Even A Soft Landing Won’t Protect Builder Profits: Analyst
Some housing bubble reports from Wall Street and Washington. “The big ‘mortgage news event’ of the week has to be the Tuesday release of OFHEO’s long-awaited report on Fannie Mae’s $10.8 billion accounting scandal. According to NMN’s Brian Collins, Treasury secretary John Snow told traders that limitations need to be placed on the size of Fannie and Freddie’ Mac’s portfolios, which have combined assets of $1.4 trillion.”
“Could it be that the Treasury officials have some inside information about the OFHEO report, that it will embarrass Fannie and its supporters, clearing the way for the Senate to pass Sen. Richard Shelby’s GSE bill?”
“Treasury undersecretary Quarles (mentioned above) warned debt security traders on Friday that any traders who establish unusually large positions in Treasuries can expect close scrutiny from regulators. ‘Questionable trading behavior has consequences and can result in increased regulatory scrutiny and referrals to enforcement authorities,’ he said. Investment banks, banks, GSEs and FHLBs all are large investors in Treasuries.”
“Lowe’s shares fell after the nation’s second-largest home-improvement retailer made note of ’some weakness’ in early May sales and the ‘monetary pressures’ of rising gas and interest rates on consumers.”
“Rising interest rates and an easing housing market are starting to hurt home-improvement spending, said Nicolas Retsinas, of Harvard University. ‘The consumer’s had home-equity money and new homes to be involved with,’ analyst Eric Bosshard said. ‘As we see some moderation of that, it chokes off some of the fuel that’s been driving spending for’ Lowe’s business.”
“Slowing home sales and falling home prices led Banc of America Securities analyst Daniel Oppenheim to lower his profit expectations and price targets for home builders. ‘Even a ’soft landing’ would lead to significant earnings declines,’ the analyst wrote.”
“He noted that the builder stocks, which are off about 21% year to date, now reflect more of the likely earnings erosion. ‘We estimate that companies with a significant inventory of land, high financial leverage, [and] a high proportion of land controlled via options rather than ownership are factors that lead to increased sensitivity to changes in home prices,’ Oppenheim wrote.”
“‘We see greater risk of price declines in markets where affordability is stretched, given the limited buyer pool at current prices,’ Oppenheim said. Affordability ‘will worsen significantly if mortgage rates rise from current levels,’ he said.”
Oppenheim shoots holes in several of the homebuilders strategies. This is important because if these guys get in trouble, their land holding will have to be sold off or the options set free. IMO the remodeling boom is a side effect of the housing bubble. Some news from Maine:
‘The home remodeling boom of the past few years may be coming to an end because of the same factors that fueled it: interest rates and heavy borrowing based on rising house values.’
‘This time, however, interest rates are rising instead of hitting record lows, and the money borrowed over the past few years has been spent, leaving homeowners with loans to repay. And that adds up to a downturn for the remodeling and renovation business.’
‘ Bill Harris in Portland said he can tell the market is softening by his quieter phone. ‘There are fewer calls,’ said Harris, who has had a remodeling business for 20 years. ‘I would probably say about 30 percent less. Along with that, (there’s) a more price-conscious attitude on the part of many people because they’re paying higher interest rates,’ he said.’
‘People are tapped out right now,’ said Valarie Lamont, who heads the Center for Real Estate Education at the University of Southern Maine. ‘There’s concern out there because people are leveraged to the max. People were cashing out for significant dollars, not just a few thousand, but 20, 30, 40 or 50 thousand.’
‘ Research has indicated that people with high incomes and high-priced homes tend to make up the lion’s share of the remodeling market, spending much more on home projects. But in a soft economy, high-end projects are just as vulnerable to a downturn as remodeling for lower-income homeowners because high-income homeowners usually will factor in the return on their investment, Baker said.’
‘When home values are rising sharply, homeowners figure a remodeling project could quickly pay for itself through a higher selling price if they decide to put their home on the market. But with price increases moderating, they may figure the new or redone room isn’t going to lead to a considerably higher price for the home.’
Ben,
The “big box suppliers” have been such an annoying aspect of the HB. As a “bubblesitter” I kid about being “clean and sober” from Home Depot for 2 years! I had to stop in there the other day and was really put off by the whole experience. Lucky if you find parking in the same county, then headlong into a “kicked over ant hill”. I got what I needed (and got the hell out)! For so many Americans this isn’t “part” of their weekend, it IS their weekend. Will they be as excited to jump in with both feet to do home improvement projects when their “investment” is declining in value? Gosh I sure hope not.
they don’t deserve to earn any profits.
Sorry, OT for this thread but, just looked at the listing for a house in L.A. (mls 06_034657) that has been listed for 2 days, and they *increased* the price 30k today! Why on earth would someone do that?!?! Anyone?
Bond yields are plummeting. The greedy seller is envisioning more buyers/suckers will step forward.
The bond market may be pricing in a hard landing.
I completely agree but I wonder when people say “Hard Landing” what they mean. 1932? I guess we’re already living in 1984 so another 2 score and dozen years isn’t too inconceivable
Why would someone ridiculously overpay for a home? Why would someone finance their ridiculously overpriced home with a suicide loan? Why would someone ridiculously overpay for a rental property, financed with a suicide loan, that goes in the negative every month by over a thousand dollars? Why do some folks still consider real estate a “no-lose” proposition? Why do people consider mortgage-equity-withdrawl as cash earned?
I’m sorry, but your question is going to have to get in line.
NVNmrtgbrkr:
Totally agree that those are the questions that need to be asked. That attitude shift has caused this whole mess.
I’m watching for signs that Americans are getting rational about these things. Those new attitudes are the linchpin as far as I’m concerned. Unless they change, this could go on forever.
Thanks for mentioning the FNM report Ben. I’m hoping we can start looking more closely at the lending industry in general.
It’s fun to watch the inventory go up and the HB stocks go down. But that’s kind of old news now. I expect those things are a done deal and will continue on their trajectories in the coming months.
I’d love to start learning more about the lending side of things. From the international backers to the corner bank. It is something I know zero about but believe it’s the next step if this insane housing market is ever going to unravel fully.
And I do want a FULL unraveling.
“I expect those things are a done deal and will continue on their trajectories in the coming months.”
The smart money had the demise of the HBs figured out last August or earlier, especially the HB insiders who sold off gazillions of dollars worth of their stock holdings. What is not finished just yet is the diffusion of bad news from those in the know to those who get their market news on Marketwatch.com. This diffusion process will result in an ungoing gradual leak of air from the homebuilder stock prices until they line up with post-bubble market reality.
I really enjoy the links from the IMF or other currency reps from other countries. Sometimes I wish we could have some of our threads be about digesting their statements.
Maybe they want to lower it later and say it’s “reduced”. Hard to say.
Most of the LA houses I see on the internet look overprice by at least 100%, maybe more. I wonder if they’ll come back down ever. Crappy houses that would be 100K where I live are 750K.
Well where you live, its not sunny and beautiful! Everything is wonderful in LA!
To reduce it soon may be…my guess.
plysat — it also could be a throwback to the heady days of yesteryear when sellers raised prices just for the heck of it, to see if they could catch a fish. Another strategy would be to price it into a different search “tier” in the MLS, looking for a different set of buyers. In May of 2006 the first gambit will not work and the second very probably won’t. Fallback is they reduce it later. Fools’ games.
Maybe it was just an error on the listing agent’s part?
Ha. Speaking of builders, did anyone see this one?
http://www.dailynews.com/search/ci_3847768
Fake families? God I want to run out and buy a place right now!
Centex is squirming more than any other company.
I don’t think the phony family thing worked for them this weekend.
Ok - how about a real family with toddlers? Let’s hear it for goo on the cabinets and stuff, gobs of stuff, strewn all over the floor! Just from personal experience, looking around the living room while dinner’s boiling over . . .
A couple of years ago we looked at two homes occupied by real families and it was pretty much as Arwen described.
Perhaps they should hire some porn actors to demonstrate how bed works and how much fun it can be to take a steam shower or a relaxing bubble bath.
The article is decidedly silent on whether this shtick actually worked. I’m guessing that the answer is “no”; as so many on this blog have said much more eloquently than I, it’s all about the price.
I know - one of you dress up in a suit and walk in on the family, say in a loud voice you’re from the bank and you have their notice of foreclosure.
no no no… it’s not all about the monthly payment.
OMG. Unbelieveable. So how am I supposed to know now if those new townhomes are really owned?
“Treasury undersecretary Quarles (mentioned above) warned debt security traders on Friday that any traders who establish unusually large positions in Treasuries can expect close scrutiny from regulators. ‘Questionable trading behavior has consequences and can result in increased regulatory scrutiny and referrals to enforcement authorities,’ he said. Investment banks, banks, GSEs and FHLBs all are large investors in Treasuries.”
This is strange coming from a person who is trying to make a market. Can any bond bugs comment on this?
In my prior career I was a professional bond trader (Treasuries) at a primary dealer. Typically a statement like this is made when “on the run” ie. current issue treasuries are being “squeezed” by one or more market participants. Squeezed pertains to buying a sizeable percentage of an otherwise liquid security and not “repo”ing (lending) the security. The “shorts” participants who sold the security short need to pay (lend money) at a very low rate (sometimes zero %) to borrow the security for delivery. This causes a spike in the price of the security and can lead to displacement in the treasury market. Hope that helps!
In other words, they are worried that someone is going to corner the market because they know someone else is in trouble.
And how does Quarles statement affect anything? Can you really be busted for taking a long/short position?
JP, Remember Steinhart partners and Salomon Bros. circa 1991? They squeezed the 2yr note and a bunch of guys resigned, got fired, were prosecuted etc. Remember Warren Buffet came in to run Solly.
Fellows:
I think we are entering an uncharted waters. Seems to me that some people are nervous. See how the stock market have done for that last week despite of price of oil comming down, and the statement from Treasury Undersecretry is very suspicious. I sold ¾ of my stocks today, I prefer to make less money than taking risk of losing money.
2006/7 are going to be interesting years, stay safe.
I am nearly out of stocks and renting. I will be a buyer of both stocks and a home when blood is running in the streets…
Of course
IMHO
JMS
http://finance.yahoo.com/q/cp?s=%5EHGX
Horton off 3% on 3 million
Toll off 3% on 4 million
Nothing to see here, move along.
DR Horton has been flooding mailboxes with ads in WA for a couple weeks now. (a first) . Also taking out HUGE ads in the Sunday RE section of the Seattle Times (that’s a first too ).
Robert — love your dry wit. A day without your posting would be incomplete.
Thanks. Some people don’t get it though. TxChik in particular has been all over my schtick lately.
Perhaps I’m being unduly paranoid, but this looks a lot like how the S&L crisis started to unwind. That disaster (at the time) got its start when the federal guarantee was raised from $10,000 to $100,000 on individual accounts and at the same time local S&Ls had lending restrictions loosened. What happens when you can pass off risk to the gov’t, while at the same time retain the profits for your buddies on the S&L boards? Vernon Savings and Loan anyone? Freddie and Fanny too big to fail? Can you say, taxpayer bailout?
Who was the conservative president at the time who encouraged lax oversight? Who was the corrupt AZ Senator implicated in the ‘Keating 5′? Congress feeding at the trough?
I know this is a housing blog, (thanks Ben), but these things don’t happen in a vacuum. Incompetence and corruption will make this crash even worse than the S&L disaster.
Rant over. Sorry.
who was it that passed the community bankin bill?- yo
irrelevant
Sorry, but you don’t know what you’re talking about. See Below.
“Perhaps I’m being unduly paranoid, but this looks a lot like how the S&L crisis started to unwind….Incompetence and corruption will make this crash even worse than the S&L disaster.”
…Not only incompetence and corruption, but much more extensive involvement than the S&L problem.
If you’re referring to the one Republican senator with a minimal involvement with Keating, who was nevertheless successfully tacked on to the Democratic “Keating 4″ to make the affair nominally bipartisan, that would be John McCain.
Touche’.
BTW, it was the Tax Reform Act of 1986 that kicked off the S&L crisis. Congress took away the tax-shelter benefits on investment real estate that led to the speculation during the 70’s and 80’s.
I might be misremembering, but I’d have to say the S&L crisis started way before ‘86, so I don’t see how something in ‘86 could have “kicked it off.”
Arguable, many things led up to the crisis, but the straw the broke the camel’s back was:
“1987–Losses at Texas S&Ls comprise more than one-half of all S&L losses nationwide, and of the 20 largest losses, 14 are in Texas. Texas economy in major recession: crude oil prices fall by nearly 50%, office vacancy is over 30%, and real estate prices collapse.”
Here’s a good link for a history (scroll down the page).
http://www.fdic.gov/bank/historical/s&l/
Note the 1986 TRA wasn’t even mentioned, but it truly was the beginning of the end as once it was passed, billions and billions of real estate equity disappeared overnight. I vividly remember the carnage as I was in the business and new the players. TxChick can add some anectodal supporting evidence to support this view. There are also historical references for more research linked at the top of the page.
This references highlights of the act:
http://cwx.prenhall.com/bookbind/pubbooks/dye4/medialib/docs/tax1986.htm
Specifically, the Investment Tax Credit Repeal was the dagger in the heart of the S&L industry.
Arguable, many things led up to the crisis, but the straw the broke the camel’s back was:
“1987–Losses at Texas S&Ls comprise more than one-half of all S&L losses nationwide, and of the 20 largest losses, 14 are in Texas. Texas economy in major recession: crude oil prices fall by nearly 50%, office vacancy is over 30%, and real estate prices collapse.”
Here’s a good link for a history (scroll down the page).
http://www.fdic.gov/bank/historical/s&l/
Note the 1986 TRA wasn’t even mentioned, but it was the beginning of the end as once it was passed, billions and billions of real estate equity disappeared overnight. I vividly remember the carnage as I was in the business and new the players. TxChick can add some anectodal supporting evidence to support this view. There are also historical references for more research linked at the top of the page.
This references highlights of the act:
http://tinyurl.com/ff8kc
Specifically, the Repeal of the Investment Tax Credit was the dagger in the heart of the S&L industry. Then came the Bankruptcies, the RTC and the Keating 5.
Okay, pop quiz: (1) who ran Vernon?, and (2) which Dallas law firm (in the press lately relating to tax advice) represented Vernon?
What kicked off the S&L debacle was the disparity between what the S&L’s owed to depositors (10/12/14%) in interest versus what they were earning in interest off of home loans (6/7/8%) when the economy ran totally amuck in the late 70’s. PERIOD! That’s when risk flew out of the window. Anything to make a higher return to “fix” their balance sheet no matter how risky and outrageous. Every other factor is nibbling at the margins. It just took a few years for everything to totally unravel and the bill to come due in 1991. No one can continually pay out more than they collect. Eventually they go bankrupt or have to increase their revenue there is no other choice available. The exact same thing is happening to all of the f@cked borrowers out there who won’t be able to sell their houses for what will cover their liabilities. They either get more income to pay their mortgages or they bleed themselves into bankruptcy.
Where was Neil Bush?
Clicked on the limk Ben provided to the “Broker Universe”.
Here are 2 VERY basic questions to anyone who has the knowledge and can explain to the un-educated:
What is Senator Richard Shelby’s GSE bill?
Hang onto your hats for basic question # 2:
What the heck is a GSE?
Thanks in advance for those who can answer.
GSE = Government Sponsored Enterprise.
The bill limits the amount they can lend.
thankyou Dannll for the short sweet explanation. “Government Sponsored Enterprise” - the name in itself sounds like a risky venture.
Crammer just suggested buying gun, alcohol, and cigarette stocks…. The housing bubble is popping and the economy is going to tank.
Crammer…What a JOKE. He is no better than a RB. BUY BUY BUY
Always be aware of the carnival barker.
At least he preaches diversity. Realtors encourage zero diversity.