Market Correction Following Unsustainable Highs: NAHB
Some housing bubble news from Wall Street and Washington. “Homebuilder sentiment slid in July to its lowest since January 1991 as fallout from the housing slump and subprime mortgage crisis caused a glut of new homes, the National Association of Home Builders said on Tuesday.”
“The NAHB/Wells Fargo Housing Market index fell to 24 from 28 in June, the group said in a statement. Economists polled by Reuters had thought it would slip to 27. Readings below 50 mean more builders view market conditions as poor than favorable.”
“‘The bottom line is that the single-family housing market is still in a correction process following the historic and unsustainable highs of the 2003-2005 period,’ NAHB Chief Economist David Seiders said in the statement.”
“All components of the index also dipped to their lowest since January 1991, the NAHB said. Declines were seen in all four regions of the U.S., with the northeast and south registering the largest drops.’
From Reuters. “Moody’s Investors Service on Monday changed its outlook on Toll Brothers Inc. to negative, from stable, indicating the company’s debt ratings are likely to be lowered over the next 12 to 18 months. Toll’s cash flow is going to be sharply negative in fiscal 2007 due to capital spending on high-rise projects in New York City, Moody’s said.”
“‘Given the continued build out of the mid- to high-rise towers that are currently under construction, it may be challenging for Toll Brothers to begin generating significantly positive cash flow in fiscal 2008,’ Moody’s added.”
From Thompson Financial. “A ‘triple whammy’ of a poor US residential housing market, lower lumber prices and a near two-dollar pound have conspired to hit profits of Wolseley PLC prompting another round of branch closures and job losses at Stock, its North American building materials business.”
“‘Trading conditions in the US residential housing market are the toughest since the late 1980s…and there is no sign of any upturn,’ Wolseley’s finance director Steve Webster told journalists.”
From Dow Jones. “Wells Fargo & Co said second-quarter profits rose 9%, boosted by continued loan and deposit growth, but some of its big regional-banking peers struggled.”
“Net charge-offs rose to 0.87% from 0.58% a year earlier. The one major blemish was a rise in losses on home-equity loans. Wells Fargo attributed the trend to depressed home prices in some markets, especially the Midwest and California’s Central Valley.”
“Wells executives acknowledged they were caught off-guard by the severity of the losses, which they predicted would continue through the rest of the year. They said they are tightening their underwriting standards and putting a greater emphasis on loan collections.”
“Regions Financial Corp. became the largest bank so far to suffer a sharp deterioration in credit quality. The Birmingham, Ala.-based bank said nonperforming assets jumped to $585 million, or 0.62% of its loans, from $422.5 million, or 0.45%, three months ago.”
“Regions, the nation’s eighth-largest by market value, blamed the increase in part on commercial real estate lending, which regulators and investors fear may be the Achilles heal of many regional banks. Specifically, Regions said it was seeing weaker demand for some real estate projects.”
“It also said it is implementing ‘more prescriptive credit policies, including extensive credit file reviews,’ which added to its pool of nonperforming loans.”
The Wall Street Journal. “Falling home prices are about to take a big bite out of many midsize banks’ profits. Until recently, banks were eagerly doling out loans to real-estate developers looking to capitalize on soaring home prices.”
“Today, as housing markets cool rapidly, banks are starting to reappraise the collateral behind those loans, often finding that land and property values have deteriorated, forcing the lenders to take painful write-downs that are taxing earnings.”
“‘Going in and reassessing the collateral is going to be the key for everybody in the next 12 to 18 months,’ says Gerard Cassidy, a bank analyst at RBC Capital Markets. ‘It’s going to take a pound of flesh off of the lenders.’”
“In San Diego, Atlanta, Minneapolis and much of Florida, more than four months’ worth of finished houses are sitting vacant, according to Metrostudy’s Mike Castleman. Meanwhile, rising foreclosures and mortgage delinquencies are hitting some of the same regions, which is likely to further depress home prices.”
“While major developers, including Lennar Corp. and KB Home, are absorbing charges to account for the declining value of land holdings, some smaller developers…have filed for bankruptcy protection. Bank of America Corp. and Synovus Financial Corp. are among those on the hook for millions of dollars in loans to the two firms.”
“‘There are likely many more very small builders and developers in distress,’ says Citigroup analyst Keith Horowitz.”
From Bloomberg. “Kohlberg Kravis Roberts & Co. canceled plans to raise 1 billion euros of loans for Dutch retailer Maxeda BV as investors shun high-yield debt. More than 20 financing deals have been postponed or restructured in the past three weeks as losses from the U.S. subprime mortgage rout rattled investor confidence.”
“‘We passed on a number of deals where we thought the structure doesn’t work,’ said Patrick Steiner, who oversees $4 billion of assets at Octagon Credit Investors in London. ‘The market was clearly out of control for a while.’”
“Goldman Sachs Group Inc., JPMorgan Chase & Co. and the rest of Wall Street are stuck with at least $11 billion of loans and bonds they can’t readily sell.”
“The market for high-yield bonds and junk-rated, or leveraged loans began to crack in June as concerns that LBOs were becoming too risky coincided with a slump in the market for subprime mortgages that caused the near-collapse of two Bear Stearns hedge funds.”
“‘The underwriters are going to be forced to provide bridge loans and it’s getting pretty ugly, but Wall Street deserves to get smacked around a little,’ said William Featherston, managing director at J. Giordano Securities LLC. ‘It’s been easy for so long.’”
“Hedge fund borrowing to invest in credit derivatives may magnify volatility in a market slump, according to a Fitch Ratings survey of 65 banks and insurers.”
“A ‘dramatic’ increase in hedge funds’ use of credit derivatives has pushed their share of trading to 60 percent of credit-default swaps, and about 33 percent of collateralized debt obligations, Fitch said in the report today, citing data from Greenwich Associates.”
“U.S. corporate bond risk premiums reached the highest in almost two years last week as hedge funds bought credit-default swaps to offset potential losses from the subprime mortgage rout.”
“‘Until all of this recent volatility, investors had been forced down the credit quality ladder, and up in leverage to meet investment targets,’ said Matt King, head of credit products strategy at Citigroup Inc. in London. ‘Now it appears hedge funds are deleveraging” to meet demands from their lenders.’”
The Associated Press. “Say goodbye to easy money, and watch out for the far-reaching effects. The drying up of the free-flowing cheap-debt spigot has been battering the housing market for months, and it’s now spilling over to other parts of the financial world.”
“‘There is no denying it. It is ugly out there,’ wrote the influential credit-market watchers at Standard & Poor’s Leveraged Commentary & Data.”
“As for housing, things have gone from bad to worse in recent days as credit-rating agencies announced they will downgrade billions of dollars in bonds backed by risky subprime home loans.”
“Not only will that further tighten lending standards, but it is sure to rattle the large banks that supplied much of that debt.”
“They said they are tightening their underwriting standards and putting a greater emphasis on loan collections.”
Good luck on getting that blood out a turnip guys, maybe if you hadn’t loaned money to people with no down payments and no history of having any ability to save money you might have something to collect on.
I tell that to my international finance director. He plugs his ears and says, “lalalalalalala”.
How’s your local lumber yard? I noticed the privately owned one in or near Westminster burned down. Hmmm….
And yet local builders still blame high construction costs on materials.
I think they refer to copper and those big stupid trucks.
stack-en-um-deep, and cant sell em cheap.
There is a Walnut yard down the road (abour a mile) from me, and there is almost NO activity.
A large lumber yard down the road by me closed last month.
Hope the Wall St. whores go down big time as the fast, easy days of pimping hanging around on the streets of Wall St are now going south. Perhaps they’l go somewhere else, who knows.
The contagion is spreading from mortgages to many other forms for credit. We’ve started to see problems in consumer spending and non-housing consumer credit. Now that it’s spreading to corporate credit as well, the fallout could be very severe. Just as a credit was extended to a bunch of high-risk borrowers for housing, the exact same thing has happened in the business world.
The difference is that the bad corporate credits are much bigger risks than any subprime mortgage. CCC and below (down to C) rated bonds normally default at 20-25% per year, about 4x the normal risk in subprime. And the losses are higher as well since usually the loan is not secured by specific assets. The geniuses of Wall Street think these loans are better quality than they used to be because default rates have been very low for the last 3 years. They’ve been low because stupid lenders have been lined up to make such loans and keep insolvent companies afloat.
If this sounds familiar, it should. A similar dynamic was at work in RE. Credit flooded in, which pushed defaults down. The lenders thought that meant risk was permanently lowers so they got even more aggressive. As long as the flood of loans keeps getting bigger, the cycle can continue. But once lending is impaired at all, the whole Ponzi Scheme collapses and the defaults start to rise catastrophically.
In the low-end of the junk bond market, we have years of defaults that were deferred and will now happen in a short period of time. Like the bad-risk mortgage borrowers, they contributed to economic activity while the lenders kept them on life-support. That’s over now in housing and it soon will be in the corporate sector.
I used to think that commercial MBS would be the next shoe to drop after residential. But many of the projects being financed aren’t even finished yet. It will be a year or more before their aggressive cash-flow assumptions get a reality check. It looks likely that corporate loans and junk bonds will fall well before then.
I read that the commercial real estate bonds took a big hit yesterday. You will not need to wait very long.
Bill
Thanks for that update. If that’s representative, it’s going to be a race to see whether CMBS prices can fall fast enough to beat out the first big M&A deal busting for lack of financing. Once ANY sector other than residential shows a serious fall, I’ll switch some of my shorts from homebuilders, alt-A lenders and mortgage insurers to the securitizers and underwriters. I’d expect them to get stuck with badly devalued “inventory” right about the same time their revenue streams dry up.
Great post, thanks.
One factor that I think is worth considering is that the people that Wall Street has producing the models are generally fresh out of MBA school by two to four years. So Deron’s point that Wall Street miscalculated the loan quality because the recent years’ defaults have been low is on target because the people constructing the models have no knowledge of long-term trends in CRE.
Great post!
The high-risk buyers could flip and the lenders didn’t see defaults, thus having a false sense of low risk which further fuelled the madness. Worked well until all the participants thought that the market was going up.
Ok… 20/20 hindsight shows an “unsustainable high.”
Now class, what happens next? Please turn your books to Florida real estate 1925/1926.
Got popcorn?
Neil
“Turn your books…?” Neil, it’s the 21st Century. Point and click on “Home Sweet Florida” —-> http://xroads.virginia.edu/~hyper/Allen/Contents.html
Neil,
What impression do you have of sales in the South Bay? It seems that homes in desirable neighborhoods are still selling at a fairly decent pace without significant price reductions. I’m wondering how long this will continue and thought you may have some input since you’ve been watching this area for some time.
“following the historic and unsustainable highs of the 2003-2005 period,’ NAHB Chief Economist David Seiders said…”
Did Seiders or anyone else ever talk about conditions being “unsustainable” anytime in 2003-2005? Not likely.
Or visit http://www.archive.org and open an archive of Ben’s blog circa Q2 ‘05.
That’s when I was fighting with that idiot from Virginia, VA Investor. Wonder where she slithered off to.
One economist was warning of the housing bubble as early as 2002, and of the danger of mortage-backed securities in 2003. Of course, he was a well-known “conspiracy theorist and political extremist” - the MSM told me so.
http://www.larouchepub.com/pr/2003/030611fed_and_fred.html
Now class, what happens next? Please turn your books to Florida real estate 1925/1926.
Neil - Point well made! Those of us who have studied this era keenly can see what is about to happen in the next four years. In the meantime, sit back and enjoy the popcorn while watching the show as the plot unravels.
“Wells executives acknowledged they were caught off-guard by the severity of the losses, which they predicted would continue through the rest of the year. They said they are tightening their underwriting standards and putting a greater emphasis on loan collections.”
Last week, CNN had the ‘experts’ stating that the ‘Big Boys’ - Bank of America, Wells Fargo etc would be untouched by the subprime meltdown. Only the small players would feel any long term pain.
today they were saying big banks are golden !
What they really meant was: they were caught sleeping at the wheel….
In fairness, Wells Fargo had a good quarter. It appears that the bad refi business is offset by better performing loans elsewhere.
Yes, but to what extent has Wells Fargo “marked to market”? Like many other financial institutions, WF could well be hiding huge losses as long as possible.
Enron was reporting great profits right up until they went bankrupt.
And they would have kept posting great profits if it wasn’t for you meddling kids!!
LOL - like an episode of “Scooby Doo”. I wonder how many of those will be happening over the next 5-10 years.
““In San Diego, Atlanta, Minneapolis and much of Florida, more than four months’ worth of finished houses are sitting vacant, according to Metrostudy’s Mike Castleman. ”
OK. How close to four months worth of inventory in any of these cities? I thought SD and Atlanta had much more.
Would it have been more accurate to say “More than 8 months …”?
I think this just refers to the new home segment. When you consider all of the existing homes on the market…
They’re not saying all inventory is 4 months, only VACANT homes total 4 months.
I think they are only referring to vacant *NEW* homes offered by the original builders.
“…more than four months’ worth of finished houses are sitting vacant, according to Metrostudy’s Mike Castleman.”
Who gets to eat the falling knives carrying costs on these?
No wonder DOW is hitting 14000 with all the good news lately. How about this one?:
http://online.wsj.com/article/SB118459289745567528.html?mod=googlenews_wsj
“Construction Jobs Mystery Is Partly Explained by New Report
The Labor Department’s payroll survey has missed up to 139,000 construction layoffs, a new analysis of underlying payroll data has concluded.
The new report released Monday by Macroeconomic Advisers LLC, based on data supplied by payroll processor Automatic Data Processing Inc., could explain in part why construction employment hasn’t slumped as much as actual homebuilding. But the report still leaves a sizable, unexplained gap.”
Oh, and then we need to add another 500,000:
“A recent report by Deutsche Bank argues that the unemployment stats have failed to capture layoffs of about 500,000 illegal Hispanic workers.”
The WSJ is a little late with that story. The financial blogs have been all over the BLS mystery numbers for a couple of months.
“a couple of months”
Years, a couple of years.
Really? The drop in construction employment was in the summer of 2005?
And the bloggers (from all over the world) are doing work that the American MSM just won’t do.
OK, now I am totally confused. With all the bad news about housing and subprime, the stock market just keeps on ticking. Don’t get me wrong, I have sizeable stock investments for the long-term (mostly international, energy and natural resources since 2004) but this is just getting looney. My only explanation is that real estate money is going into stocks. Other than that, manipulation is involved.
“My only explanation is that real estate money is going into stocks. Other than that, manipulation is involved.”
Other than that, margin debt is involved. The subprime collapse has not yet shut off the easy money spigot on Wall Street.
Margin debt soars to record $353 billion on NYSE
Thu Jul 12, 2007 3:35PM EDT
By Kristina Cooke and Doris Frankel
NEW YORK, July 12 (Reuters) - Investors are taking on record amounts of debt to buy securities on the New York Stock Exchange now that rule changes have made it easier to borrow, data showed on Thursday.
http://www.reuters.com/article/fundsFundsNews/idUSN1223842920070712
Remember the hedge fund motto. Anything worth doing is worth doing leveraged 10:1.
“My only explanation is that real estate money is going into stocks. Other than that, manipulation is involved.”
It looks like a combination of margin purchasing of stocks and equities and manipulation that is driving the market. Manipulation and speculation appears to be the driver behind the oil market. In the inner circles, people are being informed to take profits and get out before the correction takes place.
Don’t you know it’s all about market psychology nowadays? Every time it gets close to a new “thousand” (11, 12, 13, 14) they always talk about how it is “psychologically important”. When the herd of bulls turns, you’ll be suprised at how quickly they shed their horns and sprout claws.
Oh, fine, GS, your explanation is good too.
“The market can stay irrational longer than you can stay solvent”
— John Maynard Keynes
There’s no such thing as bad news, you just have to choose what to look at. Example:
http://www.reuters.com/article/ousiv/idUSN1634125720070717
“Producer prices down in June, output up
WASHINGTON (Reuters) - Cheaper gasoline helped pull prices paid to U.S. producers down in June while national industrial output increased in fresh signs the economy was growing without imminent danger of prices overheating.
The reassuring news came days before scheduled testimony on Wednesday and Thursday by Federal Reserve Chairman Ben Bernanke, who is expected to face questions about why U.S. central bank policy-makers remain wary about inflation.”
OK, so we include gas-prices when they are dropping. What if we don’t include them?:
“Producer prices are a gauge of costs at the wholesale level. After stripping out volatile food and energy costs, core prices in June climbed 0.3 percent after gaining 0.2 percent in May, weakening U.S. government debt prices as investors feared it reduced chances for cuts in official interest rates.”
Ow, yuck. We don’t want that number in the headline. Except next month when gas prices go up again….
Look, I trade the markets and I do very, very well but it took almost 10 years of watching, losing some, winning some and getting headaches trying to figure out how it worked. In the last couple of years it’s paid off.
However, if you’re invested and NOT short term trading, the big moves we are seeing mean nada, zip, zero. It’s pure manipulation by the big money. You can put one thing in the bank and one thing only. If you are invested and NOT trading, you will make 5% or 6% when averaged out over time.
The moves you see now are made by Da Boyz a.k.a The Financial Gangsters of Wall Street. Do you think the guys who run Wall Street make $100 million + by giving money to the Average Joe investors and the gangsters minions make $100,000 bonus payouts by being nice and giving the Average Joe 20% to 30% a year!? This will come down when Da Boyz want it to come down. Not with a crash (ignore people who write stuff on sites like Financial Sense) just as in times past because Da Boyz now know how to manipulate it. Check the tech boom and bust and they’ve got much better at manipulation these days. It will decline and Da Boyz will collect big time on the way down the same way they collect on the way up by taking back the money Average Joe has in his 401k.
Wake up. This country is running second to Nigeria when it comes to corruption and scams. They just hide it better with public relations.
I don’t know about that. I agree with part I of this little rant, but I’d poke a couple of holes in part II. I do not agree that this will not come down with a crash. Manipulators do not win all the time, regardless of how smart they are. Would you have said that there is enough market manipulation in housing that it would not crash two years ago?
I think it’s 3 a.m. and the party’s getting wilder. But the smart money has quietly left the building and is headed home in their limos.
My dad says all those investors/flippers who lost out on real estate and all those who sold their house for big profit are now putting their money in stocks. The depression will cause stocks and everything else to crash!
“The NAHB/Wells Fargo Housing Market index fell to 24 from 28 in June, the group said in a statement. Economists polled by Reuters had thought it would slip to 27. Readings below 50 mean more builders view market conditions as poor than favorable.”
Why didn’t they just make up the number 27 (or something close to it), if that is what economists expected? Wouldn’t that have helped their industry constituents more than reporting the ugly, unadorned truth at face value?
“More than 20 financing deals have been postponed or restructured in the past three weeks as losses from the U.S. subprime mortgage rout rattled investor confidence.”
Didn’t they mean “bolstered investor confidence?” Just look at them bulls running amok down the streets of Pamplona…
http://www.marketwatch.com/tools/quotes/intchart.asp?symb=INDU&sid=1643&dist=TQP_chart_date&freq=1&time=1mo
GetStucco
The only thing still going up is stocks. For the financial deals that article references, the important sentiment is that of bond investors and especially junk bond investors. Junk bonds have gotten crushed, down 4-5% in 6 weeks - much worse than the hit they took when subprime problems hit hard in March. Normally, stocks are most highly correlated to junk bonds since they have a similar risk-reward structure. But they have completely decoupled recently - which ought to be a big red flag for equities.
Here’s the Vanguard fund, which has a fairly representative chart:
https://flagship.vanguard.com/VGApp/hnw/funds/pricehistory?FundId=0029&FundIntExt=INT&r=6M#chart
Who was that last week that was predicting a run to 14,500 and then a precipitous drop? You might be right. . .
NPR’s Marketplace show yesterday reported on a suggestion from the options market that the stock market was in for a 10%+ correction. Then Mark Zandi got on to explain how the correction would be “at most” 10%. Did he get his crystal ball from J. K. Rowling’s Ministry of Magic?
——————————————————————————-
KAI RYSSDAL: The Dow Industrials closed the day at their umpteenth record high of the year. Nudging up against the 14,000 mark. Given the way things have been going on Wall Street the past few sessions, you’d be forgiven for thinking the good times are here again.
They may well be, but not everyone believes that. Specifically, investors in what’re called the options market. Where there are some signs Wall Street’s gone a little too far, too fast. We got economist Mark Zandi from Moody’s Economy.com on the line to explain what exactly that means.
Mark, good to talk with you.
MARK ZANDI: It’s good to be with you.
RYSSDAL: Let’s make sure everybody knows exactly what we’re talking about. What are these option indexes here?
ZANDI: These are options to purchase the S&P 500 index, or sell the S&P 500 index. It’s really a bet on whether the market’s going to rise or fall in the future.
RYSSDAL: And the numbers we were seeing this morning predicting a drop of 5 percent, 10 percent, as much as 19 percent in the S&P 500 in the next six months or so. How does that strike you?
ZANDI: Well, you know, 5-10 percent decline is in the realm of historical experience. That’s a garden variety kind of correction, and we haven’t had one of those in quite some time. So, if you told me there was going to be a correction like that in the next three, six, nine months, I don’t think I’d be too surprised. Now, 19 percent, that’s serious stuff. But 5-10 percent, that’s pretty standard.
http://marketplace.publicradio.org/shows/2007/07/16/PM200707164.html
Part of me wonders if the big boys are using margin debt to trigger a bull market psychology. They then sell off all their bad calls to cover and then bail, leaving the newbie investors with fresh bags to hold.
It’s terribly tinfoil hat of me and I have no idea how it could be pulled off. The whole market smells and what else is there besides flight out of US currency to keep it going?
Or it could be black helicopter drops curtesy of the PPT. I am so out of this market. Please feel free to poke large gaping holes in my armchair theories.
Yahoo finance has these top three stories:
Dow Hits Record High of 14,000
Oil Tops $75 a Barrel AP
Homebuilder Sentiment Plunges to 16-Year Low
Pretty dang funny if you ask me.
With all that margin debt hanging over the market like the Sword of Damacles, the next correction could be a doozy. (Oops — I forgot the PPT will be their to contain the downward momentum w/ a fire hose blast of liquidity…)
“July 17, 2007 3:42 P.M.ET
BULLETIN
Dow laboring to hold 14,000
Earnings reports inspire buyers, pushing blue chips firmly above the 14,000 level for the first time.”
http://www.marketwatch.com/tools/marketsummary/
Nice that someone’s keeping tab:
http://www.financialsense.com/fsu/editorials/ash/2007/0717.html
“…Wasn’t Bear Stearns supposed to report the losses at its two mortgage-bond hedge funds on Monday this week…?”
“BEAR STEARNS Investors Await Tally on Losses,” said the Wall Street Journal two weeks ago. The two-week deadline, set by America’s fifth-largest securities firm itself in an email to investors, came and went yesterday.
So far, no news from Bear Stearns, nor from the WSJ. No news either from the co-chief executive officer and director of the two funds in question. Which is odd. For Ralph Cioffi did so love to talk!”
Not odd, but a MAJOR SIGNAL!
The news is just so great they cant share it.
I’ve been waiting for this news too. Re-opening of this “contained” story will garner some MSM attention.
This just came over the Dow Jones newswire.
“Credit markets braced Tuesday afternoon for an expected disclosure of valuations later in the afternoon from two Bear Stearns Cos. hedge funds that nearly collapsed in June. Investors in the two funds, which invested heavily in complex collateralized debt obligations with exposure to the subprime mortgage market, are expected to recover a minimal amount, if anything at all, of their stakes, according to market participants. A conference call for investors is scheduled for 4:00 pm, these participants said.”
“Credit markets braced Tuesday afternoon for an expected disclosure of valuations later in the afternoon from two Bear Stearns Cos. hedge funds that nearly collapsed in June.”
Are you trying to say in so many words that we should expect the DJIA to hit another record high today?
Scheduled for just after the market closes.
Nice.
I smell a lower opening tomorrow.
I know you guys won’t like this horn tooting but, hooray, I’m right!
What do they mean “nearly collapsed”? The journalist says that investors in the funds will recover minimal to zero cash…that sounds like a collapse to me.
Maybe Bear Stearns is borrowing a page from Fannie Mae’s playbook?
SO what happened with this BS vs. Investor meeting? Anyone have a fast track inside to see if this stuff is worth $1 on 7/17/07 from $100 on 6/29/07?????? I’m curious to know.
July 17 (Bloomberg) — Bear Stearns Cos. told investors in one of its hedge funds that they won’t get any money back after creditors forced it to sell assets at depressed prices, according to a letter sent by the firm.
While a second fund still contains “sufficient assets” to cover the $1.4 billion it owes the New York-based firm, there’s “very little value left for the investors,” Bear Stearns said in the two-page letter,
Poof! They’re gone!
LOL - so there were some smart investors in the funds! They tried to get out for a nickel, better something than nothing. In the mean time the underlying MBS are trading at 80% of par. I love leverage when its liquid.
“The one major blemish was a rise in losses on home-equity loans. Wells Fargo attributed the trend to depressed home prices in some markets”
*I* attribute it to people not paying their mortgages.
It almost sounds like they are saying “it doesn’t matter that we give loans to people that can’t pay, as long as the price of the collateral (houses) always goes up.”
I posted this on Neil’s blog, showing how some of the ratings industry used the same assumption (ever increasing house value) for their, *ahem*, “models”:
CFA SOCIETY OF CHICAGO SPEECH � June 28, 2007
Absence of Fear, by Robert L. Rodriguez, CFA
http://www.fpafunds.com/news_070703_absense_of_fear.asp
“We have witnessed an explosion in the size and types of securitizations, with mortgage securitizations leading the way. We were on the March 22 call with Fitch regarding the sub-prime securitization market’s difficulties. In their talk, they were highly confident regarding their models and their ratings. My associate asked several questions. “What are the key drivers of your rating model?” They responded, FICO scores and home price appreciation (HPA) of low single digit (LSD) or mid single digit (MSD), as HPA has been for the past 50 years. My associate then asked, “What if HPA was flat for an extended period of time?” They responded that their model would start to break down. He then asked, “What if HPA were to decline 1% to 2% for an extended period of time?” They responded that their models would break down completely. He then asked, “With 2% depreciation, how far up the rating’s scale would it harm?” They responded that it might go as high as the AA or AAA tranches.”
Notice the reliance on only TWO pieces of data:
1. The FICO score.
2. The *ahem* “fact” that house prices always go up.
In other words, there was ZERO default risk (according to their models).
The only reason that “experts” in the industry were blindsided is because they KNEW that people could keep up payments, but thought that ever increasing collateral (house) prices would always bail them out.
*Sigh*.
Sorry, that should be “KNEW that people could NOT keep up payments”
“Absence of Fear”
You made that up — RIGHT???
As Dave Barry is fond of saying, “I am not making this up”.
A comedic writer would be hard pressed to make up the current comedy of errors in the financial system.
This would have worked if they had limited total loan values on properties to reflect HPAs of the “low single digits”. Instead, they loaned money in 2004-2006 based on recent HPAs of 30% or more. Now, as noted, they will need to assume negative HPAs for a few years to get back to the 50 year trend. And the models will break down completely.
Let’s say the Dow closes above 14000 and then BS drops a bombshell. Maybe July 17, 2007 will join other days of infamy.
If BS drops a bomb, my money is on all the IB being in on it and ready to hit the BUY button hard tomorrow morning a half hour in to trap as many bears as they can. Because they can. These IB’s are like the terminator, they just keep going no matter how hard you hit them. Until they are completely dead, they know only one game. In fact, their lives depend on it.
If I was a betting man, I’d gather some dry powder to go long on any panic selling tomorrow AM.
Buy low, sell high! Best time to buy is when funds crash(if you can be sure they will recover)
Must have honed those modeling skills at Hamilton College through online courses, arroyo.
“As for housing, things have gone from bad to worse in recent days as credit-rating agencies announced they will downgrade billions of dollars in bonds backed by risky subprime home loans.”
Good, now we go from bad to worse in a matter of days not months. My HB shorts are doing wonderfully.
“The NAHB/Wells Fargo Housing Market index fell to 24 from 28 in June, the group said in a statement. Economists polled by Reuters had thought it would slip to 27. Readings below 50 mean more builders view market conditions as poor than favorable.”
Have yourself a look at the HMI data — it is generously made publicly available on the NAHB web site.
7/17/2007 HMI Chart and Components Desktop Analyst
http://www.nahb.org/page.aspx/category/sectionID=134
Wow. Check out the link (Excel file: graph from 1995 to present)
“HMI Chart and Components”
Textbook dead-cat bounce.
Oh, and all 4 categories are in record territory….
“graph from 1995 to present”
Better yet, change the graph settings to go all the way back to 1985. Then you will see that the all time low was hit in 1991, and we are headed down below that into all-time-record-low territory (all components!).
And BTW, the 1991 low point which is currently matched in the data was right smack in the middle of a nationwide recession.
Some owners are going crazy,’” said Noone. ‘They say they need the higher rent or they’ll go bankrupt.’”
Is is Noone or No One? No!!!!! This can’t be happening to flippers? I thought they were smarter than the rest of us and had unlimited bankroll? You mean, some may have overextended? Who could have known? Guess now the only Flipper is a dolphin. And a lot of floppin’ crazy belly-up fish out there.
“Moody’s Investors Service on Monday changed its outlook on Toll Brothers Inc. to negative, from stable, indicating the company’s debt ratings are likely to be lowered over the next 12 to 18 months….”
It’s not a soft landing. It’s harder than a soft landing
R. Toll
If Robert asked for $20 bills when he cashed in his stock, he’ll land quite softly….
“Homebuilder sentiment slid in July to its lowest since January 1991 as fallout from the housing slump and subprime mortgage crisis caused a glut of new homes, the National Association of Home Builders said on Tuesday.”
Didn’t we have an economic recession the last time sentiment was this low? What’s different this time?
We have a Goldilocks economy, not too hot and not too cold, but just right. As Casey Serin says, “It’s all good”.
Just don’t look behind the curtain, you might find Cthulhu and be driven mad with the real truth.
Love the Lovecraft reference arroyogrande…
Gotta believe a lot of folks are going to fail their SAN check.
Every market has its greater fool:
http://www.reuters.com/article/fundsFundsNews/idUSN1724295520070717
NEW YORK (Reuters) - Hedge fund firm Black Pearl Asset Management on Tuesday said it will launch portfolios to snatch up cheap subprime mortgage securities battered by the current crisis.
Black Pearl, co-founded by Jim Midanek and John Pak in 2002, will invest up to $500 million in mortgage securities that have been tarnished amid increased risk-aversion in the sector, the managers said in a statement. The subprime market is approaching a point where “widespread price dislocation” is likely, Pak said in the statement.
“Investors need to position capital now to participate in this tactical trade,” Midanek said in the statement. “The investment phase of this cycle is nearly upon us.”
http://tinyurl.com/2hv84s
Bear is expected to tell investors this afternoon how much of the funds remain, according to market sources. Several traders and hedge fund managers have told TheStreet.com that values of the underlying securities in Bear’s portfolios may fall below 20 cents on the dollar. Sources say investors had been expecting a recovery of around 50 cents on the dollar for the less leveraged fund.
From the FT:
“Bear Stearns on Tuesday told investors in two stricken hedge funds managed by the bank that one fund had lost all its value and the other had about nine cents remaining for every dollar invested following bad bets on the US subprime mortgage market.”
So that means it’s contained, right?
“…Wall Street deserves to get smacked around a little,’ said William Featherston, managing director at J. Giordano Securities LLC. ‘It’s been easy for so long.’”
Gonna be more like a smack DOWN?
My 2 cents on the market and probably RE as well. There’s no fear because maybe too many people have now figured out the fed. Their job is to print money (expand / inflate the money supply). Thats all they do. Sometimes they print more money, somtimes less, but always printing…
After 2000, inflation has showed up initially in housing / energy. In the last year it has started to affect other more tell tale things (food prices, autos). All the gov’t needs is an orderly increase in wages and voila all problems solved. Through the MSM and our court systems, they have even figured out how to curtail rapid wage inflation (unions bad for america… crush unions). Inflation is in check. The only losers are most of us on this blog who are savers. Maybe RE is not such a bad investment… Even now. In the UK their bubble started to pop, but has now gone back up.
The stock market boom makes sense given this managed inflation. Our dollar is nearing peso grade making stocks really cheap. We are a corporate driven gov’t now. The big companies really benefit from the cheap peso like dollar. PG, KO, MRK, banks, etc should be able to sustain their earnings given this.
What should have happened to $hit companies like United Airlines, etc, was the BK courts should have sold off the companies. Problem was what happens to the banks that financed all those aircraft? GE etc would much rather have them reorg instead of having to take all those losses. Workers got screwed, management made out like kings on the re-emergence. CONSUMERs get screwed as it props up a company that should have died.
But the hedges, banks, etc all know the game. Me, I’m trying to convert my dollars into pennies and nickels… And losing on my short positions.
“CONSUMERs get screwed as it props up a company that should have died.”
Savers get screwed, too… oops! There are no savers…
http://tinyurl.com/2zkjbk
“By its own measures, everything looks good at ACA Capital Holdings, a financial management and insurance company. But other numbers do not look so good, and the stock price is falling rapidly. The company will not comment on what is going on.
In New York Stock Exchange trading yesterday, ACA shares fell 22 percent, dropping $1.87, to $6.59, on the heaviest volume in the company’s brief history. The shares have lost a third of their value since Thursday, and are trading at less than half of their value a month ago.
ACA has written billions of dollars worth of insurance on the value of financial assets, and it manages collateralized debt obligations, or C.D.O.’s — investment vehicles that invest in bonds backed by risky mortgages and other debt — on billions more. Some of the C.D.O.’s it manages for others were mentioned by bond rating agencies last week as candidates for downgrading.
But it is not clear how much pain ACA could suffer from the subprime market. In detailing its exposure to subprime mortgage loans on its Web site last week, the company said that nearly all of its direct exposure to subprime mortgage debt came through securities rated AAA by at least one bond rating agency.”
Probably pocket change for BS, but still:
“The company’s largest shareholder, with a 27.6 percent stake, is a fund managed by Bear Stearns Merchant Banking, an affiliate of the Bear Stearns Companies”
And, as we all know, THIS is why Alt-A lending will go down the tubes as well (are you listening investors?):
Broker Outpost
http://forum.brokeroutpost.com/loans/forum/2/142372.htm
rugreedy - Posted - 07/15/2007
“A family friend wanted a home loan, so I met with him. He brought in his paystubs, w-2’s, etc. He wants to buy a condo. His credit score is 713 and he has been a wage earner for 12 months. His w-2 reflects $2500 a month in income, and he has a $300 a/mo car payment and $200 a/mo in Credit card bills.
He wanted to go zero down…. of course, but the kicker is he wanted to buy a $340,000 condo. I told him he could go no doc with his score, with 5% down and a decent rate. He didn’t like the $2200 a mo payment and asked me why he couldn’t go Stated Income. I kindly told him “because that would be fraud” He thanked me for my time, and we parted ways.
I come to find out that he just closed on his condo thru another broker. He told me he got an 80/20 stated loan thru a mtg broker who lives a few houses down from him. The broker apparently gave him a raise reflecting $9,000 a/mo in income and Bingo, it was funded.
He said he didn’t do anything wrong since the broker filled out the 1003 for him, income, etc.”
Investors and reporters, please remember that about the only thing separating “sub-prime” from “alt-a” is the freakin’ FICO score.
Got fear?
Got printing-press? Maybe this whole RE mess will inflate itself away, along with parts of the federal buget deficit. Single scoop ice cream cone is now $3.50.
Here’s a thought: I wonder if the law constraining the bank’s recourse to foreclosure is vitiated by fraud in the mortgage application?
Note sure of the law in this area (anyone know Rachel Dollar?), but without having looked at the statute in question in CA, I imagine a bank could make a pretty good argument that its damages for fraud should not be limited to foreclosure on the relevant property, and/or that misrepresentation by the borrower should at least allow them to rescind the loan agreement and go after the borrower for the full value of the loan rather than just the current value of the property.
Anyone have any knowledge on this? Haven’t heard about it yet, but if it’s possible, I wonder if/when they’ll start down this path… As the losses mount, and some houses are worth large two digit percentages less than what is owed, with banks losing hundreds of thousands of dollars on some foreclosures, I’m guessing the litigation on these things is going to get more interesting… they may not have much luck recovering from the folks at the bottom of the economic food chain, but the second and third-home specuvestors could get badly, badly burned when the bank comes for the first house and the Hummer too.
Disclaimer: Not legal advice.
http://online.wsj.com/article/SB118470713201469384.html?mod=googlenews_wsj
“Two Bear Funds Nearly Worthless, Investors Told
Weeks after the meltdown of two prominent Bear Stearns Cos. hedge funds that bet heavily on the market for risky home loans, the brokerage has told the funds’ investors that the portfolios’ assets are almost worthless, according to people familiar with the matter.
The assets in Bear’s more-levered fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, are worth virtually nothing, according to people familiar with the matter. The assets in the larger, less-levered fund are worth roughly 9% of the value since the end of April, these people said. The April valuations were not immediately available, but in March, before their sharp losses, the enhanced leverage fund had $638 million in investor money, while the other fund had $925 million.”
“These losses, which took more than two weeks to calculate because of the fluctuating values in the market for risky, or subprime, mortgage securities, came amid another tumultuous day for the broader mortgage market. One particularly wobbly slice of the market tracked by a closely watched index called the ABX fell to an all-time low of 44.”
“Fluctuating values”, just like a rocks altitude will fluctuate when you throw it out from a tall building….
“assets in Bear’s more-levered fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, are worth virtually nothing”
Whoops.
I also like this one:
“The assets in the larger, less-levered fund are worth roughly 9% of the value since the end of April, these people said. The April valuations were not immediately available, but in March, before their sharp losses…”
So for example, if April was 60% of March, then it’s not really 9% but more like 5%.
Highly-Degraded Destructed Credit Tragedies Enchanted Leverage Fumble
NEW YORK, July 17 (Reuters) - Bear Stearns Cos. Inc. (BSC.N: Quote, Profile , Research) has told investors in its two troubled collateralized debt obligation (CDO) funds that the funds are now essentially worthless, CNBC television reported on Tuesday.
Bear Stearns shares were down about 2.7 percent in after-hours electronic trading following the report.
From MarketWatch:
“The crisis also has dented the reputation of New York-based Bear Stearns, which has been known as an expert in the mortgage market.”
“Bear Stearns, which has been known as an expert in the mortgage market.”
REVISED: “Bear Stearns, which has been known as an expert GAMBLER in the mortgage market…although they didn’t realize they were gambling at the time.”
No worries here.. I’m sure the market will again hit an all time high tomorrow.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aIHfpRXMKVfc&refer=home
“Yen Gains as Subprime Mortgage Concerns Spur Risk Aversion
By David McIntyre and Stanley White
“July 18 (Bloomberg) — The yen gained as losses at a Bear Stearns Cos. hedge fund prompted traders to pare investments in higher-yielding assets funded by borrowing the currency.
“The Japanese yen gained against the New Zealand and Australian dollars, favorites of so-called carry trades, after Bear Stearns said the fund won’t return any money to investors. The yen has dropped against all 16 most-active currencies over the past 12 months.
“The yen is rising on an unwind in carry trades,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “Bear Stearns’ latest woes are sparking risk aversion. This isn’t just about Bear Stearns. Other hedge funds may be suffering just as much.”
**Oh oh**
There are literally hundreds of hedge funds that are pursuing the same strategy as the two broke funds from Bear Stearns. We just don’t know how much leverage is being used here. Two funds in the UK have already announced that they are going to dissolve and return any funds to investors (Queen’s Walk was one). Over a dozen hedge funds are keeping their investors from taking money out to avoid what happened at Bear. Their clients will be allowed to liquidate slowly over about a 12 month period. That may prevent a wholesale massacre for now but they can no longer retain the BS “mark to model” valuation now that we have market prices.
shhhhhh … the rest of us need a few hours or days to get out of stocks and dollars, too!!!
Damn, a one day liquidation sale sure would make for an interesting day!