“Too Many Soft Markets To Call Upturn”: CEO
Some housing bubble news from Wall Street and Washington. “Toll Brothers Inc. on Thursday said the weak U.S. housing market drove down its quarterly profit 67 percent after write-downs for lower land values, and the luxury home builder lowered its forecast. The results included write-downs of $96.9 million for the lower value of the land Toll owns or from forfeiting payments for land options Toll decided not to exercise.”
“Investors, home builders and other industry watchers have been looking for signs of an upturn, but Toll’s chief executive expressed caution. ‘There are too many soft markets at this stage of the selling season to call a general upturn in the new home market,’ CEO Robert Toll said in a statement. ‘Demand varies greatly from week to week in individual markets.’”
From theStreet.com. “New home orders fell 33% to 1,544 units. The steepest drop came in the Western region of the U.S., where orders fell 65% from a year earlier amid particular weakness in Arizona, California, Colorado and Nevada.”
“Bank of America analyst Daniel Oppenheim said he views Toll’s comments as less positive than two weeks ago, when the builder reported its orders for the quarter and signaled an uptick in demand in January and early February.”
“‘We think this [less positive commentary] is a reflection of choppy market conditions and the soft traffic at the start of the spring season, consistent with what we have seen in early results of our February Survey of Real Estate Agents,’ Oppenheim wrote.”
“Oppenheim said his research shows that an expected increase in buyer traffic in February has not happened so far. He said his traffic index, which polls real estate agents on customer volume, is likely to fall in the month after three consecutive gains.”
“‘Agents attributed the easing of traffic to the perception that prices will be lower in coming months,’ Oppenheim wrote in a note to investors. ‘The weather does not appear to be the driver.’”
“‘We believe further price cuts are needed to bridge the gap between the pricing expectations of buyers and sellers,’ Oppenheim said.”
“‘We see risk from continued pricing declines (necessary to remedy the excess inventory), which will negatively impact earnings expectations along with the potential for inventory levels to worsen further at the start of 2007,’ Oppenheim said.”
The Vancouver Sun. “Top American homebuilders are walking away from deposits on land options, a clear signal that the slumping U.S. housing market has yet to bottom out, according to a research report by the International Wood Markets Group.”
“‘When I look at the data, I don’t believe the builders think the worst is over,’ report author Peter Butzelaar said, referring to $1.4 billion the top 10 builders collectively wrote off their balance sheets for the last three months of 2006. ‘To me, you don’t write off future opportunity unless you don’t believe there is an economic opportunity there.’”
From Reuters. “Moody’s Investors Service on Wednesday said it may cut its servicer quality ratings on NovaStar Mortgage, Inc. due to the mortgage servicer’s exposure to weakness in the subprime mortgage market.”
“‘NovaStar, like a number of other independent subprime mortgage finance companies, is facing lower profitability as well as potentially an increased level of liquidity risk given current market conditions,’ Moody’s said in a statement.”
“NovaStar late on Tuesday surprised investors by saying it may generate no taxable income from 2007 to 2011, and may drop its tax-friendly real estate investment trust status in 2008..”
From MarketWatch. “The company said that certain reports ‘erroneously stated’ that it doesn’t expect to be profitable from 2007 through 2011 and that it believes it will ‘generally be profitable’ as calculated in terms of generally accepted accounting principles over the next several years.”
“‘Our comments about 2007 to 2011 related to taxable income, as part of our discussion of a potential change in NovaStar’s real-estate investment trust status,’ the company said.”
From Business Week. “‘While NovaStar’s results were disappointing, the guidance of little to no taxable income from 2007 until 2011 was unexpected,’ Deutsche Bank analyst Stephen Laws said.”
“‘If delinquencies in NovaStar’s mortgages continue to rise, pullback from investors in its securities could create a liquidity crunch, limiting NovaStar’s ability to originate new loans in the future,’ analyst Ryan Lentell wrote Feb. 9. After NovaStar’s news on Feb. 21, Lentell added that ‘liquidity remains our number-one concern associated with the firm.’”
“One passionate supporter of NovaStar went so far as to start a Web site to rebut negative reports on the company. Yesterday, in what he described as ‘probably my last writing here,’ the investor had this to say on the site: ‘I am shell shocked after the conference that took place yesterday, and quite annoyed that I participated in the collective hallucination that led so many into such a disaster.”
“Michael Simonsen, CEO of Altos Research, which studies California and 15 other major U.S. real estate markets, says subprime lenders’ recent performance is ‘one of the scariest signs’ for the larger housing market.”
“‘The majority of the subprime business is with first-time buyers. So it may take several years to shake out,’ Simonsen says. ‘But when it comes time to sell and trade up we may find that the low end has been squeezed out.’ In other words, a meltdown in the subprime market could affect the supply of future buyers for years to come.”
The Financial Times. “A key derivative index that tracks the credit risk of high-risk mortgage-backed bonds hovered near record levels. ‘The market is still searching for a level where people feel they are being fairly compensated for the risks they’re taking,’ said Alex Pritchartt, a trader at UBS.”
From Bloomberg. “Prices for credit-default swaps linked to 20 securities rated BBB-, the lowest investment grade, and created in the second half of 2006 fell 3.9 percent to 78.59 today, and are down 19 percent since being introduced Jan. 18, according to Markit Group Ltd.”
“The drop in the ABX-HE-BBB- 07-1 index means an investor would pay more than $1.1 million a year to protect $10 million of bonds against default, up from $389,000 last month.”
“‘It’s been a one way train,’ Dan Ivascyn, a managing director at Pacific Investment Management Co., manager of the world’s largest bond fund, said in an interview. ‘There’s been selling from a lot of different areas, and there’s not a natural buyer.’”
“‘Somewhere in the mid-3s to around 4 percent’ of the mortgages that NovaStar sold last year experienced ‘early payment defaults,’ or missed payments within the first few months that allow loan buyers to force repurchases, NovaStar Chief Investment Officer Mike Bamburg, said on a conference call yesterday. That was up from about 1.25 percent in 2005, he said.”
“Janet Yellen, president of the Federal Reserve Bank of San Francisco, is sleeping better than she was a year ago, thanks to signs of stabilization in the housing market. Last year, when it looked like the housing downturn could turn into a bust, Yellen said she found it more difficult to sleep.”
“‘I’m waking up less at night than I was,’ she said.”
From Fitch Ratings:
‘While the default rate is expected to remain below average for the fourth consecutive year, Fitch believes that the very low default rate experienced in 2006 is not sustainable and that the risk of a spike in the default rate is substantially higher in 2007 than it has been in the past several years.’
‘Fitch’s most recent survey of the financial performance of a sample group of 260 U.S. high yield companies rated ‘BB’ or ‘B’ revealed that through the third quarter of 2006, debt had expanded at the highest annual rate in five years (up 12% year-over-year).’
‘In addition, the most recent Federal Reserve’s Senior Loan Officer Survey showed lending standards among bankers shifting to neutral in the latter part of 2006, a retreat from an earlier bias toward looser lending practices. This suggests that the days of easy money may have peaked.’
NCUA Year-End Figures Show Mortgage Delinquencies Spiking, CDs Surpass Regular Shares as Largest Savings Category
ALEXANDRIA, Va. — NCUA’s 2006 year-end data showed credit union mortgage delinquencies skyrocketing while, for the first time, share certificates surpassed regular shares as the largest savings category.
Assets of federally insured credit unions rose 4.61%, increasing from $678.7 billion to $709.9 billion over the last year. Loans increased 7.88% to $494.3 billion from $458.2 billion, according to NCUA. Delinquent loans also continued to decline and net charge-offs dropped 11 basis points.
However, mortgage delinquencies over two months shot up 41.31% while first mortgage real estate loan charge-offs expanded 34.01%. At the same time, first mortgages grew 10.04% and other real estate loans were up 15.03% as well. Similar to Federal Reserve findings, credit union real estate loan originations dropped 5.23% over the year.
Additionally, new auto loans overtook used for the first time since 2000.
Even though investments declined 9.14%, more favorable market conditions permitted investment income to grow 18.84%.
On the flip side, shares increased 4.08%, and, for the first time ever, share certificates grew 23.81% to $189.0 billion surpassing regular shares to become the largest share category.
“In addition to continued increased lending, credit unions reported an average return on assets of 0.82% and a net worth ratio of 11.54% at year-end 2006,” NCUA Chairman JoAnn Johnson said. - scooke@cutimes.com
I always did like Janet….one of the few honest people at the Fed.
But I don’t like her sleep analogy….very unprofessional, very unbecoming of a central banker.
Last year she NEVER said “I am having trouble sleeping” -
Last year, when it looked like the housing downturn could turn into a bust, Yellen said she found it more difficult to sleep.”
I thin it is a little premature to say we are not going to bust.I really think california is heading for a major bust myself.Prices just way out of hand out there.
Not included in the first article: Janet’s caveat
The San Francisco Fed chief, however, warned that “the housing downturn could spread to consumer spending if enough home owners experience financial distress.”
Reuters news service
http://tinyurl.com/23vje3
Janet’s just trying to quiet down all her SF neighbors and local realtors, who are likely bleating on about having the FED lower rates.
If she stays “calm”, they’ll slow their harping - for now.
she gets a raise either way
I couldn’t agree more. Of course she sleeps well at night. She has probably paid off the house and her big fat raise will mean even more steak and lobster dinners for her this year. NICE!
Strange. Seems like a bust is more likely now than it appeared last year.
I’m surprised how quickly subprime is tanking. Its one of those things I thought had to go bust sooner or later, but it hung around for a lot longer than I expected.
“Seems like a bust is more likely now than it appeared last year.”
Seems like a bust is in the bag, with the subprime implosion well underway. I wonder what the Fed knows that we don’t, or are they just playing a game of Casino Royale liar’s poker with the media?
No, she just forgot to mention the three double scotches she has before she goes to be each night.
No, she just forgot to mention the three double scotches she has before she goes to bed each night.
three double scotches
LOL!
I understand what she means. Last year she was worried that a bust would begin. Now, she KNOWS it’s coming so there’s nothing more to worry about! She takes solace that she still has her cushy job and her paid off house.
So what exactly do these fed heads do other than say “Well, IF this happens then something bad could occur.” ?? No duh. I could see them captaining the Titanic. “Well yes we hit an iceberg, but IF we start taking on water this ship might just sink.”
Wonder what she will say next year ? I never thought I will have so many sleepless nights this year 2008. Everyone is fudging numbers, hiding the truth and hoping the party never ends.. Guess what it just ended 6 months ago
Agree that is a idiotic thing to say anyway - that is something I would post on a blog!
I find nothing admirable about central bankers; they are at the root of the inflation and bubble problems which have been growing in frequency and intensity in this century. They don’t work for us, and they don’t work in our interests.
WELL SAID, watcher. AMEN!
Are we enjoying the carnage yet? It’s fun to blame realtors, mortgage lenders, GFs and FBs, isn’t it? But there’s really only one acronym that’s to blame for this: FED. These folks are the worst criminal whores, lower than any child molesting rapist that you can imagine, exporting misery to entire populations, including our own here in the US. Sure, this bubble is providing us with hours of amusement here on the blog. But there is real suffering brought on by insane monetary policy. Or is it really insane?
The Fed has nothing to do with the government, except to dictate to it and to provide the Pres with a list of approved people for him to select as FedHeads.
That’s OUR money they are playing with and bleeding away and redistributing to their buddies. The IRS exists as a collection agency for the Fed, basically.
But “Fed” as in Federal Researve Isn’t an acronym.
Central bankers do explicitly work for us and all their work and decisions get extensive review by congress. The gold standard was abandoned because it was deflationary. Unless you can come up with something better, the current system of fiat currency is here to stay.
The Federal Reserve is owned by its member banks. When was the last time the U.S. Congress passed a law changing Federal Reserve policy?
Umm, US Congress has the power to approve/disapprove nominations for Fed members, including the chairman.
The whole idea of the Fed independency was that it be separate from the minute political rhetoric.
Mole Man,
I don’t think Palmetto was calling for the abandonment of all fiat currency or a return to the gold standard. He was just railing (quite rightly) against reckless central banksters who do not have the American working class’s best interests in mind when dictating policy.
Well, if Palmetto isn’t calling for the abandonment of fiat currency, a lot of people are doing just that. Either that or we will have to repeal child labor laws, because two incomes are not enough to make it any more. First Dad had to work, then Mom and Dad had to work, now little Bobby and Bobby Sue need to learn how to chop sugar cane. Isn’t a century of Fed inflation glorious?
The gold standard was abandoned because it forces governments to make do with what money they have instead of recklessly printing more of it. Once the supply of money is fixed - i.e. gold as money - there is no advantage to making more money. All you do is dilute the value of the existing supply of money - i.e. inflation.
Yes, in an economic system in which the supply of money is fixed, prices will inevitably go down (albeit slowly) across the board as a fixed supply of money chases an ever-increasing number of goods. While this is an alien concept to us who have become accustomed to perpetually rising prices, it is actually a sign of a healthy economy.
“Yes, in an economic system in which the supply of money is fixed, prices will inevitably go down (albeit slowly) across the board as a fixed supply of money chases an ever-increasing number of goods. While this is an alien concept to us who have become accustomed to perpetually rising prices, it is actually a sign of a healthy economy.”
Hear, hear, Toast! Very well said.
Yep, what is so bad about DEFLATION? Don’t you want your savings to get more potent each month?
Oops, I forgot, most people don’t save. They don’t want to see their debts become harder and harder to pay.
Screw the savers. They’re just old fashioned. Thinking that you shouldn’t spend what you don’t have. What a bunch of marooons.
Gold standard was bad because it led to repeatable bank runs.
We don’t need to revert to the stupid policy of having gold as money.
If the amount of available currency is truly fixed, how does population growth affect the “flation” debate?
Seems we need to establish a relationship between productivity, population growth, and monetary growth — or ???
What in the heck is improving her sleep. All recent so-called upticks have proven to be just passing phantoms, and now news has just gone from bad to worse. If anything, 07 proved to be a validation of everything we all knew, and that was that this was a massive asset bubble doomed for bust. Nothing that we have called out on this blog has failed to come to fruition. If Janet is getting better sleep, it’s not due to a rosy outlook for housing, but more likely a potent prescription from her local Dr Feelsgood.
Maybe she’s seeing Dr. Kapoor
http://www.tmz.com/2007/02/22/anna-and-dr-kapoor-down-and-dirty/
This story just keeps getting more bizaar by the day.I heard howard stern mention this doctor in his testimony yesterday.
I wonder if howard stern joined in on all the action anna seemed to be getting?What a messy life they had.
“All recent so-called upticks have proven to be just passing phantoms”
I’ve been having recent upchucks, every time I read all the lying crap.
Maybe she sold in time
Maybe she’s not waking up because she’s not falling asleep in the first place
She must have swithed between red and blue pills.
She must have switched between red and blue pills.
Yes, sometimes even I wish I had not chosen the pill that makes you see reality (housing bubble and coming economic doom) and just kept spending like everybody else and enjoying the matrix.
Maybe she’s sleeping better because her husband is taking that blue pill?
Ha! Funny!
Of course she’s sleeping better at night. It’s uncertainty that keeps people up. Once you KNOW that the situation is FUBAR you can sit back, relax and start thinking about how to put it back together again.
Not to worry, she is based in San Francisco, Even she knows prices in her own city are way out. Prices have skyrocked 300% in under 10 years. Given the tech bust and further erosion of jobs to cheaper low tax states/nations. Janet is more in denial.
No your not awake and your still dreaming Janet.
All she has to do is talk to local CEO’s. They will clearly tell her that high prices are hurting local business. As such local employers will look elsewhere to cut costs.
But we know Govt dont want to hear that.
Recently HP released good earnings… guess what else —they will have layoffs as will Seagate. Further cost tightening. All very high cost positions. HP CEO stated “good earnings and cost restraint go hand in hand”.
“good earnings and cost restraint go hand in hand”
No kidding. Wouldn’t want to restore revenue through innovation in new products/markets when you can do it with a few “restructurings.”
Also SanDisk 10% jobs cut (250).
may be as she is much fatter now…and less agile.
“The drop in the ABX-HE-BBB- 07-1 index means an investor would pay more than $1.1 million a year to protect $10 million of bonds against default, up from $389,000 last month.”
And why is anyone surprised by the continued bloodbath in the subprime market? I don’t know what interest rates will need to be to justify the risk and cost to insure the bonds… to guard against loss of principal. This is only the beginning and with underlying assets declining in value, tightened lending this is going to unwind faster than the futures markets are suggesting.
The 20% increases seen in 2004-2005 in some markets may get wiped out a lot faster than even those here are expecting… prices on MBS sure aren’t sticky on the way down — why should the asset prices be?
http://www.markit.com/information/affiliations/abx
Gotta love this one:
http://www.markit.com/cache/curves/d17eb4ef6a02e5ba051c76a2099.png
I like how they think the losses are going to be isolated to the BBBs. I can’t wait to see it spread to the As, and then AAs.
I’ve been watching ABX-HE-BBB- 06-2. What a catastrophe! What I don’t get is why A & AA are still so strong. They are subject to exactly the same deterioration in the underlying asset price.
For the same reason that the BBB tranche was at 100 up until a month ago. Investors are still asleep and delusional. As to when they are going to wake up? Ah, if we knew that we could make a lot of money.
Each index “insures” the index above it. In order for a single “A” index to feel any principal loss, the whole “BBB” tranch needs to be wiped out. Depending on the tranch stratification, it is unlikely to affect any “A” to “AAA” tranch. They are usually protected by 5-10% “equity” of the “BBB”. And the real funny money 20% seconds are not in this group at all. However, mortgage fraud deals, or rapidly declining markets with 25% or greater price declines, could affect the “A” paper, but not by much. The linch pin is always the “b” notes and unreated mezz stuff. If no one buys that paper, or insists on 25% returns, then the sub prime market has no way to securitize the loans. This is where the rubber meets the road. The “B” tranch buyers are going to be much harder to find and they will do a lot of due diligence on the assets. Perhaps companies like C-BASS, who seem to know what they are doing and have professional servicing groups who will work with defaulting borrowers to keep bleeding them until they finally throw the keys on the roof.
Thatks paladin. That is interesting. What does wiped out mean, for bbb?
Simple - BBBs percieved higher risk, value goes down. AAs seem safer, stay the same pp. My take, give it another 10-15 days viruses do spread especially when agenicies are using old/outdated sanitation procedures (1.7%, my butt!).
My take, look to the holders - “Excuse me sir, I am your client and you want me to buy something that is declining in value, has an unknown risk, costs a forture to maintain. Why?”
I feel like I am in kindergargen watching a game of musical swaps, no books, no, er, musical chairs sorry about that.
My only guess is at some point they are not insuring against the loss of value in the asset, but rather the willingness and ability of borrowers to pay for the wasting asset. People with good credit scores are more likely to try to ride out the storm.
“The drop in the ABX-HE-BBB- 07-1 index means an investor would pay more than $1.1 million a year to protect $10 million of bonds against default, up from $389,000 last month.”
That is an outrageous premium to insure those bonds. Nobody is willing to back them because they know the failure rate is going to be very high.
“And why is anyone surprised by the continued bloodbath in the subprime market? I don’t know what interest rates will need to be to justify the risk and cost to insure the bonds… to guard against loss of principal.”
I don’t think anyone can quantify the magnitude of the potential losses if the whole market goes south, that’s the problem.
“This is only the beginning and with underlying assets declining in value, tightened lending this is going to unwind faster than the futures markets are suggesting. ”
I fully agree. I think we are going to see some shocking price reductions in the near future as FBs fight to unload their houses.
“The 20% increases seen in 2004-2005 in some markets may get wiped out a lot faster than even those here are expecting… prices on MBS sure aren’t sticky on the way down — why should the asset prices be?”
MBS buyers can shut down the whole market. People don’t realize that. Everyone says that the buyers will step up this spring/summer, but lets not forget that the buyers don’t have the cash. The MBS buyers do ! If the MBS buyers vote with their feet, they can shut down the whole RE industry. I suspect that is about to happen.
We ain’t seen nothing yet.
Hmmm….
It costs 10% of principle to insure a subprime mortgage with the 10-year bond at 4.73% so that means that interest rates on subprime are going to be 14.73%+, doesn’t it? I wonder if that will have any effect on house purchases going forward?
Your basic observation is correct, but it is important to remember that risks to the MBS pools are not spread evenly over time. Some events are predictable, such as the fact that many ARM borrowers will refinance around reset time and will default if they fail to refinance. The point is that the amount necessary to insure an existing pool that is going bad is not the same as the amount to insure a fresh pool during its first year. But the amount to insure a fresh pool is still likely to be very high compared to what it cost last year.
Nope, the two are usually related but don’t move in lock step. The spreads widened, but they aren’t as high as the premiums got. Insurance is usually too expensive after a crisis, and too cheap before.
MBS buyers, like all buyers, may be caught “dumb” at anytime. But to think they’ll continue to buy subprime securities with anything less than an incredible spread is nuts. Fool me once, shame on you. Fool me twice…….
So the only subprimes that will be saleble will be VERY high yielding, right? And how many people will bother to even try and “qualify” for those loans? Only the stupidiest, highest risk, most desperate borrowers. So, naturally, the “quality” of these “securities” will have all of the repayment characteristics of a roll of the dice.
“Subprime” is over for the forseeable future. No investors will be left, no borrowers will either qualify or pay the ridiculous rates needed to move any of the paper. The collatoral will be in a decline to one extent or another until market equilibrium is discovered….a loooong time.
As housing prices decline (because no more subprime cash is available) the existing subprime “experience” will only get worse and worse and worse making people holding onto this toxic waste look like complete idiots. Look for pension funds, insurance companies and other, somewhat “responsible” fiduciaries, to dump their holdings to prove (if nothing else) they aren’t completely incompetent.
These most recent series are total junk. However, if lending standards return, it’s conceivable that the insurance will drop on newer issues, but there will be a lot less product since the borrower market shrunk to 1/10 its size overnight, and the amounts they qualify for won’t buy anything in many markets (UNTIL PRICES COME BACK IN LINE WITH ABILITY TO PAY).
AZ,
interesting observation. I concur.
wow that’s a real number
and the bond market sleeps on
Real number…
I’m in shock. I’ve been following the ABX’s and was sort of lulled to sleep as all of them seemed to have a natural floor at 85 cents on the dollar.
To see one at 78.6 cents is a shock!
I’m going to have to go home and just… well, enjoy a good cabernet.
Newish article on my blog on how me an my fiancee are determining affordability.
http://recomments.blogspot.com/
Got popcorn?
Neil
“…MBS sure aren’t sticky on the way down — why should the asset prices be?”
Some sellers are obligated to get permission from the bank before selling at a loss. The question is: How low can they limbo?
Some sellers are about to rediscover that 1990’s phenomenon called:
THROW THE KEYS ON THE ROOF
Too many people bought in 2004 through 2006 with neg-am loans. Even those that had a 30 year with a low to zero down payment aren’t going to stick around for long. Let’s face it, there is a reason the old risk curves noted that 25% down payment had a quarter of the default risk of a 10% down payment.
People have no money in the game. Here in California, property values tripled but home owners own the same $$$ or RE that they did five years ago. The rest is debt thanks to MEW, HELOCs, or stupid housing suffles.
I just cannot see someone who bought a $850k home in 2005 that now pencils for $800k with ~$930k in debt sticking around. Those keys are going on the roof.
Got popcorn?
Neil
Unless they can find a straw buyer and a lender with a bag of money and a box of stupid.
Unless they can find a buyer like yesterday’s Diane.
maven, you have Diane all wrong.
She’s fascinated by human nature, remember? And we’re all just specimens in her gigantic petri dish of scientific blogging.
LOL.
Diane was out checking to see how much cash she cash jerk out of her property.
Carnival music and limbo dancing comes to mind when I think of sellers with little equity — equity limbo dancers. Let’s hope Diane does not have to sell soon OR she is a very good limbo dancer. Yeah Man! Limbo Limbo deh!
http://en.wikipedia.org/wiki/Limbo_dance
Who said the music stopped? The party just started.
I feel this blog is important because it is outside the group think of MSM, however if we all have the same point of view I think the quality of this blog will suffer.
Depends on the purpose of the blog, if it is for discussion of the housing bubble ( pro or con) or just one side. doesn’t really matter to me as there is another blog for the other side. However if it becomes too repetitious (like realtors) it will probably start to loose credibility. If it becomes to one sided you can always take the other position, and give a different point of view even if you don’t agree with it. I have done this on a council to open up debate, when everyone was in favour and no discussion was seemingly needed, but you better be prepared for hostility .
if we all have the same point of view I think the quality of this blog will suffer
I agree 100%.
“an investor would pay more than $1.1M a year to protect $10M of bonds against default” - Hmm. So the investor pays $10M for a bunch of bonds, and $1.1M per year for insurance. Regarding the investment as now quite safe, the investor might now settle for a yield similar to Treasuries, say 4.9%. However, the prospect of maybe having to claim the insurance adds a “headache” premium. My “headache” premium would be at least 2%. Doesn’t that mean subprime borrowers should be paying 17% mortgage rates?
(11% + 5% + 2%)
Oops, I guess that’s 18, not 17
They must pay that only for the BBB tranch which is usually 5-10% of the stratified loan pool. All the tanches under that would still be receiving 6-7%, since the BBB piece has to melt down, before single A is at risk. That is why 20% on 5% of the loan pool only raises the overall loan rate to the borrower by 1/2 percent. The extra spread on the whole loan is applied to the 5% BBB tranch for the 20% yield on that tranch. It is part of the beauty of securitizing loans. No matter what “junk” is tossed into the pool, the A tranches and better are going to get their return and principal. Unless…………..
Well, that’s what those buyers pay on their cars.
I wouldn’t dispute that rate, as justified. If the incomes are verified and max loan amounts tied to incomes, how much will these clowns be able to borrow, at these rates? What does this say for the subprime lenders? They won’t be able to securitize the loans they originate so then what? Their sales will go to 1/10 what they sold in ‘06…
“…would pay more than $1.1 million a year to protect $10 million of bonds against default…”
Suddenly subprime bond insurance looks more expensive than FL hurricane insurance…
65% drop in California, Nevada, and Arizona? Wow. And to think the inventory is still ridiculously high.
I’ve also noticed that asking prices have upticked a bit where I live in the last little while. There are still a lot of people out there thinking 2006 was a blip and 2007 is recovery time. 2007 will prove to be much MUCH worse than 2006 when the REOs come on the market in force, add to the inventory, and screw up the comps (thus adding more NODs and REOs to the fire as the option arm geniuses can’t sell unless they bring cash to the table).
The logic, or lack thereof, of those who think 2006 was just a blip is baffling. If a starter home was 150k in places like Vegas and Phoenix five years ago, what makes anyone think that 300k is somehow affordable to first time home buyers now? Suicide loans kept the party going longer than it should have, but now the lenders are realizing that subprime borrowers are subprime for a reason, so the subprime lenders and market are falling apart and drying up. When first time home buyers can’t qualify for a conventional 300k 30 year fixed loan, then move-up buyers can’t sell their starter homes. First time home buyers make the whole system work, but they’ll be in incredibly short supply without the subprime market. So, quite simply, the system will stop working (like it is right now), and the only way to get back to normal is through the substantial lowering of prices to a level where first time home buyers can qualify for the loan on a 30 year fixed basis.
It’s that simple.
“I’ve also noticed that asking prices have upticked a bit where I live in the last little while.”
I think this has to do with sellers re-entering the market for the spring season. They’re hoping market has turned and is on the way back up. Wait a couple of months and the prices will start to go down again.
“If a starter home was 150k in places like Vegas and Phoenix five years ago, what makes anyone think that 300k is somehow affordable to first time home buyers now?”
People have selective short memory. According to my calculations, a starter home – 3/2, 1300 sf SFR – should be worth around $175K in Vegas now. This is based on historical growth rate for the past 28 years including the 5 years of run-up. Based on growth prior to start of run-up (end of 2001), it’s around $160K. So they’re about 100K overpriced based on technical data.
The only market I have examined in great detail is low-end SFH in Morro Bay CA. The only re-listings I could specifically recognized had reduced prices by about 5%. I think they will go on wondering why nobody is buying.
As a first time buyer myself…
Amen!
One of the most important things I have learned from reading this blog is that the only buyer that can truly remove a home from either the resale or new builder inventory is a first time home buyer. I can’t remember who posted this to give credit where its due, but this was truly an A ha moment from me. Screw the first time home buyer and the whole thing is sure to eventually come tumbling down without that foundational support.
Excellent point.
Actually speculators changed that calculus.
haven’t you receive the memo that all 60 million baby boomers will now own 2 or more homes? the boomers are all filthy rich millionaires
*Yawns. The material in all those articles is old news to us here. Its nice to see the media finally catching up though.
It doesn’t sound like the spring selling season is going the way the industry thought either.
So when do we get capitulation ?
When does Joe Average homeowner, behind in his payments, underwater, finally throw in the towel and ditch his albatross house while things are as good as they are. Sooner or later Joe is going to realize that things (employment, house prices) are only going to get worse and worse, and that NOW, TODAY is the best time to unload that thing he thought was an investment. When does this happen ? It will happen, but when ?
The market is still in denial. They are still waking up from the dream of “10% in the bag”. They still haven’t come to the realization that things are going to get much, much worse before they get better.
I suspect fall 2007 will be the clincher.
Agreed. The idea that a massive multi-year run-up has been corrected with such a weak downturn is laughable. Compare whatever weak metrics the bulls point to against continuing subprime implosion, massive inventory overhang, consumer debt saturation, housing price vs. income, etc.
The bulls are whistling in the dark.
“So when do we get capitulation ?”
Not for a while. We’re still in denial. 2007 will see fear and desperation.
We won’t see panic and Capitualation until 2008. So be patient. Relax. Have one of your favorite beverages (I’m having an excellent Sumatra coffee right now.) The lowest prices are Despondency through depression.
I (amoung many others) have blog the investment emotions quite a few times. So when do we get capitulation ? Summer 2008 at the earliest.
http://recomments.blogspot.com/2007/02/record-home-price-slump.html
Got popcorn?
Neil
1) Denial 2) Fear 3) Depression 4) PANIC 5) Capitlation.
Same scenerio as the dot.com bubble. In the depression stage, most people can not make a decision, one way of another. Give the news media one more month to report falling house prices and sales, and the Panic of 2007 will be on.
I expect to see the Dead Cat Bounce this spring to sucker in the last few hopefuls. Then because of lack of liquidity in the housing market I expect a decline for the next decade as happened in Japan. I do not expect to see buying opportunities over the next 3 years. Few buyers in bubbles know when to cut their losses or when to take profits. The stock market crash of 2000 took 2 years to unravel and 6 years to get close to its 1999 levels (it is still below the highs of 1999). The stock market is the most liquid cash reserve in the nation, why is housing almost always illiquid going to come close to recovering in a shorter period?
I think we’re at “fear” now. Yeah, a dead cat bounce will probably be reported based on a few anecdotes but the undercurrent of properties which don’t even get a BID will cause “cognitive dissonance” to begin.
Sellers will hear “success stories” but their reality will be completely different. This will be confusing at first, then progressively more frightening. Wouldn’t you ask yourself what you were “doing wrong”? Since the only thing you’re REALLY doing wrong is to not lower your price (which “experts” and news reports tell you needn’t be done) you CANNOT POSSIBLY figure out what’s “wrong”, can you?
Being unable to figure out what’s wrong will cause “depression”. How long that lasts, who knows? Very individual. But isn’t “panic” a much more “collective” emotion in nature? Like greed?
I suspect my neighbors with homes on the market over 6 months have dwelled in depression sufficiently. It shouldn’t take much of a GENERAL fright to push them into panic mode, should it? And that is probably the only thing left to happen; something, utterly unforeseeable by everyone, triggering a panic to get out.
Right now, if you aggressively drop your price, you should be able to catch the dead cat bounce, find a greater fool and get through the exit before the smoke you smell turns into a conflagration. I’d bet by the end of April many won’t be able to find the exit much less get through it.
If Florida isn’t in full panic mode now its probably because no one can “point” to a single, simple, reason for the meltdown. My bet is, most everyone on this board will know “the sign” when it hits.
I’d say FL is in the FEAR part of the cycle…therefore they are looking at the taxes….after they figure out getting rid of property taxes was no great help…they will hit depression and so on…
I’d say “Fear” is about right. A little “Desperation” as well. Her in MA I’m seeing a lot of “$1000 to selling broker who can bring in buyer by March1st”. Gimme a break… Reward the BROKER??? How about $100,000 off for the BUYER?
It’s been said before, and I agree: It’s going to get ugly before it gets better.
TOL shareholders went through 3 phases today:
1) Happiness stock gapped open
2) Confusion when it didn’t keep going up but still higher than yesterday
3) Despair when it went below yesterdays price.
What does this mean?
jag said: “My bet is, most everyone on this board will know “the sign” when it hits. ”
Yep. And we’ll wonder why that straw was the one to break the camel’s back.
I have one emotion right now: Schadenfreude.
Got popcorn?
Neil
I was doubtful about capitulation in ‘07. Not so much any more, with the catastrophic sharp collapse in the ABX. Unraveling a lot faster than I expected in the financial markets that supported the madness. Q1 Defaults and foreclosure numbers are going to really hit home. This summer is the beginning of a steep decline - IMO.
A very good indicator of the fear that will grip the market is the inventory of unsold homes. I suspect that it will spike around May or June as additional sellers hit the market for the spring ‘frenzy’ of buyers. When they don’t materialize, reality may start to seep into the market. It will get interesting from then on to see who heads for the door first. But the big builders have already positioned themselves near the exits.
“When does Joe Average homeowner, behind in his payments, underwater, finally throw in the towel and ditch his albatross house while things are as good as they are. Sooner or later Joe is going to realize that things (employment, house prices) are only going to get worse and worse, and that NOW, TODAY is the best time to unload that thing he thought was an investment. When does this happen ? It will happen, but when ?”
Problem is Joe paid a ridiculous price for his home. He can’t unload his house at a reasonable price. Even if Joe and his bank are willing to short sell there are no willing buyers because his house is still waaay overpriced. His only option to unload the albatross is foreclosure.
I think Wickedheart is correct in suggesting that Joe Average homeowner will not be in control of the process by which prices come down. It will be a matter of senior officers at big lending institutions strategizing over how to unload REO’s without flooding the market w/ all the REO’s simultaneously. Considering that sales volume continues to decline SLOWLY (i.e., not immediately to zero), they have some chance of bringing the prices down on a gentle enough slope to keep some people sleeping soundly. In particular, the people who will be buying these “bargains”.
we seem to be in period where it is better to have lived like the rich and gone broke, than not to have lived like the rich at all.(not optomistic about the future)
This is the problem with the bullish mentality of bigger, better, larger in this country. So many people in this country never think that things have to go down. All they see is that everything is LA-LA Land (not a ref. to el Lay, either). They only see Dow 36K. What crap! They only see 15% in the bag. What a crock! These people are the ones who have never saved. are in debt up to their eyeballs, and just continue to believe that everything is well while Rome burns.
These people are the ones who have never saved. are in debt up to their eyeballs, and just continue to believe that everything is well while Rome burns.
How’s this for a couple who represent that. Admittedly they are friends of mine so I have to watch what I say. But…they make a combined income of about $100K - $125K. They bought a house just prior to the huge run-up for $225K. Not bad, right? They have NO savings (even though they sold a house to buy this one). They have MOUNTAINS of debt. They live paycheck-to-paycheck. And the only thing they can see to help them in the future is to let the equity grow in their home so they can tap into it (I should say tap into it again…they tapped in about a year ago already).
They pretty much pity me because I have a single (and average) income. The pity is that I will never be able to own a home. Well I’m going to prove all these debt hounds wrong (I hope). I have a nice chunk of money saved. I just refuse to pounce until I’m 100% comfortable with the entire transaction.
sorry, this was supposed to be a reply to Wickedheart’s post
oops. no, i posted it in the right place.
Eastcoaster that is the story of so many in this country, I am positive. My wife’s uncle visited us this past weekend and talked about how is poor. This from a guy who lives in a home bought for 250K years ago, now worth about 650K. He is also a full-bird colonel in the Air Force, not a bad pension. He works part time and the wife works. Broke, by what standards, I ask? I think we can all say greed is at work, but the bottom line is that people just aren’t content, which leads to the greed. I also applaud you on the 1-income. Are you married? If so, that is great. To many people aren’t just living paycheck to paycheck, but are literally, a spouse;s check away from disaster. That is the reason why divorce is so deadly from a financial standpoint for the middle class. When you live a lifestyle of debt that requires 2 very high incomes, you are toast when one of those incomes disappears.
It is also amazing to hear that people who combined make twice what I make (wife doesn’t work anymore, takes care of our children) are broke and in debt up to their eyeballs. I ask, who wants to live like that? WHat has happened to us as a country?
To many people aren’t just living paycheck to paycheck, but are literally, a spouse;s check away from disaster. That is the reason why divorce is so deadly from a financial standpoint for the middle class. When you live a lifestyle of debt that requires 2 very high incomes, you are toast when one of those incomes disappears.
MSM luvs to crow about the fact that divorced and single females have been the largest purchaser segment during the last 4 years.
The feminists particularly like the words, “financially empowered”…
LMAO!…Empowered for what? Bank foreclosure?
Look for an escalation in the membership levels on the i-net dating sites as the owners all look for a sugar daddy bail-out out of their impending financial disaster.
OCDan,
I agree in regards the divorce comment. It really destroys the middle class. Most people dont understand how truly screwed we are as a nation due to gloablization, outsourcing, etc. The real wages have way down and so now in most households both people work. But instead of using the second income to pay down debt and amass savings, they are relying on both to cover the mortgage. So if one loses a job or there is a divorce, they are done financially.
But people watch Anna Nicole, Johnny Carson, Michael Douglas, etc. and think I can trade in my current problem for a better model. But it usually doesn’t work out for working class people, and most think they are upper middle class - whatever that is.
It will interesting to see how many people stay married after losing the house and/or one of the jobs. It takes determination, a work ethic and commitment to stay married even when things aren’t working out well. But I fear that most people today don’t have the upbringing to understand that success comes from smart hardwork and commitment, not just from flipping a house or “getting over” on someone else.
I believe that how this society handles the coming economic situation will determine pretty much the outcome of our nation going forward - whether we remain a super power or turn into a psuedo-third world society with a few wealthy and the rest starving by the roadside.
Just my two cents FWIW
The problem with having a lifestyle that needs two incomes, is that you have just doubled the chance that a jobloss will send you into a spiral of debt. If EITHER spouce loses a job the poo flys.
Well I almost hate to reply to these posts because I’m a divorcee. But…I am a single mom, making all my bills, and still saving money. I do NOT get full child support. I did not get boo in the divorce settlement. (I had a really shitty attorney who I paid way too much to.)
My ex made TWICE my salary so, combined, we’d have done very well. However, during the marriage he did not assist one iota financially. I paid for everything. He wouldn’t help at all - always had an excuse (clearly one of the main reasons why I filed). And, of course, his accounts didn’t show all that money when we did discovery on him (and my crappy attorney talked me out of requesting a full disclosure of where the money went).
Anyway, while not an advocate of divorce, I’m also not an advocate of real estate only being affordable to married couples with dual incomes. And that’s where I’m at presently. I am not going to troll internet dating sites to find a guy to link up with to just so I can buy a house. It HAS to become affordable to someone like me at some point. It was prior to the crazy run-up. And I manage my meager salary better than many dual income couples do.
Eastcoaster, I’m glad for you (in that you are making it in spite of the turd you used to be married to). Good for you.
dude - in coastal CA, you have the same situation with similar numbers… except they bought a $850K house.
Well I can understand living paycheck to paycheck with a house that expensive. But one that’s only 2x the combined income? Geez, they should be saving money out the wazoo.
“The pity is that I will never be able to own a home. Well I’m going to prove all these debt hounds wrong (I hope). I have a nice chunk of money saved. I just refuse to pounce until I’m 100% comfortable with the entire transaction.”
I’m in that same situation. Single, late 40s, never conformed to the marriage trap, and saved a huge chunk of change, nearly half of which is not in stocks. Younger guy at work told me a couple of times ‘I thought you have a house in Phoenix.” I told him no, just renting. He does not say anything else. He and his wife live in a McMansion in Mesa (MMiM) and just produced a baby. Long term Phoenicians trapped by a mortgage and kids now.
Debt is the American way. Take pride in knowing it’s not your way. There will be a day in a few years when you can choose among high quality houses for sale at 50 cents on 2005’s dollar. You may probably have some leftover change!
I’m in that same situation. Single, late 40s, never conformed to the marriage trap
If you think marriage is simply a “trap”, I pity you. Regardless, if that truly is your attitude, thanks for not becoming a member of the institution.
hey 85249 is toast. Ever read the news lately? Married people comprise less than half the population of adults. Single / divorced are the majority. What does that say about your institution? And I ask why do we have to get government involved. Make it a non-marriage! http://www.buildfreedom.com/bookrev.htm
Regardless, if that truly is your attitude, thanks for not becoming a member of the institution.
——————————–
One less divorce and transient child(ren). It’s fine if people are against marriage, as long as they disclose that to any prospective partners BEFORE getting into a relationship, IMHO.
Hey, Bill…since you’re up already.
Do you tell your prospective dates how you feel about marriage before you get into a romantic (read: have sex) relationship with them?
Just curious…
how long has Rome been burning?
quite annoyed that I participated in the collective hallucination that led so many into such a disaster.’’
“collective hallucination”….could this whole housing debacle be described any better?
Refer to the three rules of bubbles;
Rule 1: A bubble expands far longer than anyone expects
Rule 2: A bubble expands faster as the cycle nears its end
Rule 3: It’s tough to admit the cycle is over.
Sounds like the author discovered rule 3.
Dr. Hofmann would be proud.
Dr. Hofmann would be proud
from his site:
“With time passing, the “NFI will file for bankruptcy within the next xx month” canard becomes a species on the brink of extinction.”
this was posted a month before his “collective hallucination” gem.
I can’t help but thing about what SoCalMtgGuy posted more than a year ago on the question of why the bubble was taking so long to burst.
“In 2006 there are approximately 335 billion dollars worth of ARMs that are set to adjust. Let’s just assume that each loan set to adjust is for $500,000. That means 670,000 households are going to have 4 options: refi, sell, foreclose, or pay the higher payments. Things get really tricky in 2007 as 1.2 TRILLION dollars of arms are set to adjust. That means 2,400,000 households have to pick one of those 4 options.”
Everything that has happend so far has been due to the smaller number of 2006 resets, plus flippers/fraudsters who defaulted immediately in 2006. But the reset party hasn’t really hit yet.
More from that post:
“So there you have it. That is one of the things I belive that will be the catalyst for the bubble to burst. Massive people selling will lower prices. Rising rates will force people to lower prices as the same payment buys less house. Tightening lending standards will pull potential borrowers out of the market. Once those stated loans get a bad rap and/or they actually start pricing them correctly, you will remove another section of people from the market. Once these things start happening, I think you will see the beginning of things REALLY coming down. Don’t fall for the dead-cat-bounce when people start buying in on the first dip.”
I think the guvment will step in before this happens and “save” the situation. Maybe Ben will load up his helicopter and dump some $s on the economy.
I recall reading quite a while back that most of the expected 2007 resets wouldn’t happen because most of the people with resets coming had or would shortly refinance. Anybody have any info on whether a lot of the people with ARMs coming due in 2007 have already refinanced, so that there really won’t be 1.2 Trillion dollars of arms resetting?
I’m sure many can’t. You can refi if your house is worth money to the bank, and if you want to pay the out-of-pocket costs to do it - most people were using borrowing at the same time as the refi and using that money to finance the refi. Not only that, but many people have to deal with prepayment penalties. Add to it all, that most just can’t afford it. I recall brokers saying that you could just refi into a similar loan.
…and with the SubPrime meltdown, the same loan that you got 2 years ago may not even be available to you - even if all other conditions are unchanged.
It’s over.
“NovaStar late on Tuesday surprised investors by saying it may generate no taxable income from 2007 to 2011, and may drop its tax-friendly real estate investment trust status in 2008.”
I suspect NovaStar is about to have a supernova experience: http://en.wikipedia.org/wiki/Supernovae
“I suspect NovaStar is about to have a supernova experience”
Can’t wait. Neil, pass me a supernova bucket of popcorn.
yo bob(toll) you forgot to mention theose firm markets
-if you can’t see a drilling rig,it’s soft bro
Off Topic but can someone tell me what month inventory typically starts to increase in LA or anywhere for that matter? It seems like inventory is going down everyday in LA right now & I am wondering if people are taking their houses off the market temporarily and plan to put them back on in the spring.
From what I’ve seen over the years in SD, inventory dips slightly in Feb, then slowly grows until about April-June, when it grows more quickly. The inventory usually peaks around Sept/Oct.
Wasn’t it part of Steve Martin’s old stand-up routine that, ‘you just can’t be negative or depressing while playing the banjo’ and that maybe the President should start playing during the State of The Union address’? Maybe we should all kick-in and buy Bob Toll a banjo?
“Everything is just fine!” (plink-plink, deedle-deedle, plink-plink, deedle-deedle) “Its bound to turn around any day now!” (plink-plink, deedle-deedle, plink-plink, deedle-deedle) “Yup! Aaaaany day soon would be just fine with me!” (plink-plink, deedle-deedle, plink-plink, deedle-deedle)
When I think of banjo music I think of “Deliverance.” No further explanation of how this analogy applies to the housing bubble should be necessary.
The trouble with lake burials is that bodies eventually float back up to the surface. It will turn out similarly for REIC shills currently trying to bury bad news below the placid surface of the water.
“No further explanation of how this analogy applies to the housing bubble should be necessary. ”
Aaaaaannnnnnd CUE auger-inn!! Auger… Auger??
Neil’s “Got popcorn” is the new “painful xxx pounding.”
Squeel like a pig!
Now… I’m not saying that. I’m just spectating from a safe distance… Less than 90 days to go before seeing the impact. Its been a long slow train wreck (and I am a relative late comer to the party).
Got popcorn?
Neil
Apparently Baker Person Real Estate in Lodi CA didn’t get the memo. Here’s their ad from the Lodi News real estate section:
“It’s Time To Cut Out The Bull”
“In a Buyers market if the buyers don’t cut the bull and begin buying, the sellers may just turn into bears. Once those bears go into hibernation you won’t see them again until spring. As professional Realtors(R) at Baker Pearson Real Estate we realize the best time to buy real estate is yesterday. The wise buyer will take the bull by the horns during good economic conditions, while the rates remain low and inventory levels provide a better selection. We want our clients in before the great deals dry up and turn to dust. Before you know it we will be stampeded back into a sellers market.”
Let the sellers turn into bears. Buying their overpriced home is not something I HAVE TO DO! The nerve of this ad! Go ahead, pull your home. See what I offer you the next time it is on the market. I hope you can keep up with the mortgage resets, taxes, HOAs, HELOCs, the car payments, the Credit Cards, all the insurance you need for the house and the cars, the private schools, the vacations, and all the karate and ballet lessons for Hailey, and the little league and karate for Spencer. Good luck man. What a way to spend your lives. No I am not a bitter renter. I am bitter because that was my life for 10 years before cashing out. Sad thing is that for many of these people it is too late to get out. The next cycle won’t be for 20 years. What a waste of a portion of your life!
“-The wise buyer will take the bull by the horns…”
I really dislike incorrect advertising phrases; The correct phrasing should be “the wise seller will take the bull by the tail and face the situation”
“-The wise buyer will take the bull by the horns…”
The dumb buyer will take the bull’s horns in the @$$.
Play with the bull and sometimes you get the horn.
These people are just so a$s backwards. You buyers had better buy, or, or, WE”LL BAN YOU!!!!!
What’s next, threats of physical violence? This blurb, the one from the plastic babe in FLA, yesterday…what little respect I had for realtors is diminishing with every one of these shill-o-phonic spiels.
I know there’s an Implode-O-Meter for lenders. If there is a Respect-O-Meter for realtors, it’s got to be down to about 2.3541, on a scale of 1 to 100.
anybody listen to the old JERKY BOYS stunt of the car salesman from upstate NY, he says to a prospective employer, (cause he got fired from his old job) the f***ers gotta buy, some guy he doesnt know if he wants to lease or what, i take his face smash it into the hood, i say u buy this f***ker or i break your neck, i gotta have dough too,
anyone see realtors resorting to this?
“The wise buyer will take the bull by the horns…”
That’s a lot of bull.
Note to realtor: I’ll have a coke with them burgers and fries.
Ads like this can mean only one thing: They’re full of Fear and this is an act of Desperation. Otherwise, why would they be acting so bullish? Advertisement exsits for a reason - i.e.: “We NEED your business.” The tone is almost threatening.
Bull? Bullsh*t is more like it.
While this add reeks of arrogance and superior “wisdom” I agree it REALLY indicates FEAR.
Admonishing buyers for not responding to the prices they help sellers set reminds me of a statement a former neighbor said to her kid: “Don’t act dumb stupid”.
Somehow I don’t see much persuasion in either appeal.
“a meltdown in the subprime market could affect the supply of future buyers for years to come”
Yes, but the reason behind the meltdown in the subprime market is that the supply of QUALIFIED future buyers was exhausted over a year ago.
The other possible reasons for affecting future buyers are (assuming revised lending standards)that it will be more difficult for a foreclosed individual to buy in the future, 100% subprime loans will disappear and various liar loans will be toast. This alone knocks out 50% of the buyers over the last 5 years. IMHO real money, real income and real assets will be the only buyers in the future.
“QUALIFIED future buyers”
There are still qualified buyers; just not qualified end-user buyers who can afford to buy at subprime blowout price levels. Once prices come back to earth, the flow of buyers and sellers into the market will once again equilibrate.
And of course some of today’s subprime buyers would have become Alt-A first-time buyers 5-10 years from now after paying down student loans and saving up for a downpayment in a normal market. Instead, years from now we’ll still be dealing with a deificit of normal first time buyers because they’re either trying to hold onto a home that they bought at peak and can’t really afford, or they’ve been foreclosed upon and are renting until lenders will deign to talk to them again.
“Mark J. Roach, a portfolio manager at Dreman, said his fund made a good return on shares of NovaStar in 2005 but has been cutting back its exposure since. He said it now made up only 0.3 percent of the small-cap fund he manages, down from 2.5 percent in 2005.”
How much of that reduced exposure actually was driven by Dremen selling? Heck, the stock dropped from $40 down to $9. That by itself would reduce Dremen’s exposure from 2.5% to around 0.6%.
BTW, at one point Dremen also was up to their eyeballs in Fannie Mae.
“That by itself would reduce Dremen’s exposure from 2.5% to around 0.6%.”
Of course that assumes the value of rest of their portfolio remained constant. Small-cap indices have been up about 25% total over the last two years. If the rest of Dremen’s portfolio matched the index this would reduce Dremen’s % exposure to NovaStar even further without any action on the part of the portfolio manager.
“He said his traffic index, which polls real estate agents on customer volume, is likely to fall in the month after three consecutive gains.”
They poll RE agents? That’s like the fox guarding the hen house! No conflict of interest here!
“Investors, home builders and other industry watchers have been looking for signs of an upturn, but Toll’s chief executive expressed caution. ‘There are too many soft markets at this stage of the selling season to call a general upturn in the new home market,’ CEO Robert Toll said in a statement. ‘Demand varies greatly from week to week in individual markets.’”
My question: Without subprime, who will be in the market for a Toll McLuxury Mansion? Because the truly rich, who can afford to buy in the $800K+ price range, have many better choices these days…
What really gets me about Toll Brothers is that they were quick to point out in 2006 that the economy was relatively strong, employment was relatively strong and, historically, no housing downturn had occurred under these conditions. Therefore, they wouldn’t do any “apples to oranges” comparisons to other downturns. Now, however, without any historical precedent to base this downturn on (no place to compare dangerously low rates and irrational lending habits over the last 4 to 5 years, and an enormous, but still under appreciated glut of housing on the market), Toll is now ready to compare this downturn to the late 1980s-early 1990s. Something, they wouldn’d do last year.
It doesn’t work that way. The problem this time is and has been the enormous existing inventory. Builders built 12 years of houses in 5 years, because of the low rates, easy credits, and specualtion. That is the reason for the current downturn, plain and simple. Unfortunatelty, when that gets coupled with the impending recession, things get a whole lot worse and disaster for home builders ensues. Toll Brothers still brushes this off, even though, the probability for this occurring is much greater than the market stabilizing at a current, lower construction numbers. They are still using optimism when, in my opinion, they know the glass is only 5% full (or more appropriately 95% empty).
“Builders built 12 years of houses in 5 years, because of the low rates, easy credits, and specualtion. That is the reason for the current downturn, plain and simple.”
IMHO it is not the inventory that created the problem, it is just the final stage in a credit bubble extending for 12 years. The bubble is bursting (has burst) and will take 12 years to unwind. The inventory would get sucked up in a month if prices were in line with actual incomes.
Hoz,
Try this. Invite 4 people over to a BBQ and make 50 large hamburgers for them. Tell me if those burgers get sucked up by those 4 people (no dogs allowed). People can only take so much.
Yes, but then you beg the Congress and the Fed to “do something” to bail you out, so they invite 46 illegals over to your place with empty stomachs. If necessary they will even subsidize over-eating to encourage consumption of your enormous burgers.
lol
Hoz, you are right . . . inventory did not create the problem . . . it is a result of the problem . . . cheap money and lack of good alternate investments. Inventory rose because Prime Rate was down to 4% and stayed there for far too long (thanks Uncle Al). Savings was discouraged, borrowing encouraged. Land was gobbled up and infrastructure put in. At that point, developers/HB’s are limited in what they can do to make a return on their investment. Build or flip the land to someone else.
Now if the mortgage lending industry didn’t go totally brain dead over the past couple of years - the problem would have never escalated to the current point.
There are so many factors that contributed and have been eloquently posted on this blog, I won’t repeat them . . . except for Greed (the biggest one IMO). Home ownership is already at an all-time high, simply lowering prices by even 30% across the board would not fill them all.
This will indeed take time to absorb . . . my suggestion is procreate, procreate, procreate. We collectively need to create more buyers (I wonder if my wife will buy that theory tonight? . . . hmmmm) Honey, think of the economy . . . we must do our part!!!!
I remember when we had all sorts of outsourcing and offshoring issues in 2002/2003 President Bush wanted everyone to own a house. That was his big thing at that time. I guess he worked hand in hand with Alan greenspan to sprout a new bubble.
Yep. Not hearing much about the “Ownership Society” anymore, are we?
Well “receivership society” just doesn’t have the same ring.
“‘When I look at the data, I don’t believe the builders think the worst is over,’ report author Peter Butzelaar said, referring to $1.4 billion the top 10 builders collectively wrote off their balance sheets for the last three months of 2006.
Anyone here know the aggregate total of land holdings for the top 10? I’m too lazy to look ‘em up. Compared to a 6 billion loss in one hedge fund blowup (Amaranth), the builder writedowns are paltry. I’d bet there’s plenty more to come. Short LEN TOL KBH…
4 million homes are empty in the U.S. according to someone that was just on CNBC.
BTW, anyone notice the HB’s are all falling thru their uptrend lines?
From money.cnn.com: One person will be able to sleep easier now that he is fired.
LONDON (Reuters) — Europe’s biggest bank HSBC Holdings has ousted the head of its North American operations, Bobby Mehta, in the wake of this month’s shock profit warning from its troubled U.S. mortgage business.
The bank also replaced the head of its New York-based retail banking operation, HSBC Bank USA.
INTERNATIONAL
HSBC (Charts) said Mehta stepped down as chief executive of HSBC Finance Corp. and as head of HSBC North America effective Feb. 15.
Merrill strategy threatened by bad loan market
His departure is a sign of action being taken by HSBC’s Chief Executive Michael Geoghegan after the bank warned on Feb. 7 that its charge for bad debts would be more than $10.5 billion for the year, or $1.8 billion more than analysts had expected.
Geoghegan said at that time he would take direct action to manage the group’s response to a deepening problem in the United States due to its lending to lower quality home borrowers.
“The buck stops with me,” he said, adding: “My hands are all over this.”
Mehta will be replaced at HSBC Finance by Brendan McDonagh, previously chief operating officer at the unit.
HSBC also appointed Paul Lawrence as president and CEO of HSBC Bank USA and HSBC USA Inc, replacing Sandy Derickson, who is leaving the bank effective immediately.
Lawrence will retain his role as head of HSBC’s investment banking business in North America and have dual reporting lines to Geoghegan and Stuart Gulliver, head of the investment bank.
Troubled times
New HSBC Finance CEO McDonagh, 48, joined HSBC in 1979 as a graduate, and the Irishman held positions in group strategy and in Asia, before moving to the United States in 2002.
HSBC Finance is the bank’s U.S. consumer finance business and incorporates Household International, which it bought for $14.8 billion in 2003, its biggest ever acquisition.
Mehta joined HSBC as part of that deal, after arriving at Household in 1998 from Boston Consulting Group.
Problems in the U.S. housing market have hit several lenders, but HSBC has warned that conditions have deteriorated three times in as many months, highlighting that its credit scoring system is flawed, analysts said.
In midday European trading HSBC shares were down 0.1 percent, valuing the bank at £106 billion ($206.7 billion). The shares have fallen 10 percent since it first warned of U.S. mortgage problems in mid-November. Shares also fell less than 1 percent yesterday at competitors Barclays Plc (Charts), Citigroup Inc. (Charts) and Lloyds TSB Group Plc (Charts).
OT AMT question
if you make over 200k have kids and qualify for an 800k home isn’t amt crushing your mort interest deduction ?
Ahhhh, the ol’ AMT. Seems like a lot of people forgot about this ‘un. However, it seems that congress is going to up the minimum, but that won’t help this year. I think in your question, AMT would kill these people. If you make something in the 65K range you are subject to it, if I remember correctly. Thankfully, the wife and I just missed the bar on that one, so I can’t be real sure where the min. threshold is, but I am sure A HUGE number of people are going to be squeezed by this monster this year. Oh well, so much for the interest deduction on that 1mil McManny. On the other hand, I’ll just sit back and enjoy my CA renter’s credit that increased our refund. Thanks, Ahnie, now cut me that check.
If nothing is done, and the standard deduction continues to rise with inflation while the AMT theshold does not, ALL deductions, credits, etc. will eventually disappear. Everyone will either be using the former or subject to the latter.
Home mortgage interest deduction flows thru. Income property depreciation, business depreciation (autos, equipment) do not. Neither do unreimbursed business expenses. Charatible contributions flow thru, but I stopped giving to cash to charities, until the AMT is recitified. I need the cash to pay the extra AMT from disallowed deductions.
Your’e right. The mortgage interest duduction will flow through and be ok. The key for these people is property taxes. Depending on income property taxes get wacked fast.
For 2006 I was not able to deduct 1 dollar of $7,000 in property taxes paid.
I personally know 4 speculators holding a total of 15 ‘investment’ properties in the Phoenix area. This is going hurt. Really bad…..
If I were you, I wouldn’t invite your speculator friends over for dinner, or, if you do, hide your valuables.
Also hide all sharp objects.
And any sheep or other livestock…
These people obviously have no self control.
Got popcorn?
Neil
Tell them I’ll be around to pick up my keys in 2008.
Looks like the party is just starting. The Wall Street Journal had a piece today about why investors didn’t see the sub-prime meltdown coming. The piece was pointing to more trouble ahead. A far cry from the the “we have seen the bottom”, “goldilocks”, “soft-landing” BS of only a month ago.
I love it. Crash and burn.
That’s awesome. We’ve gone from denial to finger pointing. Basically, an admission that things are tanking.
Here is the link to the story (sorry had trouble posting last time) …
http://users1.wsj.com/lmda/do/checkLogin?mg=wsj-users1&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB117210627935015558.html%3Fmod%3Dtodays_us_nonsub_money_and_investing
Miss yellen can start waking up at night again when inflation is entrenched and raging……… and housing is still going down…….
We all saw how japan managed its bubble in 1990 by manipulation and refusing to allow business to go bust they streched it out 17 years. Bravo. Now nobody wants to spend money in Japan because of entrenched Deflation. The USA will do it different though, nobody will want to save money because of entrenched inflation.
This easy money won’t save the housing market though but will blow another bubble. Look at the stock market now, lots of liquidity is a reason I keep seeing. But I expect the third bubble won’t be in stocks again but in something else? Or maybe we will just get deflation after all. With all this debt that is a reasonable outcome.
Its just being postponed.
What I can’t believe is the fact that the wider market has not discounted the housing bubble blow-up. Or, if it has, it does not expect it to impact the economy that much. Personally, I see the drain in liquidity as the only thing really driving the economy. It just baffles me that people are not selling like mad right now. Any comments on when/if to expect a correction?
Any comments on when/if to expect a correction?
————————-
Ahhh…if we knew this, we’d all be rich.
Many of us have been expecting a correction for a long time — and getting punished for it.
I’d suggest waiting until it’s obvious — just follow the trend — but I’m not a knowledgable investor. Just speculating.
The liquidity being pumped in seems to be going mainly into Equities (worldwide) and into Commodities (including Gold/Silver) right now. I agree with others that it is going to take more than just running the printing presses to have the liquidity flow into Housing which is becoming the pariah of investment vehicles (it should never have been an investment-vehicle to begin with).
It is disgusting and un-nerving to hear fed reserve employees make flippant comments about “trouble sleeping”.
Aside from a lack of professionalism, it drives home that these clowns of the bureaucracy really believe they are in full control of things. This clown should stick to the basics - low inflation, reasonable employment.
Had they done that as a group, we would be dealing with fewer asset bubble problems…….and her implied statement that we are out of the woods on the housing problems is simply ludicrous and not supported by the data, which remains poor.
“Janet Yellen, president of the Federal Reserve Bank of San Francisco, is sleeping better than she was a year ago, thanks to signs of stabilization in the housing market. Last year, when it looked like the housing downturn could turn into a bust, Yellen said she found it more difficult to sleep.”
“‘I’m waking up less at night than I was,’ she said.”
Helen,
You don’t know it yet honey but in 2 years from now, you will walking around like a zombi.
“Janet Yellen, president of the Federal Reserve Bank of San Francisco, is sleeping better than she was a year ago, thanks to signs of stabilization in the housing market. Last year, when it looked like the housing downturn could turn into a bust, Yellen said she found it more difficult to sleep.”
“‘I’m waking up less at night than I was,’ she said.”
Nero Fiddled while Rome burned.
Question for you smart people:
What if the Congress allowed say an increase in the maximum capital loss to say $50,000 or $100,000 a year or your AGI for the year?
What would that do to the housing mess? Would people bite the bullet and finally take the loss?
I know a few people who will probably pass away first before they use up all their stock losses from the dot com bust.
I say it’s a good thing most people don’t know what a capital loss carryover is and if they could actually find it on the tax return - still wouldn’t know what is meant
Otherwise some might be in big trouble with their spouses - as for most it’s a mark of shame from the tech bust
As for congress expanding the caps each year for real estate flippers to dump their losses in - it won’t happen
1. the crash would accelerate
2. big loss to the treasury
To explain it further - any sudden change in the law to allow (often highly taxed) wages in to in effect now to be offset by cap losses in idiotic investments in real estate - is not going to happen
Congress no doubt loves generally productive upper middle class/lower-end wealthy classes of taxpayers paying near confiscatory rates (e.g. 40 to 45% fed/state combined in many locales at the margin) for wages