“Conditions Continue To Be Challenging”: CEO
Some housing bubble news from Wall Street and Washington. “D.R. Horton Inc. early Thursday said profit in its latest quarter fell 85% from a year earlier as the company booked land-related charges and said it continues to grapple with a challenging market for residential housing. Its results for the quarter ended March 31 included pre-tax charges of $67.3 million for inventory impairments and $13.9 million for write-offs and costs related to land-option contracts it does not intend to pursue.”
“‘Market conditions in the homebuilding industry continue to be challenging in most of our markets as inventory levels of both new and existing homes remain high, and further increases in the use of sales incentives continue to put pressure on profit margins,’ said Chairman Donald R. Horton.”
“The company said it closed 9,792 homes in the latest quarter, down from 12,570 a year earlier.”
From Reuters. “D.R. Horton, the largest U.S. home builder, on Thursday said it has cut 10,000 jobs since last spring and now has a staff of about 7,300. Horton also said it has seem some increased defaults on relatively new loans.”
From MarketWatch. “Pulte Homes warned late Wednesday that losses for the first quarter will come in deeper than previously anticipated. The homebuilder said it expects a net loss from continuing operations for the quarter. The results will include between $130 million and $140 million in land-impairment charges.”
“‘The operating environment for homebuilding continues to be challenging, with orders and closings remaining under pressure,’ Pulte CEO Richard Dugas said.”
“Net new orders fell to 8,499 for the quarter, a 21% drop from the same period last year. Closings dropped 37% to 5,420 homes during the period.”
“Many investors and analysts expect the market downturn, caused by a glut of homes for sale, tighter lending standards and weak demand, to worsen until at least the second half of this year.”
“‘I think it’s a pretty severe downturn,’ said Robert Curran, Fitch lead home building analyst. ‘Could it be more severe still? Obviously.’”
“‘The builders are the last ones to see that, because the resale market drives the new home market,’ said analyst Jim Wilson. ‘You have to start seeing (that) the resale market is seeing less inventory, and so far it’s not. It’s seeing more,’ he said.”
“‘There’s way too much resale inventory sitting out there that hasn’t been and needs to be marked down in price and needs to clear before you have any need of new homes,’ Wilson said.”
“Meanwhile, the year’s supply of new houses is expected to be about 1.2 million, Fitch’s Curran said. As a result, home builders will add 300,000 homes to the current overhang of new homes for sale, Curran forecast, adding that the overhang is already troubling at about two months worth of sales.”
From CNN Money. “Swapping risky mortgages for those with steady payments sounds like a reasonable plan to keep millions out of foreclosure. But the way mortgage products have been packaged and sold into financial markets presents a big hurdle.”
“This kind of restructuring may be complicated because most of the loans have been ’securitized,’ bundled together and sold into the capital markets.”
“In the first place, servicers don’t have quick access to the actual groups that own these loans. A bigger problem may be that the servicers’ contracts with investors often prohibit them from taking remedial actions with non-performing loans.”
“‘Subprimes sold into securitization are governed by terms of agreements signed when they were sold. Servicers have to abide by those agreements,’ says Doreen Woo Ho, president of Wells Fargo Consumer Credit Group.”
“Terms may, for example, not allow the loan to be modified until it is at least 90 days delinquent, according to Marietta Rodriguez, a director of a non-profit, community development organization.”
“In addition, the agreements between servicers and investors may not allow borrowers to work out their problems unless they can bring their payments current within a six-month period, according to Rodriguez. ‘That puts the borrower in a serious financial bind,’ she says.”
“Another impediment that can work against bailout efforts is stratospheric home prices. Many homes bought with subprime loans are in places like California and other high-cost areas where even many modest homes far exceed the conforming loan limits of these agencies, which is about $417,000.”
“Federal regulators and mortgage lenders Tuesday warned Congress against moving too aggressively to regulate the mortgage industry in response to a soaring number of home foreclosures.”
“‘There is no silver bullet,’ Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corp., told the House Financial Services Committee.”
“‘I think we should hold the servicers’ and the investors’ feet to the fire on this,’ she said, referring to failure of investors to conduct due diligence before buying mortgage-backed securities. ‘We did not have good market discipline with investors buying all these mortgages. There may be some issues of disclosure.’”
From Bloomberg. “A bailout for subprime borrowers wouldn’t be the best use of government dollars, said Representative Spencer Bachus of Alabama. ‘I can’t agree to taking taxpayers’ money and addressing this problem,’ Bachus said.”
“Freddie Mac CEO Richard Syron also cautioned against a borrowers’ bailout. Such a policy ‘could have lasting, unintended consequences that harm the housing finance system in the long-term,’ he said. ‘The ability to enforce a mortgage contract, including the use of foreclosure, is critical to continued investor confidence in the U.S. housing market.’”
“Federal lawmakers can take steps to protect consumers from bad mortgages in the future but have limited options in how to assist troubled borrowers today, a Congressional panel heard.”
“‘Legislation going forward will not help this current group of people who are entrapped,’ said Barney Frank, chairman of the House Financial Services Committee at the opening of a hearing on the subprime mortgage crisis.”
The LA Times. “A Capitol Hill summit on the mortgage problem (was) convened by Sen. Christopher J. Dodd. Following the summit, Dodd said…that ‘lenders raised questions’ about what can be done to rework mortgages that may be pooled together in large securities owned by investors.”
“The summit fueled no expectation of a taxpayer bailout. Dodd, who is chairman of the Senate Financial Services Committee, has been aloof to the plan, and Sen. Richard C. Shelby blasted it.”
“‘It’s a bailout,’ Shelby said. ‘You can’t save people from themselves in the marketplace.’”
“Some in the Senate have raised the possibility of direct government intervention to help sinking borrowers. Dodd, who is chairman of the Senate Banking Committee, has backed away from the idea. ‘I’m not overly anxious to legislate,’ he said Wednesday.”
Sorry for the OT, but I know of someone who is moving from Colorodo Springs to Kansas City, so if there’s someone who knows about selling in CO and buying or renting in KC, the advice would be greatly appreciated. Thanks in advance.
The secret to selling in CO is praying. If that doesn’t work, consider dropping the price by 25% less than similar houses in the neighborhood that are on the market. Then, look in the mirror every morning and say “My house will sell.” If that doesn’t work, consider using frayed wires on all appliances.
For renting, just offer a FB, one-half of the going rent in the area for his empty money bleeder. The FB will jump at the chance. Then ask for a month-to-month lease and renegotiate down every month.
I rent in KC. Best advice on finding a rental is rentclicks.com. I found a house in Olathe outside of KC (but in the better blue valley school district) VERY nice deal. Good luck.
My sister-in-law is considering moving to the Bethesda, MD area. I am advising her to rent, at least for the first year. Two reasons:
1 - I think housing prices drop in the DC area, so renting makes sense. I think it drops for longer than one year, but let’s start at one year and reassess at that time. Flexibility is good.
2 - Get a better sense of what area she wants to live in. Best schools? Short / easy commute? Housing affordability?
It’s hard to make great assessments on issue two on a couple of visits and a 4-week window in which to buy a house. Live there for a year, then decide where you want to live for the longer term along with being able to be more picky about which house you’d really like to live in.
I would advise your friend to do the same in regards to identifying where to live in KC.
JMHO
Jimmy, ylekiot, and HK, thanks for the advice, I will pass it all on.
From this morning’s AZ Republic. Look at the reader comments following the article—not too much sympathy here.
http://www.azcentral.com/news/articles/0419predatory-loans0419.html
People who are active in the internet tend not to be subprime borrowers.
But they do tend to vote…
And they tend to be educated
And they tend to use the word tend.
And they tend to manage their tender.
And they’re not afraid to express their opinions.
Nor make fools of themselves.
Well, I’m not sympathetic because this is all a cover for bailing out the lenders on Wall Street and the banks. They don’t want foreclosures, they will lose a lot of money and the numbers involved will affect the economy.
The powers that be know that no one will be sympathetic to the lenders and their losses.
Beyond this, most Arizonans I have met are amoral, selfish, contradictory, argumentative, and ignorant.
“Beyond this, most Arizonans I have met are amoral, selfish, contradictory, argumentative, and ignorant.”
AZ certainly hasn’t cornered the market on that behavior. Spent any time in So Ca?
Yes!?
Hey! I resemble that remark!!
Actually I was having a conversation with my 9 year old this morning about how folks in CA seem to be less than nice when compared to folks in other states. We had a perfect example experience when he was 6 months old. Traveling from SFO to DFW. In SFO I could not get all of the bags off of the bus at the terminal because people were pushing me aside to get into the bus. I had to yell at the driver to stop him from driving away. When we got to DFW, people were holding doors open and even helped me load and unload the bags.
It may have something to do with folks feeling under pressure to make more money to pay for the inflated life style. Under the gun financially many folks will kind of move inward and become more focused on what they need to do in the next minute/hour/etc. This may result in a kind of social myopia and isolation. But because we are all crammed into/onto cities/highways etc. organisms acting solely out of their self interest will tend to create conflict and inflict harm on other organisms when those goals do not match.
No excuse, but just a bit of cognitive meandering.
People in SF may be under the gun financially, but people in TX are under the gun.
Funny, we’ve seen the opposite effect. Plenty of nice people in California and nothing but surly crapitude here in our heartland home state.
Wonder if the halo effect is just a function of being a visitor instead of a native.
Penina,
Ever hear the phrase “an armed society is a polite society”?
Hey! I resemble that remark!!
Actually I was having a conversation with my 9 year old this morning about how folks in CA seem to be less than nice when compared to folks in other states. We had a perfect example experience when he was 6 months old. Traveling from SFO to DFW. In SFO I could not get all of the bags off of the bus at the terminal because people were pushing me aside to get into the bus. I had to yell at the driver to stop him from driving away. When we got to DFW, people were holding doors open and even helped me load and unload the bags.
It may have something to do with folks feeling under pressure to make more money to pay for the inflated life style. Under the gun financially many folks will kind of move inward and become more focused on what they need to do in the next minute/hour/etc. This may result in a kind of social myopia and isolation. But because we are all crammed into/onto cities/highways etc. organisms acting solely out of their self interest will tend to create conflict and inflict harm on other organisms when those goals do not match.
Look into the work on Game Theory done by John Forbes Nash.
His results showed that when given a choice people will be nasty to the other player. Since his work was published years ago there have been some challenges to his methods and analysis, but there may be some clues in it still.
No excuse, but just a bit of cognitive meandering.
“Beyond this, most Arizonans I have met are amoral, selfish, contradictory, argumentative, and ignorant. ”
Probably because they’re all SoCal transplants.
–
“Some in the Senate have raised the possibility of direct government intervention to help sinking borrowers…”
Or, “direct government intervention to help sinking” lenders?!
Yes, we are here to help ordinary Americans, right Sen. Dodd?
Jas
He wants to appear to help the borrowers to garner votes but really wants to help the lenders to get donations.
somebody needs to get the word to these borrowers that the absolutely best thing for them to do is simply walk away.
I have been writing to every govt rep listed in these articles. I have written to my own reps (state & fed) as well. I berate them if they support a bailout and encourage them if they do not. I use their home office for the city & zip (USPS.com has the +4) then fill in my own info in the other spaces & the body of the message. I acknowledge that I’m not their specific constituant but that I am concerned and affected by their decisions. If every one in Ben’s constituancy did this with the reps we could probably cause a solid shift away from this nonsense.
“The summit fueled no expectation of a taxpayer bailout. Dodd, who is chairman of the Senate Financial Services Committee, has been aloof to the plan, and Sen. Richard C. Shelby blasted it.”
I guess all our letters to Dodd scared him off.
hillary and obama are still for bail
tax em hard
Hey flat,
Your beloved Republicans are spending 10 billion dollars a week in Iraq. I really liked what Bachus had to say, but then I read this:
http://bachus.house.gov/HoR/AL06/Issues/Rebuilding+Iraq+and+the+War+on+Terror/
not a rep
try this http://www.fcta.org
or this http://www.cagw.org
flat,
You ever attack Repubs for spending 10 billion dollars a week in Iraq?
all the time
http://www.lp.org
And what about the $8 billion in cash the Bushies sent to Iraq that just “disappeared”…?
This is the kind of legislation that passes at midnight on a holiday as an amendment to an omnibus spending bill. These guys don’t put the crappy bills out in the open, they sneak them through when no one is looking.
I am expecting Senator Dodd to attempt some kind of stealth bailout while denying above board support. The taxpayer will be forced to pay indirectly and unknowingly, similar to the way taxpayers are forced to bear the inflation tax imposed by the Fed, which steadfastly insists that keeping inflation under control is their highest priority.
Isn’t that what’s happening with Freddie Mac stepping in to refinance distressed subprime borrowers at below-market rates?
Bingo. “No man’s life, liberty or property is safe, when the legislature is in session.” That’s all you need to know. Leave the details to the boys (and girls) on the Hill.
more NO SPILLOVER news
Reuters
Bank of America profit up but card losses rise
Also along the topic of “no spillover”
“Haverty Furniture Cos., Atlanta, Ga., said that its furniture sales in March dropped nearly 12% from the year-earlier month–to about $66.1 million. Same-store sales were down 13.5%.”
Interesting to read (once again) how difficult it is to work out problems on a loan that has been “securitized”. Every single year I receive some phone call or email from one of my own mortgagors requesting something like, “I have to pay a huge veterinary bill, can I skip a month’s mortgage payment?” My answer is always yes, if they’ve been paying regularly for a while. I tell them NOT to try to make it up. I just send them a new amortization table. As you can imagine, the one month that they skip usually translates into several months of additional payments at the far end of the mortgage, but what do I care? They don’t seem to care either. The good service they get from a non-securitizing retail lender is part of what supports my 9% interest rate.
How do borrowers know you won’t securitize? Do you put it in the contract?
I don’t advertise, and all my business comes in by word of mouth. I have been in business 14 years and am very naive (but lucky). The clientele probably know that I wouldn’t have the slightest idea of how to securitize even if I wanted to. I do get offers from outfits that want to buy my notes, but they always want to buy the 9% notes on some basis that would yield them 14%. I just ROTFLMAO.
Feel like investing in the Sacramento area in 3 yrs? But you wouldn’t like to loan to me because I like to double up on payments or send in a little extra when I can to knock down principal >; )
Hey AZ_Lender…
The Boston Globe ran a story this morning about a mortgage loan officer in NH who got bagged by the IRS for failure to file for the years 2001 thru 2005.
The article went on to say the dude averaged $734k per year for the period.
The bank branch loan officer who handled all my real estate related loans over the last 20 years never made more than $50k for essentially doin’ the same job.
WTF is with these outrageous income figures?
One of the books I read in college that had the most lasting impression on me (hey, I still remember it all these years later) was called something like “The Moral Economy of the Peasant.” The basic observation was that susbsistance farmers who rented their land would prefer a landlord that always left them enough to feed their families, even in years in which crop yield was relatively low. The landlord could then take a heck of a lot more in years in which crop yields were good. These landlords might take a larger portion of the harvest if you agregate it over a decade or more than a landlord that demanded a fixed rent every year no matter what the crop yields were, but the farmers knew that keeping the extra rice in year 4 didn’t do them much good if two of their kids starved to death in year 2.
Your business model is very different in detail, but the basics are the same. You provide some security against catastrophe to people who are living near the edge.
Sounds like everyone is happy.
I also think the book stated that this was one reason why westerners had such a hard time getting the farmers to switch to higher yield rice varieties. The new types had a higher yield on average, but also had a slightly higher risk of complete crop failure each year. The scientists couldn’t figure out why the farmers didn’t want to switch.
Those same basics to which you refer were pointed out to me by a Forbes article about 10 years ago, saying that the Korean bankers would make out better than the Japanese bankers, because (according to the article) the Korean bankers were motivated to create ways for people to meet their obligations, while the Japanese bankers were more in the mindset of “I take your house, I take your boat, I take your trailer”. Regardless of possible falsehood of the K/J comparison, the general point is the same as yours.
az- so you are basically a lender just a personal one and on a small scale?
In your examples the Korean model rewards borrowing and not being responsible. The Japanese model rewards not borrowing and if you do borrow pay on time.
The Korean model keeps the people on the top in charge because individuals are not encouraged to save but do have incentives to borrow.
The Japanese model gives more power to the people on the bottom because they become self-reliant.
Which model do you think America is following?
I’m not sure I agree with the tone. Anyone who has done any business as a lender and/or investor with a third party knows that getting into a fight (litigation) or foreclosure is a lose-lose situation. The asset drops in value based on the sale process, legal fees mount in fights, recovery is generally lower for the investor.
The Korean system seems to be a bit more pragmatic and realistic. The Japanese seems quite rigid, which pre-supposes that the world works in a very organized manner, just like the schedule for early morning exercises.
AZ Lender is simply a lender that also sells flexibility (the cost of which is the difference between his rate and the rate of a more institutional competitor). The same decision is made all the time for commercial loans–do you go with a conduit lender (securitized), or do you go with a balance sheet lender (local bank or insurance company). The conduit will give the better rate, but the balance sheet lender will generally have more flexibility.
I must say though that the difference between these two options from a commercial side are narrowing, and the difference in rate between the two options isn’t nearly as large as what I think AZ Lender is getting.
“…model rewards borrowing and not being responsible”
Believe this applies to “corporations”… as well as individuals.
Isn’t the FED Reserve a “corporation”?
“because they become self-reliant”
Self-reliance is dead…in the context of 6,000,000,000 +
people on a spinning, wobbling, planet.
Self-reliance has become archaic.
American Heritage Dictionary - Cite This Source
ar·cha·ic (är-kā’ĭk) Pronunciation Key
adj.
1. also Archaic Of, relating to, or characteristic of a much earlier, often more primitive period, especially one that develops into a classical stage of civilization: an archaic bronze statuette; Archaic Greece.
2. No longer current or applicable; antiquated: archaic laws. See Synonyms at old.
It sounds like, on a small scale, the landlords back in the day were partners with the peasants. Take some downside risk in exchange for some upside reward.
Sounds like the same deal with AZ Lender. Don’t tell anyone that it works, you might find more flexible lenders in your space.
“A bailout for subprime borrowers wouldn’t be the best use of government dollars, said Representative Spencer Bachus of Alabama. ‘I can’t agree to taking taxpayers’ money and addressing this problem,’ Bachus said.”
That is the first sane thing I’ve heard from a politician (Ron Paul excluded) in a long, long time.
” Freddie Mac, Fannie Mae and the Federal Housing Administration testified that they are preparing to offer more lenient loan terms for hard-pressed borrowers who would like to refinance into safer, long-term mortgages with fixed interest rates. But they cautioned that there is little they can do to help those who used fraudulent means or extremely lax lending standards to buy homes they could ill afford in the first place.”
The first thing that should be done is check a borrower’s IRS income against the amount they claimed they made when they applied for the loan. If the amount claimed is higher than the actual amount, they should be prosecuted for lying on their application for a home loan.
The financial day of the long knives, has arrived…
Are loan applications signed on under penalty of perjury? Seriously, I don’t know. They might be under the government programs.
Any other crime that you had in mind?
I believe that lying on a mortgage application is mortgage fraud, and is prosecutable:
http://tinyurl.com/9d8o2
Old:
“The income tax has made more liars out of the American people than golf has… Will Rogers
New:
“the income tax has made more liars out of the American people than home loan applications has.”…Bugs Bunny
I suspect statements made on loan apps are “true and accurate to the best of my knowledge”, but regardless, if you claim on a loan app to make $100k but your tax return only says you make $50k, I think you’ve best pay up to the government for tax evasion.
Well, if someone told the IRS about it, they might audit you , but I doubt the statement on the application itself is sufficient evidence all alone to create a deficiency. Bank records, outstanding credit balances and evidence of spending habits might get you.
I would sure hate to see all the liar loan FB’s sent prison or even required to be supervised on probation. Talk about a big bill….jail isn’t cheap.
jail isn’t cheap
Neither is the pending societal cost of the mess caused by all these liars.
In a stroke of good luck and sure fire business skills…
d.r. has managed to keep 15% of their bottom line intact and this lowers expectactions and wall street is chomping at the bit to pump them up, because the most they can fall is 15% more, right.
Too many drinks @ a Tribeca watering hole, kinda logic.
A Strong Buy on this one~
Some housing bubble news from Wall Street and Washington. “D.R. Horton Inc. early Thursday said profit in its latest quarter fell 85% from a year earlier as the company booked land-related charges and said it continues to grapple with a challenging market for residential housing. Its results for the quarter ended March 31 included pre-tax charges of $67.3 million for inventory impairments and $13.9 million for write-offs and costs related to land-option contracts it does not intend to pursue.”
And D.R. Horton’s stock trades up on the dismal news. I think traders think the infamous “double-bottom” has taken place for HB stocks. The fast money of these traders will never have the patience to endure the long and slow road to recovery in the industry.
Here is my proposal for a “bailout”:
Banks become co-owners with the FB’s. Say an FB borrowed a 500K suicide loan. The bank assumes 50% ownership of the house and reduces the mortgage to $250K. If the house is ever sold then the FB and the bank would split the gain or loss.
I’m sure the banks won’t be too crazy about this, but:
1) It would stem the foreclosure wave
2) (best of all) Banks would become far more careful about to whom they lend money.
OT: I’m done. I can’t take this market disconect any longer. Everyone get out of the market because I’m going to capitulate and go long.
“Sell in May and go away”
Has the market has remained irrational longer than you can remain solvent?
i hear ya, brother. let the market decide for you.
No, this would completely destroy any access to capital. Banks would simply not lend to anyone. It would also destroy lending to those with good credit. That is why any government bailout or new laws will only make housing worse. The solution is letting the market work it out. Investors in bad loans will take losses. This will reduce their willingness to invest in such moronic loans in the first place.
Are the banks any better off if they end up with a millions of foreclosed houses that they have to sell for 50 cents on the dollar? Or bulldoze them because there is no one to sell the houses to?
I’m not talking about any taxpayer money here. I’m saying that the lenders should eat their own dog food. It would also remove any incentive for them to offer 100% financing (isn’t this what we want).
I know that there is a contingent on this board with a “burn baby, burn” attitude, but I do agree with others that a hard crash will hurt more than just the FB’s, specuvestors and lenders, and if a way to prevent such a hard crash is possible, it should be explored.
But like I said, banks are probably none too eager to become “investment partners” with their FB’s. But it has to be better than a default epidemic.
“I’m saying that the lenders should eat their own dog food.”
Maybe they’ll end up eating some of that tainted dog food!
There is almost always someone to sell the house too. If it’s really bad, the city comes up with a homesteading act. Didn’t SF do this back in the 60s in some of it’s really troubled neighborhood? I think other cities have done this as well. Bull dozing is getting a zero return and I think most banks will take even a tax credit from the city or county before they break out the heavy equipment.
“But it has to be better than a default epidemic”
Focus is to narrow…expand your mind…think: Pandemic
Colorado, ha ha very funny. Which of the 50% stakeholders gets to decide on when to sell the house and at what price? Does the bank (ha ha) pay half the prop taxes and insurance? ha ha. If banks were not careful about to whom they lent money, they know their best solution is to speak softly and foreclose ASAP, trying to beat the other banks to the exit door.
The devil is in the details. Perhaps both have to agree when to sell the house. Or since the banks half is paid for, they could decide (as long as there is no loss). Taxes and insurance? As I said above, irresponsible lenders should eat their own dog food.
Now I know that there is no chance of this happening, and I expect the powerful banking lobby will instead work to get taxpayers to eat the dogfood. You don’t get rich by assuming responsibilty for your mistakes after all.
Partial foreclosures? That’s an interesting idea.
If the bank ownes 50% of the house, can’t the bank charge rent on that 50%?
Like I said, the devil is in the details. The trick is to create a scenario where the FB won’t have to walk away. The idea is to buy time for the markets to recover (yeah, fat chance) to a point where at least the loss is minimized. Of course if Joe builder keeps build 2 million houses a year that will never happen, but the banks can shut Joe Builder down.
Some sort of headed ho, I hope.
“‘Subprimes sold into securitization are governed by terms of agreements signed when they were sold. Servicers have to abide by those agreements,’ says Doreen Woo Ho, president of Wells Fargo Consumer Credit Group.”
The only way out of that quagmire would be for the government to buy those securities and go into the securities business itself. Bad move for a lousy investment.
Pulte: “losses … deeper … than previously anticipated”
We all noticed for some time that the builders, at least in their public statements, were somewhat more realistic than the RE agents, but still the builders have not grasped the magnitude of the problem.
Can someone comment on why the builders are so screwed? Builders have been building houses and selling them profitably 5 years ago. Then house prices doubles and they made even more money. But their building costs could not have also double in the last 5 years. Sure inflation, construction costs, and land costs might have increased, but definitely not in the same manner as house and RE prices.
So maybe builders will have to forget their 50% profit margins and go back to 10-15% profit margins they enjoyed 5 years ago.
Land prices are the key–land prices are generally set in a bidding situation and act much differently than the price of lumber or labor.
The way builders determine what they can pay for a parcel of land, they take the expected revenue for the home, back out the costs of construction (including soft costs and interest), back out a profit margin of say, 10%, and then bingo. They have their number that they can pay for the dirt.
If things go well, home prices go up, and since they have locked in their land prices, they are set.
If things go poorly, they are underwater–they paid too much for the land.
Land is the most volatile cost in this whole equation. If a piece of land is, say, 25% of the price of a $400k house, it is worth $100k. EXPECTED profit margin is $40k, and the cost to build the house is $260k. Now, drop the price of the house to $360k. Do the same analysis.
10% margin - $36k
Cost of construction - Still $260k.
Land value - $360k-$36k-$260k=$64k.
A 10% drop in home values in an area correspond to a 36% drop in land value.
The main point is that builders do not have a business plan that assumes 50% margins. That’s just what happens if home prices go up dramatically after you have bought your land. If margins were all expected to be 50%, new builders would come out of the woodwork and big up the price of the land, driving margins down.
Today, builders are faced with two main problems–1) the interest carry on the land they own and homes they’ve built and 2) the land they bought recently is too expensive to make a profit on when they start to build houses on it.
A stable market is OK for a builder. One that rises is great. One that falls is a nightmare.
Everybody gambled.
Everybody.
Each house they build adds to an already overloaded supply of housing. Yes, they can continue to build and…..in the process continue to cut their own throats by adding to supply as demand is…..RAPIDLY SHRINKING.
You assume they will always be able to undercut the rest of the market…..is this a valid assumption when more and more of the market is made up of REO’s and other (increasingly motivated) sellers?
I suppose some will survive, even some will manage to eak out that 10-15% profit you describe in some parts of the country. The problem is; wherever there is a market for builders in this country where some profit remains….that’s where other builders will direct their resources as well, no?
Maybe you’re right but I think it will be a lot more difficult for builders given the gross imbalances THEY’VE helped create.
In some markets land is the lions share of the cost. Think of property that is close to the beach in SoCal.
In others, unless the supply of subdivided land is artificially restricted, land should be more reasonable.
But there is no doubt that builders have high markups, which probably explains why the prefer to build in places like Victorville, where they were charging 300K for houses that sold for 100K 5 years before. I doubt that their land costs skyrocketed in Victorville.
“I doubt that their land costs skyrocketed in Victorville.”
This is absolutely wrong, which is why builders are in much more trouble than everyone thinks.
Land costs skyrocketed wherever home prices skyrocketed.
If I’m a landowner, and values of homes went up by $10k, I raise the price of my land by $9k. Why? Because 3 different builders can all afford to pay $9k more now. It is a very efficient if you’re a landowner and public homebuilders are in buying mode with cheap capital from Wall Street.
This is why land speculators can make absolute fortunes. Homebuilders only make fortunes if home values go up rapidly between the time they buy the land and the time they sell the house on that land.
And now to find a way to get in on the land-speculation business
Definitely a great discussion, thanks! It also makes me think further on this land issue… we keep seeing graphs on house prices, is there any resource out there that shows land prices in various areas and their increases? I guess that most of the land is owned by state / government. So then is the value of the land gets set simply by the price builders are willing to pay for it in an auction? I can start seeing a lot of local governments going into spending deficits now that their building permits and land sale income is drying up after the splurge they had in the last couple of years… Higher property taxes as the solution, for the win!
“Another impediment that can work against bailout efforts is stratospheric home prices. Many homes bought with subprime loans are in places like California and other high-cost areas where even many modest homes far exceed the conforming loan limits of these agencies, which is about $417,000.”
———————————————————————————-
I think this is the issue that will stall any action on a bailout here in California at least. There are alot of FB’s in California with loan balances in the $ 500 - 700 k range. Even if you could get placed into a 6.5% fixed rate loan, what good would it do?
Wow! 1.3M at 30yr payoff. (6.25 %) Do they really think the house will be worth that in 30 yrs?
Yeah, I had forgotten about the conforming loan limit. California, no Fannie/Freddy bail-out for you.
“Yeah, I had forgotten about the conforming loan limit. California, no Fannie/Freddy bail-out for you.”
And don’t forget all those California AltA loans that are coming down the pike. A lot of those will exceed the conforming loan limit also.
California is home to something like 20% of all sub-p loans, and probably (due to the high prices) 33% of the dying ones. So…forget the Left Coast - maybe they can sell these 40 yr. wonders to a few folks in Topeka.
Exactly. I just don’t get the disconnect between these bail-out plans and reality. When you talk “starter homes” in CA at $600k and they were bought with 0-down, how on earth would a household earning, say $60k a year be able to afford a fixed rate 30 or 40 year loan?
Uh, folks…We’ve been reading Ben’s note’s now for years, and at this point the over-all trend has definitely taken the southern route. Remember those ‘things are in the saddle and riding mankind?’ Sorry for this prediction, but everything I’ve read lately leads me to believe that the days of wine and roses are over. Housing and it’s effects on this economy just went over the cliff.
totl…i would agree with your assessment that it “went over the cliff” but it seems that until it hits the bottom, it’s having very little affect on the broad economy. any guesses on what quarter this year (or next) the broader economy will start to feel the effects of a widespread housing recession?
It begins Q3, 2007, IMHO. Not sure what’s keeping the stock markets up all around the globe…
Hey Dodd:
Props to you for announcing your failed presidential champaign on TDS, but in case Jon wasn’t clear with you?
You’ve got a Chinaman’s Chance of winning, similar to said Chinamen’s possibilities of collecting that Trillion Dollar debt, we owe them.
vegas isn’t taking action, either way.
Is that a racist commet?
maybe if you’re a Chinese gambler
1 result for: a chinamans chance
Pronunciation
–noun, plural -men.
1. Usually Offensive. a Chinese or a person of Chinese descent.
2. (lowercase) a person who imports or sells china.
3. (often lowercase) Political Slang. a person regarded as one’s benefactor, sponsor, or protector: to see one’s chinaman about a favor.
—Idiom
4. a Chinaman’s chance, Usually Offensive. the slightest chance: He hasn’t a Chinaman’s chance of getting that job.
Sometimes you just have to punt on 3rd down and break the rules, a bit.
Besides…
Who made you chief of the Pronoun Police, commisssioner Gordon?
I haven’t heard anything about all the ‘offensive’ words being banned.
Think only happy thoughts!
How about these comments:
An Englishmen’s chance of not conquering another country.
An Irishmen’s chance of saving a bag of potatoes.
A Frenchman’s chance of getting respect from an American.
A Polishmen’s chance of screwing in a light bulb.
A German’s chance of not committing genocide.
An American’s chance of not bombing an Arab country.
All valid points at one time or another, but like most stereotypes, old and antiquated, except for the later.
85 to 90% of our citizenry doesn’t have a passport and thus, hasn’t been anywhere.
They all have very strong opinions about foreigners, though.
I’m with Tortious on this.
Chinaman is an offensive term.
Don’t use it.
No one here knows what anyone else’s race/religion/national origin/whatever, is, so why poison the discussion?
Tortious,
Do you know why god invented whiskey?…So the Irish wouldn’t rule the world!
It’s dawned on me that the party offended was upset by this:
c
vs.
C
We used to dream, HUGE
Once Upon A Time…
It’s Pole, not Polishmen.(sic)
66:
You’ll need to complain to MS Office Spell check on that one.
ala:
No, Eire. Where do you folks learn to turn your bigotry around to being everyone else’s fault? Fox?
So if i’d simply stated “chinaman’s chance” you’d have not thought I was a bigot, in your mind?
Do you torture yourself in this fashion often, tortious?
Well, it depends upon how often I come across arrogant, ignorant bigots.
Are you often so inane, insane?
was that a typo or some frozen water trapped in an elliptical orbit?
Either way it would be a typo.
I think you mean comment, not commet. (sic)
Do you have anything to write of a substantive nature?
Nah, not a chinaman’s chance.
That clears up any doubts.
You are a tedious little person. No surprise though, as you describe yourself as “selfish, contradictory, argumentative, and ignorant”.
“In addition, the agreements between servicers and investors may not allow borrowers to work out their problems unless they can bring their payments current within a six-month period, according to Rodriguez. ‘That puts the borrower in a serious financial bind,’ she says.”
Maybe all this bailout talk is just a bunch of hot air?? I can’t imagine these subprime borrowers are sitting on cash reserves. What’s the chance of being able to bring payments current in 6 months?? Plus, WMU is focusing on people who’re aren’t behind yet for their “assitance”, but MBS terms require at least 90 days delinquent before terms can be adjusted.
We can only hope that whatever bailout is offered, a minority of FB’s will actually qualify for it.
Honestly, I think that the biggest issue will be not qualifing for the bailout; but will be who would actually WANT the bailout.
Say I bought at 500K last year. Next year (2 years after the purchase) I am in trouble w/the lender. The houses around me are selling for 375-400K (the comps). Unless I put 20% down (yeah, right) why do I even bother to try to stay in the house. Hand the keys over, and try again in a few years.
In the true bubble areas (50-100% overvalued) I think that the bailout plans are really moot. Who wants these huge loan balances when you can just walk away, buy and then buy it again later at a lower price?
Even so, I am against any attempted bailout; STOP GAMING THE MARKET!
Markets work, and are effective. That’s why we trust them to correctly price items! Just stop with all the stupid games/tricks to try to manuver the market where you want it (that’s what got us into this mess in the first place).
Michael,
Greed got many into this subprime mess. They weren’t going to look a “gift horse” in the mouth (no doc, low-initial-rate, no down payment loans on “investments” that “always” went up in value). When it “looks too good to be true” all too many people can’t resist. Some call it ignorance but it really is underlined with greed regardless of the validity of a given sob story.
Now the same people, those with a defective greed “gene”, are supposed to suck up a decade or so of certain asset decline. Somehow I don’t see very many of these people making the choice to suddenly find “nobility” in their financial heart of hearts.
Giving FBs hope that a bailout is coming is just evil. They’ll do whatever it takes to stay in their homes in hopes of a bailout. At the end of the day, however, it will be late and short. How many times can a FB be F’d?
Not enough!
YKYAFB if you can’t remember how many times you’ve been F’d.
if their is a bailout they should run the borrower credit and look at all of the income they made and see if it was not only a bad loan, but be sure they don’t have a history of debt issues - a bail out should only be at best for folks who have had real hardship
Sounds like the sort of thing you need a bankruptcy court to adjudicate. Why reinvent the wheel?
you’re right- no bail out - what the heck was I thinking, had a weak moment
new marquee” on YAHOO !
Top-Searched Foreclosure Markets
Atlanta Foreclosures
1. Atlanta, Georgia
2. Las Vegas, Nevada
3. San Diego, California
4. Los Angeles, California
5. Charlotte, North Carolina
6. Orlando, Florida
Wait, *which* Democrats are for a bailout?! I want to know whom to write to!!
“‘Legislation going forward will not help this current group of people who are entrapped,’ said Barney Frank, chairman of the House Financial Services Committee at the opening of a hearing on the subprime mortgage crisis.”
So Barney, Tell me how did they get entrapped?
“Many investors and analysts expect the market downturn, caused by a glut of homes for sale, tighter lending standards and weak demand, to worsen until at least the second half of this year.”
What happens then? Will Fannie and Freddie stepping up to the plate and buying subprime mortgages “fix” the situation?
I don’t think so. Any efforts to reflate the bubble will only dissipate more of the national wealth, as we already have a McMansion glut that will only worsen so long as construction exceeds fundamental demand for homes as shelter. And systemic risk will also increase to an ever higher level if Fannie and Freddie load up their unreported balance sheets with toxic mortgages. Only subprime MBS investors will win.
Evidently they think that wage growth will magically make up for the fact that people are in homes that under traditional credit standards are 2-3 time or more than they can afford.
Wasn’t the last average wage growth number up $0.07 per hour for the last quarter? or was it month?
I guess 3 more months of that will be enough to get everything in balance again. Right?
You have pointed out one of the fairy tales that those who claim “subprime lending problems are contained” would like the average American to believe.
I’m not sure what the wage growth stats look like, but inflation is definitely alive right now - houses ARE getting more affordable every minute.
That’s only true if incomes are keeping pace with inflation.
I sort of agree with this, from another angle: IF you already have a mortgage and you’re not a FB, your house payment, as a percentage of your total consumption, is decreasing…
“…as a percentage of your total consumption, is decreasing…”
How about as a percentage of the value of the asset you are purchasing, especially in markets where values are off by 40% or so?
Don’t expect prices in California to come down anywhere near as much as many on this blog think - between high inflation and gov’t intervention, no way.
40% Real declines over 3-5 years are in the bag for California.
Pretty much like the last bust.
foreclosures are equal to the peak of the last bust already in CA.
Yep. I’d even say 40-60%, depending on the market.
I only know of one family of “owners” that is comfortable with thier finances. They bought in 2000 and make good money (near $200K).
Everyone else we know who bought since 2000 is literally a paycheck or two away from insolvency (or worse). Doesn’t matter what their income is or what kind of cars they drive. Those who make 6 figures and drive BMWs and shiny, new SUVs are in just as much trouble as the lower-paid “homeowners”.
It depends on where. Victorville, oh yes. Laguna Niguel - maybe not.
Can we please come up with a term that readily communicates that the post is just WRONG? How many times do we have to go over this? Yes, Laguna (BEACH), Manhattan, Marin, La Jolla, etc. are all very nice, exclusive places and it costs a lot to live there, but it is all RELATIVE. If Laguna Beach costs 3x Dana Point when Dana Point costs 800k, Laguna Beach will cost 3x Dana Point when Dana Point costs 400k.
Thank you, chilidoggg!!!!
It is amazing how many times you hear the “not here” tripe.
ALL areas which have seen price increases as a result of the credit bubble will see price declines. Each and every one.
“A Capitol Hill summit on the mortgage problem (was) convened by Sen. Christopher J. Dodd. Following the summit, Dodd said…that ‘lenders raised questions’ about what can be done to rework mortgages that may be pooled together in large securities owned by investors.”
I am not sure whether it is clear to most people that it is not possible to “rework” adjustable rate mortgages into fixed-rate mortgages without either making offers the stretched borrowers cannot afford, or else injecting some form of subsidy into the deals. FBs who used ARMs typically did so in order to purchase homes they could not afford with fixed-rate mortgages at market rates of interest. Now that market rates have adjusted upwards, it is impossible for FBs to refinance into fixed-rate loans (at market rates) on which they can afford the payment streams. Lurking beneath the hood of any realistic proposal to offer fixed-rate loans at below-market rates is some form of subsidy, most likely borne by taxpayers.
Man is a wolf to man … as witnessed throughout this entire debacle.
How do you bail that out?
I was particularly struck by an article a few weeks ago in that regard…a couple who were being foreclosed on in CO were packing their bags, ready to go back to the dreaded ‘renting’ status because essentially they couldn’t afford to buy the house they bought, with an adjustable rate mortgage that ballooned their payments, which they overpaid for in a big way, etc…
The final note was to the effect that they “knew* how they were going to come back from this, once their credit rating was restored and they could get a loan again…they would seek out a ‘bargain’ from someone who was facing foreclosure!
How ugly is that?!
The one and only real big “flaw”, if you will allow me, with capitalism, esp. in this country. GREED! Many of us will do whatever it takes to screw the next guy or just plain keep our mouth closed when it comes to us being honest/right/in the know/etc. I realize that no where will you find perfect individuals on this planet. However, the number of greedy basturds (spelled that way on purpose) that now reside in this country or want to take advantage of this country/or the system is astounding. There was a day , in this country, not too long ago, when your word and handshake were the bond. If you failed to keep your end for any number of reasons, you went shunned. Now, it’s, “Hey, we were forclosed, but in 2-3 years we will pick up someone else’s mess at a fraction, then sell it 20 years and retire in luxury.” What a screwed up system we live in.
Furthermore, we can compound this greed by all the banksters, hucksters, financial hucksters, midnight lawyer ads, etc. and you can see where this country is headed. Add in all the debt and further corruption and you know where we are all headed.
That’s right, THE FREAKIN’ TOILET!
Sure, sure, you’ve been saying that for years. Well, even Rome finally collapsed and those who fail to learn from history are doomed to repeat it. Geez, where have I heard that and how does that apply to America? I wonder.
Anyway, that’s my daily rant. I love all you guys here. How come we can’t run this country. The ideas here are better than any I read or hear from the knuckledraggingheads on the “HILL” or on TV/radio. What a bunch of dopes that lead this country!
I am disgusted, I need some prozac and a big spending spree on credit at the mall and on eBay. Gotta run, while I’m at it, I think I’ll pick up some foreclosures. Man, I am in a pi$$y mood today. Got mydol?
“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency.”-Keynes
IMO we do not have a capitalist system.
“Geez, where have I heard that and how does that apply to America?”
OCDan,
Love your… Bernie Mack impersonation…LMAO
You hear me America…we need more laws and lawyers to go with’em…we need more judges like Judy & Marilyn…we need more prosecutors & D.A.’s …we need more prisons and prison guards…we need more taxes and H&R Blocks next to Macdonald’s & Starsucks…we need more drugs and Walmarts to sell’em…we need more creative home loans and lenders to sell’em…YOU hear me America…yeah that’s what I’m talking about…
Good luck with the wrecked credit. Sub prime will be no more. It will take 10 years for their credit to heal.
Check “GSEs, Mortgage Rates, and Secondary Market Activities” from the Federal Reserve System:
“We find that GSE portfolio purchases have no significant effects on either primary or secondary mortgage rate spreads. Further, we examine GSE activities and mortgage rate spreads in the wake of the 1998 debt crisis, and find that GSE portfolio purchases did little to affect interest rates paid by new mortgage borrowers. This empirical finding is robust to alternative identification assumptions and to alternative model and variable specifications. “
HUH???
The current housing/mortgage mess is due to avarice,greed and financial irresponsibility. Since when are such people awarded protection???? The words “going to hell in a hand basket” keep running in my head…
It just can’t happen. It will take hundreds of billions (if not trillions) to bail FB’s out. Where is that money going to come from?
As I see it, lenders are either going to have to go on a foreclosure rampage, which will decimate the market and cause even more foreclosures, or they will have to reach into their own pockets to keep FB’s in the houses until things improve (assuming they will). Congress critters know that selling a trillion dollar bailout to the public will be next to impossible, and even if they did borrowing all that money at low rates will prove to be interesting at best. The Fed has its back to the wall with inflation on the rise.
Sometimes, I just wish wecould flush the whole economy down the toilet. I hate where many of the leaders are taking us and I hate how this country is run by corporations that don’t care about anyone, but the bottom line. I am so disgusted by it all. I know, make change where you can. How the heck is that going to help? Everyone is so in debt and/or busy with work or entertainment that no one cares anymore. Who can you actually get to help. A lone voice in the neighborhood isn’t going to do any good.
But I digress. This is exactly why the powers that be want so much debt. First, the servicing of the debt by the sheeple is a feeding tube for these greedy scum that pay for the leaders to stay in power. Secondly, all the debt keeps people from actually taking time to ask the gubmint for a redress of grievances. Heck, by the time mom and dad get home from all the OT at work and get meals ready, no one has time or energy left.
I may be out of line here, or, at the very least, considered a tin foil hat guy, but this has been in the works for awhile. I realize our leaders our dumb, but not that dumb. The systematic erosion of freedoms by both parties has been going on since after GW retired and left Adams in charge. For all his faults, GW was a man with some decency . He could have named himself king and everyone would have followed, but he didn’t. He advocated isolationism in his farewell speech. WOW! Was he right on there. Not a perfect man (see slaves), but much better than what we get now.
Anyway, the next step is to make everyone a debt slave, which the gubmint has done very nicely. What other country would have morons that allow 35% interest for being late 1 day on a loan? Rates like that make Tony Soprano blush and envious. What other country would lead the way in universal default. Oh, sorry, you missed the gas bill, well all 3 CC’s now raise your rate to 28%. Criminey, when will the people say enough is enough. Where is the guy in Tiannaman Square (SP?) in front oof the tanks, but doing that here. I realize we still have it great in this country, but come on. We can do better than settling for the crap we have now.
OCDan,
Careful there, Tom Cruise will be knocking on your door…offering to e-meter you…you sound like a prime candidate for scientology.
35 years ago my schizoid brother made the mistake of getting e-metered by them and gave them my name. For 35 years they have wasted thousands of dollars in postage trying to recruit me. I have never responded to any of them, but they never give up.
As a follow-up to this tragic story, I will tell you what happened to my brother 33 years ago. “Voices” told him to brandish a kitchen paring knife in his underwear in the middle of I-280 ( Silicon Valley) during rush hour. The police responded. He was shot with two twelve gauge rounds point blank. They, in armored vests behind their car doors claimed that they were in fear of their lives and let loose. He was an otherwise, a successful electrical engineer given to occasionally hearing voices his head, otherwise, harmless, and 135 pounds soaking wit and weak as a noodle
So, when I am asked to vote on a bond issue to increase taxes to support local law enforcement to protect society, I vote, and I encourage my friends to vote NO. Cops claim that the most traumatic event in their lives is when they have to kill someone. That is a lie. They love it, and that is what they live for.
Sorry for the rant. I had to get it off my chest after 33 years. I’ll return to normal now.
OCDan, this may calm you down a bit.
http://www.taoism.net/enter.htm
Sorry about the URL: all the pages on the site display the same URL, and checking “source” didn’t give me a better one. Click on Tao Te Ching link in the left column, then go down the page to the on line translation link. Clearly what we are seeing today it the same rubbish people have been dealing with for thousands of years, but today the extremes are so much more extreme, and numbers of dishonest people are mind-boggling. And while I’m on the subject, aren’t people who default on their loans technically thieves? And don’t they have any sense of guilt in leaving others holding the bag?
There’s an article in today’s Washington Post about Freddie Mac spending 30 Billion (from where I wonder) to bail out the subprime market. The madness has begun..
I’ll bet you that they actually underwrite these loans…which could make actually getting all $30B out the door a bit problematic.
Heard on the radio today: help is coming for subprime borrowers, Freddy Mac is coming with 20B to refinance to low fixed rate loans.
I think New Century, Freemont … should send all their problem loans to Freddy.
Sorry, I meant 20Billion but what’s one billion? Anyhow, I used to work at Freddie Mac during the height of the housing fury. When the biz was being explained to me (about how they buy all these mortgages) I asked - where does Freddie get the money?…I remember getting a quizzical look like - does that really matter? I could share some tales but I signed a confidentiality agreement. But let me just ask a hypothetical question - how can one organization possibly keep track of 1/2 the US mortgages?
Definitely wondered where all the money is coming from. Sure, foreigners would buy some, as would hedge funds, mutual funds, pension funds, etc. But at some point, you’d think the demand for these mortgages would reach a saturation point.
Makes the conspiracy theroist in me wonder about those Caribbean hedge funds.