July 25, 2006

‘Supply Driven Correction Occuring Now’

Some housing bubble reports from Wall Street and Washington. “Centex Corp., the fourth-largest U.S. home builder, on Monday said its net profit fell 31 percent and orders were off 21 percent, prompting the company to slash its forecast in another sign of the eroding U.S. housing market. ‘Centex is another confirming data point that the trends directionally are continuing to get worse,’ analyst Rick Murray said.”

“Centex followed in step with U.S. home builders who have reported falling orders and have slashed their forecasts, bemoaning the flood of unsold homes on the market, especially from speculators dumping their investments that no longer rapidly increase in value.”

“Closings fell 11 percent in the once-sizzling Southeast, where new orders tumbled 43 percent. With the order fall-off, Centex walked away from options contracts for land, writing off $36 million of options deposits.”

“‘Despite the supply driven correction occurring now, the company believes that the fundamentals driving industry demand remain strong,’ Centex said on Monday in a statement.”

“Orders fell across all markets, with the Southeast (down 43%), Mid-Atlantic (down 23%), and the West Coast (down 21%) seeing particular weakness. On the company’s conference call Tuesday, Centex management blamed speculators looking to quickly flip their homes for much of the current inventory accumulation in the U.S. housing market.”

“Centex said it is using incentives to increase sales in markets where oversupply is an issue. By also reducing overall land purchases and walking away from land option contracts in overheated markets, particularly California, the company is emphasizing cash generation and a clean balance sheet.”

“UBS analysts said Countrywide Financial turned in ‘mixed’ results, with production earnings below estimates, with lower spread income, lighter margins and higher expenses. UBS noted that management lowered its production range $400 million to $475 billion from $400 billion from $550 billion, ‘which reflects the outlook for a more competitive environment.’”

“Countrywide Financial CEO Angelo Mozilo on Tuesday said the largest U.S. mortgage lender wants to cut $500 million of costs in the next year as competition rises and mortgage production volumes are expected to decline. ‘We find redundancies and waste in certain areas of the company,’ Mozilo said. Mozilo did not specify where the cuts would come from, or how many jobs might be affected.”

From the FDIC. “Surging loan volumes and relaxed underwriting point to the possibility of rising losses in the future, according to the Summer 2006 edition of FDIC Outlook released today. ‘Despite today’s low loss rates, credit risk remains the most important long-term threat to bank earnings,’ said FDIC Chief Economist Richard A. Brown. ‘Bankers and bank regulators need to remember that rapid expansion in loan volumes often leads, over time, to declining credit quality.’”

“Perhaps the most far-reaching changes have been observed in U.S. mortgage lending, where the use of interest-only mortgages and pay-option mortgages increased dramatically in 2004 and 2005. Use of these products has led to concerns about the risks they may pose to lenders and to homeowners.”




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53 Comments »

Comment by Ben Jones
2006-07-25 10:11:40

We can all relax now:

‘It’s official - even the nation’s leading group of real estate agents now says it’s a buyers’ market in housing, as a soaring supply of homes for sale means nearly flat prices and longer waits for sellers…which it said is good news for those shopping for a home even if it posed a problem for those looking to sell.’

A reader posted this in the bits bucket:

‘The total increase in household expenses is expected to be about $16-$18 billion or so for 2006, given that about $800 billion of adjustable mortgages will reset. While Countrywide (CFC) calls these ’substantial,’ as surely they are in outright terms and for some households, it would cut GDP by less than 0.2%. When the tax deductibility of mortgage interest is taken into account, the cut is even smaller than that…The bigger impact that higher rates will have on households will come from the weaker income growth that follows cutbacks in new borrowings and credit expansion more generally.’

Comment by Rental Watch
2006-07-25 10:47:33

So, if you have an ARM, your interest rate is, on average going to increase by 2-2.25%?

I’m not worried about the cutting of GDP because of it, I’m worried about the number of families that are going to be completely financially ruined because of it.

 
 
Comment by crispy&cole
2006-07-25 10:17:04

Looks like a few heads will roll at Coutrywide. 500,000,000 is a SHIT LOAD OF EMPLOYEES!!!

Comment by crispy&cole
2006-07-25 10:33:01

This bodes well for the property values in Ventura County!

Comment by Robert Cote
2006-07-25 14:03:44

That’s like half of all Countrywide employees in the county at $100k per. IMHO it does bode well for county prices. We need a serious employment driven decline to avoid an implosion. I’d much rather have the useless nonproducing Countrywide take it in the shorts than let their continued existence continue to drive out producing Biotech and solar and agriculture, etc.

 
 
Comment by Hoz
2006-07-25 10:41:16

Either that or get rid of the board of directors!

 
Comment by Fred Hooper
2006-07-25 10:55:36

Crispy, it’s 500,000,000 in COSTS. Settle down and grab a beer. It’s noon and it’s OK.

Comment by Fred Hooper
2006-07-25 10:58:14

Oh, I see, you mean $500,000,000 divide by $50,000/year annual salary = 10,000 employees. Yeah, that’s a shitload of employees. Me get a beer now.

Comment by crispy&cole
2006-07-25 11:06:06

LMAO!

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Comment by Mort
2006-07-25 11:57:54

I was about to say, five hundred million! That is a lot of employees.

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Comment by turnoutthelights
2006-07-25 12:30:54

Well, if the good ol’ USA tanks, China’s export market losses may generate that 500,000,000 after all!

 
 
 
 
Comment by josemanolo7
2006-07-25 13:36:35

unbelievable, people will lose job, maybe lives will be wrecked. and some guys will celebrate to that. i know, i know, its not your faults.

Comment by crispy&cole
2006-07-25 15:37:05

Valuable lessons will be learned! Some will be much more severe than others, but I say TOO BAD! I live below my means for a reason, those who don’t will learn the hard way. I know some Countrywide employees and they speak of TOTAL FRAUD at their organization! They screw people over everyday! They need to pay the piper for this (rant off…..

 
 
 
Comment by Lisa
2006-07-25 10:23:53

“Centex management blamed speculators looking to quickly flip their homes for much of the current inventory accumulation in the U.S. housing market.”

So NOW they say it’s speculators who have created this “buyers market.” So that’s why inventories are 2x or 3x what they were a year ago and sales are going off a cliff. Too bad they weren’t as honest with the public about speculators being the driving force behind the boom. Not jobs. Not population growth. Not the boomers. Buy now or lose out forever. Disgusting!

Comment by crispy&cole
2006-07-25 10:29:17

And I am sure the FAKE DEMAND from these speculators will return to the market any day. NOT. The speculator driven demand is gone for at least a few years!

 
Comment by Mo Money
2006-07-25 11:12:58

Gosh, we never thought in a million years that all those naughty speculators would actually try and sell their homes and compete with us ! Whaaaaaa !

Morons, try a business plan next time that doesn’t rely on stealing sales from the future to pad you bottom line today.

 
 
Comment by emcee
2006-07-25 10:33:13

If speculation has reduced substantially, doesn’t it follow that “inventory” (which does not include new homes, as I understand) will only decrease if renters/first-time buyers purchase old residences?

Won’t inventory rise until the affordability numbers adjust?

Comment by Rental Watch
2006-07-25 11:46:11

Theoretically, yes.

But many people think that they can “afford” a home if a bank is willing to give them money to buy it with payments that they can afford for the first 6 months.

Until there are actually lending standards again, the expected will happen more slowly.

Comment by circling_vulture
2006-07-25 14:08:01

i’ve posted this a million times, but will someone please explain to me WHY there are no lending standards? the only reason i can see is the lenders are just selling the loans to the gov’t. it’s probably one big scam in which the taxpayer will end up paying. otherwise it makes no sense to me.

Comment by HARM
2006-07-25 15:59:00

You’ve pretty much answered your own question. 20 years ago MBSs/CMOs did not exist, or at least did not represent such a huge % of the mortgage market as they do today. Back then, we still had the quaint practice of banks and S&Ls actually BOOKING most of the loans they made. This arrangement naturally encouraged such equally old-fashioned practices as requiring a 20% down-payment, requiring proof of income, and not allowing “piggy-back” loans for 110% LTV. Neg-ams and I/Os were rare and mostly reserved for the very wealthy, who used them to optimize cash flows.

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Comment by Ben Jones
2006-07-25 10:42:19

‘The fervor has gone away,’ said Bob Walters, chief economist for Quicken Loans. ‘That’s not a bad thing.’ Even as sales softened, more houses came on the market. The inventory of unsold homes rose to 3.725 million, a 6.8-month supply at the June sales rate, the largest supply in relation to sales since July 1997. Inventories are up 39% in the past year.’

‘ The inventory of condos has risen 63% in the past year to a record 8-month supply. Lereah urged the Federal Reserve to refrain from further rate increases, fearing that a weakening economy could pull down the housing market even more. Some economists expect the market to fall further. ‘We expect this trend to continue and worsen as we move into the second half of 2006,’ said Phillip Neuhart, an economist for Wachovia.’

‘There has been an array of anecdotal reports from builders, realtors, etc., in recent weeks suggesting that the market has weakened noticeably in the last month or so,” said Stephen Stanley, chief economist for RBS Greenwich Capital.’

Check out the ‘percentage rises from previous months chart; median price’.

 
Comment by Chris from Jacksonville FL
2006-07-25 10:45:17

The NAR’s underlying message is….drum roll please…

Last year, “Home prices are increasing…..its a good time to buy”

Now, “Home prices are leveling off…its a good time to buy”

Next year, “Home prices have fallen……its a good time to buy”

Comment by ockurt
2006-07-25 11:12:15

Like the realtor on that phone commercial where’s she’s yakking away screaming “it’s a buyer’s market, baby!” and then to another client “it’s a seller’s market, baby!”

 
Comment by dwr
2006-07-25 11:18:26

yes, and repeat next year for about 4-5 years, a la the early 90s.

 
Comment by josemanolo7
2006-07-25 13:50:08

don’t these guys ever side with the buyer at all? i mean, say something like to the buyer “don’t buy yet until prices stabilizes a little bit” or to the seller “the price will need to be cut further for this house to sell”. its amazing considering the fact that its the buyers who will be making the offer.

Comment by circling_vulture
2006-07-25 14:11:10

they do whatever makes them money. period. that’s all they give a shit about. if they give advice which they KNOW will ruin you financially they could care less as long as they get a few bucks. this is the selfish greed mentality that has enveloped our entire world today.

Comment by thejdog
2006-07-25 17:56:17

“this is the selfish greed mentality that has enveloped our world today”
———————————————————————

So says the poster with the name “circling_vulture” LMFAO!!

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Comment by diogenes
2006-07-25 10:51:59

It’s UNWINDING, and even the ‘deniers’ are starting to see the light.

A little OT, but I caught this on MSN Money today.
Jim Jubak, while reporting on China’s overbuilding and loose money policies had this to say in is article:

“If you’ve been following the debate in the U.S. about the likelihood that cheap money here has produced a bubble in housing prices, you’re already familiar with the basic scenario for a train wreck in China. Cheap money makes it easy to borrow to buy assets. That produces an asset bubble — in the United States, first in stocks and then in real estate. As the asset bubble grows, borrowers get in over their heads as their judgment is overwhelmed by the excitement of rising prices. And lenders under the influence of similar emotions make loans to unqualified borrowers.

When the asset bubble starts to deflate, overextended borrowers default on their loans, putting pressure on lenders, who respond by tightening their lending standards, reducing the amount of money available to all borrowers. That sends the economy into a slowdown or worse.”

I found that quite interesting, because a repeat of an article he has written on 6/10/2005, showed up about 2 months ago. It was titled “WHY THERE IS NO HOUSING BUBBLE.”
In it he explained that mortgage rates hadn’t really changed and the cost of housing wasn’t all that different, blah, blah, blah.
I was so aggrevated by his stupidity concerning this market, that I took the time to write him, explaining that buyers were buying at 2%, not 6%, with no money down, etc, etc, and we did IN FACT have a bubble.

I find in now, AMAZING, that he describes in today’s article, exactly what is REALLY HAPPENING.
Don’t get me wrong. Jim Jubak is no dummy. I think he has a great mind and understands markets. But he was really off on the HOUSING MARKET. I even told him he should stick with stocks.

Compare the above description with last years, NO BUBBLE:
http://www.moneycentral.msn.com/content/P116257.asp

 
Comment by Fred Hooper
2006-07-25 10:52:13

” ‘We find redundancies and waste in certain areas of the company,’ Mozilo said. ”

You’re an employee at CFC.
You’re redundant, and a waste.
You did a great job while times were good though.
Thanks.
Bye bye.

Comment by Mo Money
2006-07-25 11:20:38

With all the subprime lenders out there Mr Mozilo is technically redundant himself and certainly a waste of oxygen. Good management skills in allowing all that waste and redundacy in the 1st place Mr Mozilo, you really earned that paycheck.

 
Comment by turnoutthelights
2006-07-25 12:38:57

One has to have ‘redundancies and waste’ to find redundancies and waste. Nothing changed that prompted the finding, except a lower bottom line and the need to actually manage. This is a bow-shot forecasting very large layoffs.

 
 
Comment by WaitingInOC
2006-07-25 11:29:56

“UBS analysts said the home financing giant turned in “mixed” results, with production earnings below estimates, with lower spread income, lighter margins and higher expenses. However, servicing income was driven higher by hedge fund outperformance, UBS said in a note to clients.”

So, one positive note against all of the other negatives equals “mixed” results? Apparently investors didn’t find it too mixed, as the shares fell 2.6%. And Mr. Mozilo thinks that there’s $500 million in costs/waste that can be cut? Good luck with those cost cutting measures, and let’s see what type of impact those cuts have on revenues. It’s clear that Countrywide feels that it can’t really grow its revenues, so it is trying to cut costs to make the bottom line look better, but those cost cutting measures usually have costs associated with them and lead to declines in revenues, thereby cancelling out some of the savings.

 
Comment by ockurt
2006-07-25 11:30:54

This is kind of interesting.

22.3% of state’s towns see home depreciation

http://tinyurl.com/lzgbg

 
Comment by Tom
2006-07-25 12:03:31

This has got to stop.

http://money.cnn.com/2006/07/25/real_estate/michigan_ftc.fortune/index.htm

Real Estate: Anti-discounter law looms in Michigan
Would prevent discount real estate brokers from offering limited service for much less than the traditional 6% commission

Comment by Rental Watch
2006-07-25 12:17:41

I spoke with an agent with a larger brokerage who said that they “absolutely” are allowed to offer a lower commission than 6% . . . but it can’t be below 5%.

The biggest racket there is–talk about price collusion on a grand scale.

 
Comment by Tom
2006-07-25 12:31:44

Another link. This one is even worse.

http://www.usatoday.com/money/economy/housing/2006-07-12-realtors-usat_x.htm

When Kathy Kirk sold her Oklahoma City home Wednesday, she paid her discount real estate agent $998 instead of a traditional commission. That’s because even though her agent had listed her home for sale and handled closing documents, Kirk showed the house and negotiated the price herself.
Agents and potential buyers who came to see the house were surprised that Kirk, a 49-year-old nurse, was representing herself.

Though she still had to pay the buyer’s agent a 3% commission, she “got a lecture from a couple of them, saying, ‘You’re really making a mistake,’ ” recalls Kirk, who got a price above what she’d hoped for and saved $3,847 in commissions. “One told me I didn’t know how to negotiate, that I was vulnerable and wasn’t going to get the price I wanted for the house. They obviously felt this was a real threat to them.”

 
Comment by Tom
2006-07-25 12:32:47

Anti-Trust.

 
Comment by Tom
2006-07-25 12:33:19

This is worse.

http://www.usatoday.com/money/economy/housing/2006-07-12-realtors-usat_x.htm

When Kathy Kirk sold her Oklahoma City home Wednesday, she paid her discount real estate agent $998 instead of a traditional commission. That’s because even though her agent had listed her home for sale and handled closing documents, Kirk showed the house and negotiated the price herself.
Agents and potential buyers who came to see the house were surprised that Kirk, a 49-year-old nurse, was representing herself.

Though she still had to pay the buyer’s agent a 3% commission, she “got a lecture from a couple of them, saying, ‘You’re really making a mistake,’ ” recalls Kirk, who got a price above what she’d hoped for and saved $3,847 in commissions. “One told me I didn’t know how to negotiate, that I was vulnerable and wasn’t going to get the price I wanted for the house. They obviously felt this was a real threat to them.”

 
Comment by josemanolo7
2006-07-25 14:16:17

well, how is this different from car dealership of today. that is why internet car sales has not evolved more than another media to advertise to. i still cannot buy at a cheaper cost, a car from florida and shipped to me in california (or even from los angeles to san diego), considering every car sales still include delivery charges. there are always those state specific requirements which i do understand and be willing to pay for. i don’t like it. and because of these powerful trade group lobby we are left with little choice.

Comment by skip
2006-07-25 15:27:20

In Texas it is illegal for a consumer to purchase a car directly from the manufactor.

 
 
 
Comment by palmetto
2006-07-25 12:18:31

I think the correction is driven by a more than over-supply. There’s just a lack of confidence, period. When not backed by gold or some other valuable, fiat currency is only as valuable as the confidence in it. So, while charts and statistics may be helpful, they are just indicators of confidence, really. And right now, at least in the US, I don’t see that people are all that confident about much of anything, with good reason. When the government can’t even get its own people out of harm’s way, that doesn’t exactly inspire confidence. So realtors can cheerlead all they want, economists can pontificate, sellers can be as stubborn as they want. Housing market is not going to turn around until and unless people are confident they’ll be making a decent buck, that the country is stable and that their homes won’t lose value, and a host of other things. No confidence=no appreciation=no home sales=no money.

Right now, lots of denial and false confidence, with nothing to back it up. One of the best things I have learned from reading this blog is the need for patience. I think one poster said “Patience is your friend”. We have a ways to go until the stage of acceptance on the part of sellers.

Comment by turnoutthelights
2006-07-25 12:42:13

good thoughts.

 
Comment by Desmo
2006-07-25 12:52:37

In this market I get the feeling that people who are trying to sell their homes are just trying to “Unload” them vs. the traditional “Move-Up” or “Downsize”. With this in mind, who is actually going to buy all these homes and where are all the “Unloaders” going to live even if they could sell? It just dosen’t pencil out. Keeps me up at night just thinking about it!

Comment by palmetto
2006-07-25 13:05:19

Desmo, you are right. People are trying to unload, much in the same way they would try to dump stock, except real estate doesn’t work that way. And that’s why it makes sane pepole crazy thinking about it. There aren’t the buyers for all those homes that were built, at least not at prices ranging from $200,000.00 to a mil. But don’t lose sleep over it. It’s not worth it. Just do what you have to do to protect yourself from the effects of this bubble and even better, look to see how you can capitalize on it.

Comment by ken best
2006-07-25 13:23:28

Check out home builder stocks, 50% drops since Jan 06.
Also check out the lenders; business is drying up, and defaults are starting. Look for those with heavy exposures in bubble regions (California, Arizona, Florida …)
Perhaps some long term 07, 08 puts.

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Comment by palmetto
2006-07-25 13:26:56

Good work, Ken. Very much a reflection of lack of confidence. Can’t go wrong right now basing investment decisions on lack of confidence.

 
 
 
 
 
Comment by John in VA
2006-07-25 13:00:45

Centex management blamed speculators looking to quickly flip their homes for much of the current inventory accumulation in the U.S. housing market.

Centex went on to say that it was shocked — shocked to find that many of the homes it sold in 2005 were being sold to non-occupant investors. “We had no idea that this was going on,” said Dave Garfield, VP of Investor Relations. “We assumed that the sudden influx of people purchasing three or four homes at a time was due to… well, we didn’t know what it was due to.”

Comment by palmetto
2006-07-25 13:20:23

BWAHAHAHAHAHA!!! Oh, that is really rich! I wonder if these people have any idea how they look to the public. Probably don’t care. Notice he’s VP of Investor Relations, so presumably he knows what an investor or speculator is. Please, someone pass me a barf bag.

Comment by palmetto
2006-07-25 13:53:46

Ok, I about messed myself after reading that comment by the VP of Investor Relations. I think anyone on this blog who needs a gig ought to fax or email their resume with cover letter to the HR department at Centex, referencing Mr. Garfield’s comments and say they’d like to interview for his job. If I were an investor in Centex and read that, I’d be selling off as fast as I could. Forget about attention deficit disorder. Clearly, the housing bubble has spawned “Intelligence Deficit Disorder”, or IDD.

Comment by circling_vulture
2006-07-25 14:21:09

he’s just a barefaced liar. speculators are to blame in much the same way roaches are to blame when you leave rotting food lying around. the god-damned banks and gov’t are to blame for this mess - again i say it’s a scam. 500K loans aren’t just given away to wal-mart employees unless there’s something filthy going on.

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Comment by jmr
2006-07-25 14:00:28

From financialsense.com, Richard T. Williams:

“A recent report in the NY Times talked about over $400 billion worth of mortgages written over the last 3 years are coming up for resets of teaser rates that are typically well below market levels for interest rates. The effect could be to drive household expenses sharply higher to the extent that mortgage holders do not double down by refinancing with another hybrid form of mortgage that allows their payments to remain relatively low. Our concern is that with housing prices falling recently many home owners may no longer qualify based on income for the mortgages that were written with the benefit of home equity balances. That would mean consumers would have little choice but to sell their homes or embark on a serious austerity plan that would impact spending across the economy. If they choose to sell their homes or if they have no choice, then even a relatively small percentage of home owners selling in distress will take out the natural bid in the marketplace, forcing prices down across the entire housing stock and potentially setting off another round of forced sales.

Because of the use of derivatives in the mortgage market and the easy availability of hybrid mortgages that significantly reduce the monthly payments but at a high cost down the road, typical real estate behaviors may no longer be operative. Normal behavior in a pullback from recent high housing prices would be a slowdown in volume as sellers become reticent to cut prices down enough to clear the market. This hoping for better prices in the face of evidence to the contrary slows the declines in price because sellers often would elect not to sell until they get their price. In today’s marketplace this option to continue holding the home and paying the mortgage may no longer be viable for consumers with hybrid mortgages and low income to loan statistics made possible by such features as no amortization or teaser rate resets. Once the piper comes to be paid, home owners that cannot refinance will have to pay up by 100% to 200% depending on the type of mortgage employed, cutting retail spending and slowing economic activity. Or they may be forced to sell at the market price. If the amount of home equity falls below the loan amount, a possibility that has become increasingly likely with a 20%+ decline in housing prices, home owners may elect in large numbers to hand the keys back to the bank. The big problem arising from this scenario is that banks are notorious for dumping repos at whatever bid they can get, further hitting home prices.”

The Start of Something?

Comment by Mozo Maz
2006-07-25 16:58:05

Right now people are avoiding the problem by just doing another re-fi, into yet another ARM with a teaser rate. I’m starting to think the bubble might get another year of life support, as long as rates overall remain low. (Long rates have even backed off about 1/4 over the last month.)

But as we keep saying, it’s just going to make the bust that much worse when we finally face it.

 
 
Comment by Poshboy
2006-07-26 08:42:16

Here is a 26 July WaPo front-page, below-the-fold story about the DC market:

http://www.washingtonpost.com/wp-dyn/content/article/2006/07/25/AR2006072501513.html

“After 5 Years of Growth, Home Prices Drop; Inventories Swell in Parts of D.C. Region”

Oh yeah, this malaise is deep in the lungs here in Northern Virginia!

 
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