’t worse was because of France. Taking France out of net new orders, new orders were down 50% compared to last years quarter. Looking at the backlog value, France went from 16% to 36%.
I just listened to the KB call…management upbeat about the coming year but added that improvement will be back-half loaded and that we’ll have to see how the spring selling season goes to understand how the year shapes up….company did not know how subprime/aggressive lending metdown would effect their business….
They didn’t know how it would effect their business??? Please, so they have know statistics on how many subprimes bought? That is such a flogging of fidiciuary duty to shareholders I am speechless.
Help. I run a bar. The local cops are clamping down on drunk driving. I’m not sure how this will effect my business.
this may be more akin to Prohibition;-) the money supply is being cut off…
I will defer to your superior analogy good sir.
But I think that I should testify in Congress against the crackdown. After all American drunkenness levels are at record highs. How can we take away the American Dream of drunkenness?
ok, not speechless, just incapable of correct speech. Seriously, how can they even say this??? I am sorry, I don’t know what that truck is going to do when it hits my face at 30 miles per hour? The members of BOD better find good council…
They didn’t have the subprime numbers in front of them and also assured everyone that they had a great relationship with countrywide…
Not sure that will help them. If homes are still overpriced for the market they are located in, who is going to buy them?
“company did not know how subprime/aggressive lending metdown would effect their business….”
that is very reassuring.
the call was very warm and fuzzy…recall that last year, their was a fair bit of optimism at the HBs heading into the selling season. Then, reality hit.
Nobody will own up to “knowing.” Do you believe any of this? I don’t.
TXchick, do you by any chance have advice for us union-dues paying slaves stuck with a 401K pension fund? I want to rebalance my portfolio before all the crap REALLY hits the fan and I have doubt it’s coming.
The fact that CNN Money has an article on rebalancing portfolios makes me nervous too. I get a little “tinfoil hat” reaction when Money talks anything up.
I’d love to pull it all out and stick it into something safe but not sure what and not sure if that’s even an option. Where is DiNor been? He always has some great insight too.
opps should be “no doubt more is coming”.
I’d have to see the choices you have. If you have a straight index fund, I’d use it.
Thanks. UC uses Fidelity and I’ve found the easy to use online but difficult to get any advice from. I’d love to go straight Treasury if I could find it. I have another 30 yrs to vest in but I’m not a risk taker at all and am perfectly happy with 5 to 10% growth.
Thanks TX and dude - I’ll see once again if I can get the fidelity “salesman” to make time for me.
FWIW, you normally will have a good range of options available in a 401K. If you are expecting a seriously declining market or a junk bond meltdown then you should be looking for selections that buy only treasury and AAA bonds. In stocks a pure blue chip fund will do alot to at least reduce your capital losses, if not provide gains.
In a down market it’s most important to protect yourself from capital losses and less important to make gains.
Money market funds would be the safest 401k bet generally available.
I would disagree; if the money market fund holds MBS, it could be very risky. money market ‘funds’ are not FDIC insured. Money market ‘deposit accounts’ usually are.
Not advice, but I rebalanced mine recently to about 1/2 treasury bonds, 1/4 S&P index and 1/4 foreign index.
“‘Last year was clearly a turning point for the U.S. housing market,’ said CEO Jeffrey Mezger
“Net orders fell 38 percent in the quarter to 6,059, KB Home said. The cancellation rate was 48 percent in the fourth quarter, up from 31 percent a year earlier.”
Hey, MR CEO, the market turned for Bens Bloggers in 2005, 1 year before you guys got the wake up call. Of course, we had no vested interest or stock options to keep the mania going. It was just pure self interest to keep my money safe, that made me consider that this hype might be coming to an end, while you were overbuilding and BSing the MSM. It was way over before 2006.
“company did not know how subprime/aggressive lending metdown would effect their business….”
Oh really? So when they sold off their mortgage unit to Countrywide in 2005, what were they thinking? They know exactly how this will impact their business.
Anyone know where to find updated NOD/foreclosure charts? It seems January continued the trend, though a graph is always helpful.
Here’s a foreclosure heat map
http://bigpicture.typepad.com/comments/2007/02/foreclosure_hea.html
Great link, thank you.
Georgia???
Georgia is an east coast Texas. Same problems.
“KB Home posted a net loss of $49.6 million for the fiscal fourth quarter on Tuesday, as it took $343.3 million of pretax charges for abandoning land option contracts and writing down the value of inventory, a consequence of the U.S. housing market downturn. Net orders fell 38 percent in the quarter to 6,059, KB Home said. The cancellation rate was 48 percent in the fourth quarter, up from 31 percent a year earlier.”
(Yawn…)
CNBC and Crammer will be putting KB Homes on the “strong buy” list because from the great 4th quarter income reports. The joke is on anybody who still thinks Wall Street is an investment.
It’s just Las Vegas without the free drinks.
How about “Las Vegas with cheerleaders encouraging the gamblers to raise the stakes.”
CNBC and Crammer will be putting KB Homes on the “strong buy” list because from the great 4th quarter income reports.
Five minutes ago on CNBC, Cramer did just that “strong buy” thang regarding KB. Homebuilders are kicking ass today. Wonder where the money is coming from to bid these pigs up? Any guesses?
The funniest part was when Cramer said it was a take over candidate! Now I feel comfortable shorting.
“‘As the year progressed, market conditions worsened, cancellations increased, net orders declined and margins came under pressure,’ said Mezger.”
Add to the list ‘CEO resignation’ and you have the ingredients for a perfect storm.
anyone have the friday or more recent inventory numbers?
tia
from the daily reckoning newsletter, good tongue in cheek.
It would have been nicer had Irish wealth come a little later - after architectural tastes had evolved a bit. We are, briefly, in Ireland this morning…and we see that billions of dollars worth of construction is being done - mostly in bad taste. The Irish will have to live with the buildings for many, many years. We doubt if future generations will be very grateful for the gift.
The housing industry seems to be filled with ingrates on the other side of the Atlantic, too. Look at the poor lenders in America. HSBC and Century Financial took a beating last week, when it was revealed that people who couldn’t afford their homes were not the best people to make mortgage loans to. Who would have guessed? The lenders have no reason to feel embarrassed, of course. They tried their best. They offered people the chance of homeownership. You really can’t do much more than that.
But the twits let them down. When it came time to pay back the money they had borrowed, the borrowers started hemming and hawing. ‘The check is in the mail,’ they said, drumming nervously with their fingers nails. ‘Can you wait till next month?’ they asked, sidling toward the exits. ‘Here are the keys,’ they offered, sneaking out of the door. How do you like that for gratitude?
I guess that’s one of the worst parts of the bubble. The stuff being built is of low quality, mediocre taste and will consume a lot of reasources just to keep from falling apart.
I wish some of that capital had gone into better insulation, more active and passive solar and other things that would make the house less of a burden in the future.
I agree. When I visit my grandmother in Hemet, CA (Riverside country) I tour model homes for entertainment. I could build better structures out of cardboard and duct tape. And so close together. You look out your window into your neighbor’s window.
I think using greener construction could have been a great selling point for some company too. I guess they didn’t care because people were lining up to buy anything they put up.
Arthur Guinness would be horrified that they chose to buy and not rent.
“Arthur Guinness started brewing ales initially in Leixlip, then at the St. James’s Gate Brewery, Dublin, Ireland from 1759. He signed a 9,000 year lease at £35 per annum for the unused brewery. Ten years later in 1769 Guinness exported their product for the first time, when six and a half barrels were shipped to England.”
Are they still under those terms? 35 pounds/year until 9759? That’s got to be the best real estate deal in history. Well, maybe except for getting Manhattan for $24 and a case of whiskey.
–Shannon
The native americans got the better part of that deal! $24 compounded at 7.5% - they could buy the whole island back and they got a good buzz out of it.
Yes Guiness is still under the original terms.
Google says:
“We might alternatively ask how much the $24 would be worth today if the Lenape could have invested it.99 The answer is quite sensitive to assumptions about interest rates. $24 invested at 5% would have yielded $2 billion by 2001; at 7% the sum would have been $2.5 trillion; and at 10% the Lenape would have enjoyed nearly $80 quadrillion, a figure that far exceeds the total wealth in the United States.100 Maybe $24 was about right. But those numbers aren’t useful either, because the Indians hardly had access to a securities market or anything like it in the 17th century. Even if the Lenape had perfect foresight as to land prices, they could not have invested money at interest. We might finally observe that Manhattan today is worth more than $24, and conclude that the Lenape would have been better off holding on to the island, or perhaps leasing it to the English. But that’s not a realistic view of the matter either…”
John M. Olin Center for Law & Economics
The University of Michigan Law School
The Law and Economics Workshop Presents:
“Manhattan for $24: American Indian Land Sales, 1607-1763″
Stuart Banner, Washington University
Thursday, October 25, 2001
3:40 - 5:40 p.m.
Room 236 Hutchins Hall
But of course the Indians didn’t really have European ideas of land tenure. To them, selling land was something akin to those companies that will “sell” you a star. “Crazy white people bought the land, maybe we can interest them in the wind next.”
Actually, it would be until 10,759 AD. But who’s counting?
“The Irish will have to live with the buildings for many, many years.”
Maybe not. If the construction is as bad there as it is here, maybe the Irish will only have to live with it five years at best. Then plow it under.
Ditto Florida, except that the weather will be doing the honors.
“‘The only reason we would want to do that is if we felt like we would need to add to our current land and lot inventory, which at this stage in the game we absolutely do not,’ CEO Don Tomnitz said.”
Wouldn’t this be a great time to add to land and lot inventory, given that a soft landing is on the way and the pace of building will pick up again later this year? Or am I being cargo-cultish here?
“Then on Wednesday, in a report titled ‘Inferno,’ Credit Suisse analysts said….”
Real Estate Inferno together with Burn baby burn was coined some time ago on this blog.
Oh, I bet the team at credit suisse responsible for the ResMae operation is feeling quite a bit of heat.
“Closely held ResMae is at least the 20th mortgage company to be sold or closed as delinquencies surge and the market for home loans to risky borrowers contracts at the fastest pace ever.”
Does “20th” mean 20th since Dec 2006? If not, what is the time horizon?
This is something that bugs me about keeping a count of lender going under. If there isn’t a standardized time frame, or refernce point, does it really mean anything?
According to ml-implode.com this would be the 21st since Dec 2006. Subprime meltdown continues unabated. Anyone have any guesses who’s next? FirstFed maybe?
‘From CNN Money. “Some experts estimate that rates for subprime mortgage loans could rise a half to three-quarters of a percentage point because of the higher default rates, and that could top a full percentage point if the default problem gets worse.”’
Without having looked at this for more than 30 seconds, I would have to guess that 1/2 to 3/4 points risk premium will be nowhere near enough to cover higher default rates. Which suggests that derivatives or some other form of insurance must be somehow covering the remainder of the default risk. Can anyone offer comment on what keeps these risk premiums so low, and who is making up the gap between the actual level of risk and its price?
What keeps the risk premiums so low is the insane notion that there is some way to insure against correlated events. This is fostered by “geniuses” like the ones who brought us LTCM.
Our fed has proven again and again that they will step in and “mop up” when necessary. There really isn’t a lot of risk when you have that free PUT to play with.
‘This is fostered by “geniuses” like the ones who brought us LTCM.’
Either them, or government agencies who provide such geniuses the implicit “too-big-to-fail” guarantee, whose premiums are shared by all US taxpayers.
“LTCM”
I suggest the conundrum and the explosive growth of both high risk lending the hedge fund industry received significant encouragement from the LTCM bailout. Now myriad individual firms in the hedge fund industry and the lending industry are collectively testing the limits of risk taking, under the assumption that if the too-big-too-fail guarantee worked for LTCM, it can work for many, many others as well.
What keeps the risk premiums so low is the insane notion that there is some way to insure against correlated events. This is fostered by “geniuses” like the ones who brought us LTCM.
Geniuses, as in glorified card counters.
test
(who is making up the gap between the actual level of risk and its price?)
shareholder’s equity?
Yup. And when that runs out…
When the Dow Jones average yields 2.4%, some people chase cash yield. I do it by offering Trailer Trash a 9% or 10% mortgage (rates basically unchanged in 14 years) — I guess others do it by buying MBS, which requires less work ? Well, you wanted a more sophisticated explanation than that, but maybe that’s all there is to it.
Can anyone offer comment on what keeps these risk premiums so low, and who is making up the gap between the actual level of risk and its price?
Hedge funds? Foreign Central Banks (esp. asian)? Carry-traders? Fed/PPT? Best guess is to look closely at who is buying up all the sub-prime tranche MBS/CDO derivatives.
Oh, and any “expert” who (off-the-record) really thinks subprime damage can be contained at a measly 1% this time either lacks imagination, or is smoking some really good $hit.
Well, Fremont today announced that they aren’t going to issue any more “piggyback” loans. Apparently for their investors, there isn’t an interest rate high enough to take the risk.
There, the investors finally got the risk premium right.
Fortress Investment Group is a hedge fund that is into RMBS in a big big way. They did an IPO on Friday, letting all the best clients buy in, before they opened it up on Monday. IPO price = 35. They have gone straight in the tank for 3 days, as the price is now $28.90. Take a look at the chart, it is funny funny funny, http://finance.yahoo.com/q/bc?s=FIG&t=5d
So even the public won’t buy this pig.
Question for all of you:
No one seems to talk about the Northern Virginia DC market much; is this because as my real estate agent contends that this market is ‘special’ because of all of the government work. And not really subject to the bubble economy?
Wife and I have been looking at houses these past three weeks all around the 450k mark as this is said to be the starter home….over three weekends we have looked at 45 houses, 15 each weekend day for three weekends. Henerdon, Chantilly, Manassas, Bristow, Leesburg, Ashburn….we pull the property card on each property (our RE agent hates this), if we take the 1997 price and adjust for inflation 4-6% each year, we come up with a price 290-350k that oddly enough makes sense for our income, again our RE hates this when we bring it up, and basically has refused (although no saying as such) to submit such an offer. Well, our lease will be up in 3 months, about 1620 for an up-scale apartment in the nice are of Herndon/Oakton (Yes I know we can get a TH rented for that but it is a pain to move). Wife and I both think renting another year is a good idea. Any thoughts on this market? Are we making a mistake? There are some ‘patio’ homes next to our complex that sold new last year for 650-800k our appartment manager apparently had something to do with that (same company?), she said the average family income for the purchaser was around 140k/year!!!
Rent for one year: $1,600.00 x 12 = $19,200.00.
Possible decline for homes you are talking about $650k current - $350k with normal appreciation = -$300,000.00.
What’s your risk tolerance?
Get another real estate agent! The agent is obligated to present all bonified offers to the seller, failure to do so is in violation of the law as well as the NAR’s written position.
Yep, those places are probably worth around $300k, give-or-take $15k based on rent. The earliest I would get in would be next summer. We’re already 10% (35% overvalued) or so off of the peak (58% over-valued). If we lose another 10% next year, we’ll be closer to the long-term trend (18% overvalued). Another 10% off of that and we should be near the trend. For the trend, I’m inflated at 5% per year starting at 2002 (1997 was the trough of the previous realestate bust that started in 1990).
Rent. It’s obvious that you’ve done your homework. And fire the realtor.
VA was always the cheap alternative to MD, which always had better schools, better roads, less smelly gas stations, etc. The runup is ridiculous. Aside from a few areas like Alexandria, West Falls Church, NOVA is full of cheap construction and cheap people. Obviously, there has been some change with so much new population, but the agricultural part of the state fights it tooth and nail.
I would recommend looking at Montgomery County unless you don’t have kids and you actually enjoy driving all the time. (Don’t buy in Montgy today, though–it’s VERY bubblicious.)
From what I recall, Herndon’s a lot more desireable than Manassas (unless you live next to the Manassas or Manassas Park train station and you can take VRE to work). Yes, there is an “old town” Manassas (which isn’t even that charming), but most of the rest of the town is slummy crap, and Manassas Park is and has always been a joke. The ‘hood right around Manassas VRE *is* nice, though.
Oh yeah: property values near Metro or VRE stations will hold up (in general) much better than further away. This is because land around the stations is limited and if you can’t walk to the station, getting parking is very tricky.
My father has worked for government or government contractors for most of his working life. It is cyclical, and everywhere he has worked the housing has followed the gov’t job cycle. We have had several years of increasing gov’t-related employment in the US. This is what propped up the prices in Boston and DC area. However, you can bet that when the eventual budget cuts come (and they always come sooner or later) that DC/MD/NOVA property values will drop like a rock, as they always do.
One last thought: the area you are now in has this weird bias towards new houses (or at least it did ten years ago). Unless that changes dramatically, you’ll find that any existing house will actually depreciate quite a bit as long as there are shiny new houses for sale. Gradually, the whole neighborhood slides as the newcomers (there are always newcomers in that area) move into the house farms. If there’s a lesson here, I guess it’s that this is one area where it really, really pays to pay below what it’s ‘worth’ because it won’t be ‘worth’ that much when you sell.
If I were you … well, I’d probably be looking at houses near Rock Creek Park *g* … I would wait for prices to crater.
Rock Creek Park did well in the last downturn, despite being inside DC city limits. A word to the wise.
Defaults and foreclosures have been rising from abnormally low levels. When they start talking about 2002, it seems like we are back to average and still rising.
From Bloomberg. “ResMae Mortgage Corp., a U.S. home lender to people with bad credit, filed for bankruptcy protection and said Switzerland’s Credit Suisse Group agreed to buy its assets to for $19.1 million.”
“‘Despite the earlier successes and persistent efforts of ResMae’s management team, the subprime mortgage market has recently been crippled and a number of companies stopped originating loans as U.S. housing sales have slowed and defaults by borrowers have risen,’ ResMae said in its Chapter 11 filing yesterday with the U.S. Bankruptcy Court.”
You mean a company that lends money to people who have proven in the past that they are financially irresponsible went bankrupt? I don’t believe it! How can this be?
Can anyone offer comment on what keeps these risk premiums so low, and who is making up the gap between the actual level of risk and its price?
They make it up on volume . . . lol
Close bold,
Keep in mind when a loan goes to default and foreclosure, the house is still worth something. The 80% LTV mortgages are not at too much risk, except in fraud, which is probably 3-5% of the market. The 20% seconds get 8-10% interest, so if 20% of those go to zero value, you get a return of 6.4-8% interest. Still better than some vehicles, expecially if you leverage using 5% financing for 80% of your holdings. However, I believe the 20% seconds will lose a lot more in the coming years. It is starting to happen now and you saw Fremont won’t do any more (though they will arrange them from others!!)
But in a generalized downturn, I think that we’re likely to be talking about more than 1 in 5 of the 20% loans going to zero value.
I think the return on these MBS portfolios will be much, much worse. Think about it. When the 20% second loan defaults and goes to zero value, the portfolio just lost a bunch of its PRINCIPAL. It takes a lot of interest payments to recover that loss of principal. For example, assume that you have a portfolio of five $100,000 second mortgages that you bought for $500,000. One of your loans defaulted with no chance of any equity recovery for yourself. Your portfolio is now worth only $400,000. The remaining four loans continue to pay their 10% interest. You “made” $40K in interest income but just lost $100K in principal. Your total net return is negative!
Except that if the loan was paid off, you never got any of the principal. The principal is what you bought the income stream with. Once you’ve done that, it is only supposed to serve as security for the loan anyway. The lender was never supposed to see the principal again anyway. It only returns to the lender if the income stream stops.
The 20% seconds get 8-10% interest, so if 20% of those go to zero value, you get a return of 6.4-8% interest
Hello? If you don’t get your money back on 20% of those loans, you’re getting a severely negative total return. You’re not just losing 20% of the interest payments, you’re losing 20% of the principal too.
Forbes wrote about 12-13 issues ago that the housing market was going to plummet. They used tough verbage.
Nevada is king of the foreclosure markets. Subprime lender Lenders Direct Capital Corp is KIA. Buyers and sellers dont have a meeting of the minds. The stock market keeps soaring to new highs and the FED has to raise rates. The average American has nothing in their accounts.
There are going to be months, if not a year, of extreme pain. This is all going to trickel down.
Oh and someone do me a favor and shoot all the realtors. They are so stupid and un-necessary in the home buying process. Other than an MLS monopoly, they cant even read a listing or tell you about the schools.
I think the only thing they are good for is that they have keys and can show the property.
ResMAE Mortgage Corp. has filed voluntarily filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code, according to an announcement Tuesday. The company also announced it reached an agreement with an investment banker to buy some of its assets. That agreement calls for the creation of a post-petition warehouse line.
———————————————–
Nevada held the title of the state with the highest foreclosure rate during January, RealtyTrac announced Monday. The state had one new foreclosure filing for every 362 households, the statement said. Nevada had a month-to-month increase of 8 percent.
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Mortgage defaults: Latest woe for housing
Borrowers with less than stellar credit could find mortgages out of reach - the last thing the struggling real estate market needs.
By Chris Isidore, CNNMoney.com senior writer
February 12 2007: 2:48 PM EST
NEW YORK (CNNMoney.com) — Just as the struggling real estate market seems to be stabilizing, a fresh problem is brewing far from real estate offices or home construction sites: a jump in defaults by higher-risk borrowers.
News of rising default rates by buyers with less than stellar credit could put a crimp in financing for home purchases - and prices. That’s because the rapid growth of new types of mortgages was one of the key factors behind the boom that sent home buying, and prices, to record highs for five straight years through 2005.
It is crunch time guys — credit crippling crunch time. Subprime borrowers default. Lenders stop lending to subprimers. Subprimers cannot buy. Builders default. Builders default bank assets turn negative and banks become insolvent. Banks become insolvent FDIC comes under pressure.
Is a fed intervention brewing OR already underway?
Let the fingerpointing begin! From Marketwatch.com:
“ResMAE grew quickly to become a top 20 subprime lender in the U.S. However, by early 2005, loan originations began to wane, knocking ResMAE’s profitability. By cutting costs and lifting the interest rates it charged on loans, the company said it was able to make a small profit last year “despite the industry collapsing around it.”
But then Merrill Lynch (MER :
3:14pm 02/13/2007
92.12, +0.76, +0.8% ) , which had become the largest buyer of ResMAE’s loans, asked the company to repurchase more than $300 million worth of loans. That “enormous” repurchase request, which ResMAE disputes, triggered a liquidity crisis and forced the company to put itself up for sale.
The repurchase demands “crippled ResMAE’s operations by requiring the company to post enormous reserves, which dramatically reduced its capital and operating liquidity,” the company said in its filing. End of Story’ (Indeed!)
http://www.marketwatch.com/news/story/another-subprime-lender-resmae-files/story.aspx?guid=%7B5D76D8DD%2DB544%2D49BE%2DAFCB%2DB50FC56D311D%7D
Mortgage scam nets $3 million
A former Prior Lake closing agent has been charged in an investigation of 60 transactions with inflated purchase prices.
Federal investigators are probing a multimillion-dollar mortgage scheme involving inflated real estate prices, according to court documents, and industry leaders believe the case is only part of a larger problem.
Between December 2004 and August 2006, Lehn prepared loan documents that overstated the purchase price of the properties and concealed the overpayments from lenders, according to the U.S. attorney’s office in Minnesota.
The scam, uncovered by the Internal Revenue Service, allowed buyers to pocket the difference between the actual purchase price of the property and the inflated mortgage amounts. In all, buyers netted more than $3 million in fraudulent payments. Lehn was the buyer in a half-dozen of the transactions.
Chris Galler, senior vice president of the Minnesota Association of Realtors, said in a recent letter to members that he expects “a series of arrests” in the next month or two resulting from investigations into the Lehn case by the FBI and the Department of Justice.
“We don’t know how widespread [mortgage fraud] is, because finding one person leads to another and to another,” Galler said Monday.
Full article at
http://www.startribune.com/535/story/998435.html
The IRS always wants its share. Fraud is treated as ordinary income and you can not decuct the interest expense. So $250,000 in mortgage fraud nets you a $107,500 tax bill for state and fed in CA. Then recapture the deducted interest expense, with penalties and interest. A lot of people are bemoaning the difficult response by the authorities. Well, turn the fraudsters into the IRS and you get to participate in 15-30% of what they collect. That could be a serious collection amount. Maybe Dog the Bounty Hunter will change professions. I know people who are making a hobby of this and could make 100’s of thousands in a few years. Just 5 mortgage fraudsters paying back taxes and penalties could tally you up a $150,000 rewards. Wow.
Fremont’s news is huge. Not just that they are stopping the issuance of seconds, but that the reason is lack of demand from investors. Guess what? Most other lenders look to the same investors to buy their paper. The only seconds will now be issued to people who don’t need them and truly are good credit risks (ie. the banks are willing to hold the paper).
Anyone have any idea how many homes were purchased last year with $0 down? Anyone know where I can find the information?
Things are going to get very ugly.
Fremont is up 11% today. I guess that I am late to the party. Are there any good prospects for a NEW type implosion? Fremont is already way below book value, but book value is not fixed if it melts down, of course.
I agree … far and away the biggest news of the past few days. The implications are enormous.