May 30, 2007

The Homebuilding Environment Remains Difficult: CEO

Some housing bubble news from Wall Street and Washington. “Builder confidence in the condominium housing market eroded significantly in the first quarter of 2007, according to the latest results of the Multifamily Condo Market Index, released today by National Association of Home Builders. The component of the MCMI that tracks current conditions in the condo market stood at 23.1, down nearly 14 points from this time a year ago.”

“A rating of 50 generally indicates that the number of positive responses is about the same as the number of negative responses.”

“‘There’s heavy excess inventory and now the shakeout in the subprime mortgage market has taken its toll on the for-sale side of the multifamily housing market,’ says NAHB Chief Economist David Seiders. Seiders noted that, in many instances, multifamily developers who had begun for-sale projects are switching gears and delivering new rental apartment communities instead.”

From Reuters. “Citing a difficult market for home builders, Pulte Homes Inc said on Tuesday it would cut 16 percent of its work force, adding to previously announced job cuts. Pulte Homes said it expects a pretax charge in the current, second quarter of $40 million to $50 million related to the job cuts.”

“The company said it aims to reduce costs and improve operating efficiencies amid a ‘challenging operating environment that continues to exist in the U.S. homebuilding industry.’ Responding to the broad housing slowdown, Pulte Homes cut approximately a quarter of its work force in 2006 and earlier this year.”

“‘The homebuilding environment remains difficult and our current overhead levels are structured for a business that is larger than the market presently allows,’ Richard Dugas, Jr., CEO of Pulte Homes, said in the statement.”

“At least three major U.S. home builders suffering from the housing slump may violate contracts that govern bank credit facilities, Standard & Poor’s analysts said on Tuesday.”

“Centex Corp., D.R. Horton Inc. and Pulte Homes Inc. are three of six home builders whose debt rating outlooks were revised on Thursday to negative from stable by S&P. The three are ‘all close’ to breaking covenants, S&P analyst Jim Fielding said on a conference call.”

“The home builders are mostly sapped by excess inventories as cooling home-price appreciation and tightening lending standards curbed sales, the analysts said. ‘We’re operating under the assumption that another shoe could drop (in the U.S. housing market) and become more severe,’ Fielding said.”

From Bloomberg. “After years of easy profits, a chain reaction of delinquency, default and foreclosure has ripped through the subprime mortgage industry, which originated $722 billion of loans last year. Since the beginning of 2006, more than 50 U.S. mortgage companies have put themselves up for sale, closed or declared bankruptcy, according to data compiled by Bloomberg.”

“The pain has only just begun. As home prices sink and mortgage defaults climb, bond investors who financed the U.S. housing boom stand to lose as much as $75 billion on securities backed by subprime mortgages, according to Pacific Investment Management Co.”

“The imprint of ‘Secured Funding’ is all that remains of the corporate logo that once graced the outside of the two-story building. What little remains of Secured Funding, which specialized in home equity loans, or second mortgages, to people with lousy credit, is now housed in a building across the near-empty parking lot, where a receptionist tells a caller: ‘Our wholesale division is closed. We’re no longer doing business with brokers.’”

“‘Even with explanations, most borrowers didn’t really understand what types of loans they were getting,’ says Maureen McCormack, (a) former Secured Funding employee. ‘They just cared about the monthly payment.’”

“Dane Marin, who worked at Secured Funding for a year, says managers harangued everyone. ‘If you weren’t on the phone very long, you’d get an e-mail saying, ‘Get your head out of your ass,’ he says.”

“At times, Secured Funding salesmen broke the rules, according to at least three lawsuits filed last year in federal courts in St. Louis and Milwaukee. In one case, Secured Funding sent the plaintiff a ‘personalized Platinum Equity Card’ offering ‘$50,000 or more in cash’ just for calling Secured’s toll-free telephone number.”

“However the leads came in, Secured Funding’s salespeople made sure the fish stayed on the hook. ‘You would say anything to get the loan through,’ says Cristopher Pike, who worked at Secured in 2005 and ‘06.”

“Many subprime sales techniques are now spilling out in the lawsuits, advocacy reports and Congressional hearings that predictably follow such industry meltdowns. Several lawsuits illustrate the lengths to which the big wholesalers, and ultimately Wall Street, were able to outsource the selling of the loans as far down the chain as possible.”

“Mortgage investors dealing with the fallout of the subprime crisis are facing an old nemesis: rising Treasury yields.”

“As a result, the Treasury market faces increased selling pressure as mortgage investors, who typically use U.S. government bonds or interest rate derivatives to hedge against effects of changing mortgage rates, are instead selling Treasuries to counter the impact of higher rates on their mortgage investment.”

“‘There’ll be pressure to sell more as yields head up,’ said Richard Gordon, fixed-income market strategist at Wachovia Securities. ‘This low volatility environment has left some of these players unhedged.’”

“The mortgage sector may be a catalyst for higher Treasury yields, Deutsche analysts said. More homeowners with adjustable-rate mortgages will likely switch to fixed-rate ones in the coming months when ultra-low teaser rates on their adjustable loans expire, they said.”

“The pressure on Treasury yields would be compounded if the 10-year yield hit 5 percent, some analysts said. ‘There could be some pain at 5 percent,’ said Wachovia’s Gordon.”




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82 Comments »

Comment by Ben Jones
2007-05-30 12:00:56

‘The Federal Reserve said on Tuesday a public hearing on potential new rules to curb abusive home mortgage lending practices would cover prepayment penalties, low documentation loans and consideration of borrowers’ repayment abilities.

Comment by Bill in Carolina
2007-05-30 13:41:27

Is there any good handle on who “owns” all the subprime and Alt-A MBS bonds that Wall Street packaged and sold? How much is owned by domestic entities (hedge funds, retirement funds, bond mutual funds, etc.) and how much is owned by foreign entities?

And how did Wall Street manage to convince these bagholders that the MBSs were high yield yet low risk investments?

Comment by GetStucco
2007-05-30 13:48:56

“And how did Wall Street manage to convince these bagholders that the MBSs were high yield yet low risk investments?”

That is quite a conundrum!

Comment by amy repo girl
2007-05-30 13:51:34

“The pain has only just begun. As home prices sink and mortgage defaults climb, bond investors who financed the U.S. housing boom stand to lose as much as $75 billion on securities backed by subprime mortgages, according to Pacific Investment Management Co.”

75 billions sound a bit low to me considering that upward of a trillion were loaned out during the last few years.

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Comment by GetStucco
2007-05-30 14:07:14

Maybe they omitted language about the rate at which the money would be lost, as in “$75 billion a day“?

 
Comment by Backstage
2007-05-30 20:47:54

Or maybe $75 Billion EACH

 
 
Comment by North GA Dave
2007-05-30 14:28:48

“And how did Wall Street manage to convince these bagholders that the MBSs were high yield yet low risk investments?”

In the ame way they did with junk bonds in the 80’s. It only took 20 years for investors to forget that lesson.

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Comment by Carlsbad Renter
2007-05-30 14:14:48

From what I have read is that no one really knows who owns all these bonds. Due to the layers and layers of tranching, CDO’s, hedge funds, etc., not even the issuers of the bonds no who exactly is the party most at risk (foreign or domestic).

In the end, we will all know who it is, but it will only be after a large collapse. My guess it is going to be the last person standing after the music stops.

Comment by AKron
2007-05-31 00:11:20

The first one to burn will be the banks, lenders (i.e. Countrywide) and GSEs IMHO (except Ginnie Mae). Typically they hold the subordinate tranches of the CDOs/REMICs as a way of guaranteeing the principal of the ‘higher’ tranches. At least that is how it ‘traditionally’ worked– maybe now they have found GF to buy those securities, too…

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Comment by OCDan
2007-05-30 12:05:59

“Builder confidence in the condominium housing market eroded significantly in the first quarter of 2007″

This is a good sign. What is that old adage, “Condos are the last to go up and the first to go down.” Now that the builders have caught on, hopefully the sheeple will begin to.

Comment by BanteringBear
2007-05-30 12:27:43

“This is a good sign. What is that old adage, “Condos are the last to go up and the first to go down.” Now that the builders have caught on, hopefully the sheeple will begin to.”

The sheeple don’t yet get it, still believing that real estate is always a good investment. While channel surfing the other night, I happened upon a horrible program on how to make millions (CNBC?) which featured Barbara Corchoran amongst other guests. The gist of it was that, in order to become wealthy, you MUST buy real estate. It was pathetic. But folks buy into it. There are still masses of sheeple hell bent on getting their hands on any real estate. Scary.

Comment by NYCityBoy
2007-05-30 12:43:27

She’s an awful little troll.

I’m just glad her little abortion of a project in my neighborhood is going to fail miserably. Stop over for a cup of Jack Daniels and I will show you the Corcoran Group’s latest brain-fart at beatwilliam.com . You will laugh until you cry when you see the spot for these “luxury” condos located about 1 block from the New York Fed.

 
Comment by street sense
2007-05-30 12:54:42

Barbara Corchoran….

I caught a little of that show myself. Distinctly remember the line of ‘borrow the money from some other sucker’ when she was referring to financing property. She hasn’t read this blog or she would know who the suckers really are.

Comment by Arwen U.
2007-05-30 13:49:43

I actually read her book Use What You’ve Got. I found the organizational tips used by her mother of 10 children with only 2 bedrooms useful. Other than that, it went back to the used bookstore.

The Corcoran Group nearly went bankrupt in the early 90’s, along with the likes of Donald Trump. She managed to crawl her way back and sell it, but it wasn’t pretty at the time. It seems like history is rhyming again.

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Comment by polly
2007-05-30 14:20:46

10 kids (and presumably 2 adults) with 2 bedrooms doesn’t require organizational tips. It requires a filing system.

 
 
 
 
Comment by phillygal
2007-05-30 12:41:36

The component of the MCMI that tracks current conditions in the condo market stood at 23.1, down nearly 14 points from this time a year ago.”

Oopsie!

This would make me happy if I were still in the market for a condo. But after hearing so many HOA horror stories, I guess I’ll be looking for a sturdily built cracker-box. Someday.

Comment by ShaunT79
2007-05-30 13:07:37

Wow, thats over a 50% slide in over a year. Doesn’t get reported that way though. You go MSM :)

Comment by GetStucco
2007-05-30 13:50:00

I reported it that way; see below…

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Comment by GH
2007-05-30 12:10:22

consideration of borrowers’ repayment abilities.

Harldly anyone would qualify in serious bubble areas. If this can be pulled off, I would anticipate prices would tumble, since any serious seller would have to take affordability into account.

 
Comment by crispy&cole
2007-05-30 12:15:40

Secured Funding, they were one of the first to go down:

http://bakersfieldbubble.blogspot.com/2007/01/another-one-goes-down.html

Comment by crispy&cole
2007-05-30 12:16:25

Secured Funding Corporation is “the work hard, play hard company.” We are a big proponent of a balanced lifestyle. The company not only throws huge parties for employees but also takes them on trips to Las Vegas, Lake Tahoe, Catalina and other exotic ports o call.

 
Comment by crispy&cole
2007-05-30 12:19:43

Secured Funding Corporation’s own specialty café, Salt Creek Coffee Co. serves espresso drinks, breakfast fare, bottled beverages, soups, salads, sourdough bread bowls, fresh sandwiches, blended drinks, and snacks for you every workday…

Comment by polly
2007-05-30 14:17:33

So the business was a loss leader for the snack bar?

 
 
 
Comment by ex-nnvmtgbrkr
2007-05-30 12:19:56

“More homeowners with adjustable-rate mortgages will likely switch to fixed-rate ones in the coming months when ultra-low teaser rates on their adjustable loans expire, they said.”

If they can qualify.

“The pressure on Treasury yields would be compounded if the 10-year yield hit 5 percent, some analysts said. ‘There could be some pain at 5 percent,’ said Wachovia’s Gordon.”

Look for fixed 30yr closing in on 7% real soon. Pain indeed!

Comment by SoBay
2007-05-30 12:40:48

More homeowners with adjustable-rate mortgages will likely switch to fixed-rate ones in the coming months when ultra-low teaser rates on their adjustable loans expire, they said.”

The guy that said that is the Czar on the Planet Denial. He has a total disconnect. The average lunk who purchased a home with a 100% suicide loan is toast. He is in a hopeless situation.

 
Comment by MBRenter
2007-05-30 13:22:26

Look for fixed 30yr closing in on 7% real soon. Pain indeed!

Look, 30 year fixed could be at 1% and that doesn’t change the amount of pain that the high end of the market is facing. SoCal pricing is built upon the back of the pay option neg-am ARM, so requiring homeowners to pay even the interest only, much less any principal, is going to devastate them.

The fact that loans are resetting to any percentage is blitzing the market, because the “$1700/mo for $600k” payment no longer exists. Fixed rate mortgages period will cause pain.

 
Comment by Nick
2007-05-30 13:36:03

Look for fixed 30yr closing in on 7% real soon. Pain indeed!

Why do you think that? If the RE bust causes consumer spending to contract and the economy to slow down, inflation may ease off and interest rates will likely go lower, not higher. Just MHO.

Upside-down mortgage holders will be in a world of pain regardless of interest rates, however.

Comment by nikibayarea
2007-05-30 14:01:16

Consumer spending does not cause inflation. Since 2001, the fed has increased the money supply by 25%–this is what is causing inflation, whether it is in durables, stock market, housing, etc.

Comment by Front Range Bob
2007-05-30 15:10:36

Indeed. Johnny Stagflation is knocking on the door, with a big axe and an evil grin.

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Comment by MBRenter
2007-05-30 14:20:16

If the RE bust causes consumer spending to contract and the economy to slow down, inflation may ease off and interest rates will likely go lower, not higher.

I’d like to refute your argument. Just let me refer you to the latest published M3 numbers that shOH HOLY GOD THEY AREN’T PUBLISHED ANY LONGER.

Comment by englishman
2007-05-31 00:58:52

Interest rates down = US Dollar down

US Dollar down = import costs up

Import costs up = inflation up

The Fed cannot drop rates because it would devalue the currency, if that happens then the cost of fuel (and everything else imported) will go up. The currency is already very weak. The Fed would love to raise rates to remedy this but it cannot do so because it would slaughter the domestic housing market.

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Comment by AKron
2007-05-31 00:43:32

If the dollar keeps devaluating, and if the central banks get tired of buying treasuries, prices of imported items (i.e. petroleum) will rise and treasury yields will also have to rise to entice enough buyers.

Comment by AKron
2007-05-31 00:46:59

BTW, can anyone explain to me why so many ARMs use LIBOR instead of T-bill rates? Why London Interbank rate? What if treasuries’ interest goes up and the LIBOR falls? Wouldn’t the lenders be trashed? I must be missing something here…

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Comment by beachhunter
2007-05-30 12:29:02

Everyone looks to blame someone… spending years both as a realtor and mortgage broker.. people got what they deserved but most importantly what they asked for.. blame yourself for your errors and the sooner you will recover.. It’s a form of “AA” but credit and greed abuse.. I never funded a option arm.. told anyone who would listen to sell at mid 04 as I did.. it was a little early but better than a little late. I advised everone who was buying to understand things go down.. so not all of us are bad.. but most are really bad.. short time profit vs. Long time customers.. NO high horse here just buckets of cash waiting for the bottom in 2011ish- san diego style. The good ones in the business found good sources for subprime.. help people clean credit.. limit cash out and get them to clean up there act.. refi them into fannie mae 30 year at 2 year mark.. 100% purchases were for suckers or gamblers.. both seem to find a way to hang themselves.. It was fun to listen to taking heads in the industry buying hummers, 3 homes, plastic life.. now they have nothing.. nothing at all.. subprime sales man helps subprime customes.. it was the blind leading the blind..

Comment by phillygal
2007-05-30 12:50:13

people got what they deserved but most importantly what they asked for

That’s pretty much the gist of my PHL RE boom conversation last night. The FBs were not blameless. They wanted to believe the Realtor Instant Millionaire Siren Song.

 
 
Comment by Samantha S.
2007-05-30 12:40:05

Can someone provide a link to an ‘Investing for dummies” site that explains the relationship between Rising Treasury yields as it affects the mortgage investors? This stuff (especially that Reuters story) is all Greek to me, and I’d like to understand it better. Thanks :)

Comment by Lakeside
2007-05-30 13:30:25

Samantha — I don’t know if this has already been posted, but it provides an explanation:

http://www.reuters.com/article/reutersEdge/idUSN3042169320070530?src=053007_1256_INVESTING_comment_n_analysis

 
Comment by bluto
2007-05-30 13:34:42

It’s a fairly complex retationship (because you can prepay a mortgage but treasuries are good until maturity) but a good rule of thumb in the current (last several years) is that you add 1-1.5% to the 10 year tresury rate to reach the 30 year fixed mortgage rate.
As rates rise that means that the value of the bonds falls. A decent rule of thumb is the unhedged investor looses about 1% for each tenth of a point (yeild percentage) in the change of a treasury (ie 4.9 to 5.0), although some of the decline in a mortgage bond is cushioned by the decline in the value of the option explaining that is far more complex.
It starts to matter when you consider that if all bonds were unhedged, something like 100 billion is lost each treasury rates increase 0.1%.

Comment by bluto
2007-05-30 13:37:44

Note that that last line should be $50 to $70 billion for each increase of 0.1% (I was a little to simplistic in my first duration assumption).

 
Comment by GetStucco
2007-05-30 14:26:48

“(because you can prepay a mortgage but treasuries are good until maturity)”

Principle risk also differs, as mortgages can go into default and leave the lender (or owner of the MBS) with collateral worth less than the value of the loans, while T-bonds really face no default risk, other than higher-than-expected inflation or currency devaluation.

Comment by Front Range Bob
2007-05-30 15:14:47

“while T-bonds really face no default risk”

Not yet, anyway. When the boomer start drawing off the entitlements in droves, things will change.

Got food lines?

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Comment by yogurt
2007-05-31 00:13:19

No they won’t. How on earth do you think the government can fund entitlements, or anything else, if it defaults on its own debt? The government giveth entitlements and the government can taketh away.

T-bonds have no default risk. Inflation risk definitely, but that’s a different risk.

 
 
Comment by AKron
2007-05-31 00:29:02

Oddly enough, in traditional valuation of Agency MBS the default rate is assumed zero (!). This is clearly true if the mortgages are FHA/VA/ Ginnie Mae (i.e. Gov’t guaranteed), others are protected by being guaranteed by the servicers. A lot of the time, the securitizer will hold the subordinate tranche as a guarantee, also.
For non-agency MBSs, default risk is reduced by overcollateralization, keeping subordinate tranches with the securitizer and getting 3-rd party guarantees.
So, most of the MBS holder will only see defaults hitting their bottom line after the banks/lenders/Agencies have defaulted. That may be why the MBS values have not sunk beneath the waves…. yet.

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Comment by bluto
2007-05-31 05:31:25

Then use GNMA paper (they are the same credit risk as treasuries).

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Comment by flat
2007-05-30 16:17:45

and they 10yr has been sleepy till just recently

 
 
Comment by az_lender
2007-05-30 13:45:17

This may not satisfy you, but I’m going to argue that you don’t need to understand very much of it. I got into the direct mortgage lending business in 1993 BECAUSE the yields on 30-year U.S. Treasury bonds had fallen below 6% for the first time in a couple of decades. When I learned that trailer-park residents would pay 10% for mortgage loans I said whoopee. Okay, this does not address your question, but here’s what’s obvious: all long-term debt instruments compete with each other for yield-hungry buyers. If long rates in general go up, securitized mortgages must yield more in order to attract any buyers. Prepayments would be likely to decrease because, for example, nobody would be able to re-fi to a lower fixed rate than what they were paying before. In a general way, long rates will rise when inflation is expected, as lenders will shorten the maturities of the debt obligations they are buying, and may prefer to buy e.g. gold.
All the stuff about the weird derivatives in the Reuters story is probably interesting, but I don’t think it changes the basic picture I have just painted.
- az_lender, unhedged but not (I hope) unhinged

Comment by pt_barnum_bank
2007-05-30 14:56:03

az_lender. Is it difficult to sell direct mortgages? Too bad you can’t do the ole “fractional reserve” like a bank. Then you could make some real coin.

 
 
 
Comment by BanteringBear
2007-05-30 12:40:59

“The mortgage sector may be a catalyst for higher Treasury yields, Deutsche analysts said. More homeowners with adjustable-rate mortgages will likely switch to fixed-rate ones in the coming months when ultra-low teaser rates on their adjustable loans expire, they said.”

Not so fast. Though many homedebtors may want to get out of their adjustable loan, they are unable to, either because they are underwater on the property, or their credit is hammered. It’s curtains for many.

Comment by GetStucco
2007-05-30 14:24:44

This is why I expect the gubmint to step in through the FHA or other federal agency to offer ultra-low fixed rate loans (with below-market interest rates subsidized courtesy of the U.S. taxpayer) in order to get myriads of FBs with ARMs down from the ledge they are perched on.

Comment by pt_barnum_bank
2007-05-30 14:58:01

Will the rest of us prudent homeowners also be able to get in on these rates?

Comment by Backstage
2007-05-30 21:27:28

No, and that’s why the effort wil fail. Being stupid is not a reason for a bail-outl. Why should I pay taxes to support the idiot down the street, unless I get the same treatment?

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Comment by AKron
2007-05-31 01:01:20

“Though many homedebtors may want to get out of their adjustable loan, they are unable to, either because they are underwater on the property, or their credit is hammered.”

Oddly enough, this should give a (tiny) boost to MBS values. If interest rates rise, bondholders hope for prepayment so that they can reinvest the money, but in this case the prepayment rate is usually low because FB don’t want to refi if interest rates are rising. If interest rates fall, bondholders want prepayments to slow down so that they can keep getting higher rates, but are usually frustrated by FB who are encouraged to refi by the lower rates. This dynamic is priced into the bonds when sold.
As you have noted, this is breaking down, as the FB cannot refi even if rates drop. So, as long as the guarantees hold (a big if) and if rates drop, the MBS holders should get extra unanticipated money due to the tightening up of lending standards.
Of course, for MBS values to rise, this effect will have to outweigh the possibility of defaults overwhelming the servicer guarantees.

 
 
Comment by Peter T
2007-05-30 12:44:24

Could someone elucidate the mathematics behind the Reuters news, especially the following:
“the Treasury market faces increased selling pressure as mortgage investors, who typically use U.S. government bonds or interest rate derivatives to hedge against effects of changing mortgage rates, are instead selling Treasuries to counter the impact of higher rates on their mortgage investment.”

How does the hedge with treasuries work, and why are they now pressured to sell treasuries?

Comment by NeilT
2007-05-30 13:01:48

My interpretation: They are putting their hedge to good use now. Seems logical, it’s like cashing in one’s insurance policy when s**t hits the fan.
Game over!

 
Comment by bluto
2007-05-30 13:42:45

You buy mortgages and sell treasuries (it’s actually Eurodollars or swaps in the real world but almost close enough).
The problem occurs when the difference in those rates widen or narrow (meaning your swaps don’t move in the same way that the mortgage rates move). That’s called basis risk and in mortgages is the subject of many a finance doctoral thesis.
In this article, the author is speculating that many people haven’t been hedging so they’ll be selling swaps (and pushing the yield up further).
Using Neil’s insurance comment think of it as waiting for the cow to lift it’s tail before you start to buy insurance.

 
Comment by GetStucco
2007-05-30 13:44:28

According to the Fisher effect, higher inflation expectations are reflected in the presence of an inflation risk premium in long-term interest rates, to compensate investors for the risk that nominal dollar coupon payments will decline in real value over time:

(nominal interest rate) = (real interest rate) + (inflation risk premium)

If the Fed keeps talking tough on inflation while letting gas and food prices spiral upward and letting the dollar’s value slide, a higher inflation risk premium in long term T-bond yields (and fixed-rate mortgage interest rates) will be the natural consequence.

Comment by GetStucco
2007-05-30 13:46:12

P.S. Yes, it is the same Fisher (Irving) who made the “permanently high plateau” comment about the 1929 stock market index level.

 
 
Comment by gab
2007-05-30 13:47:35

The MBS market is less liquid than the Treasury market, so you sell treasuries instead of Mortgages. That’s the gist of the trade. The mathematics are more complicated and dependent on the coupon of the Mortgages you’re hedging. Suffice to say, that this type of “dynamic hedging” (the more it goes down, the more you have to sell) can exacerbate market moves. The classic example being the 1987 stock market meltdown.

In my opinion, I don’t believe we’ll see a dramatic bond market selloff this time due to mortgage hedging. If the economy weakens presently or in the near future, buyers of bonds will emerge expecting a Fed ease. For more info, vistit the PIMCO website and read McCulley’s latest post.

 
 
Comment by rellimgerg
2007-05-30 12:46:13

“‘You would say anything to get the loan through,’ says Cristopher Pike”

What an A$$hole!

 
Comment by NeilT
2007-05-30 12:47:07

“The home builders are mostly sapped by excess inventories as cooling home-price appreciation and tightening lending standards curbed sales, the analysts said. ‘We’re operating under the assumption that another shoe could drop (in the U.S. housing market) and become more severe,’ Fielding said.

Just-released Fed meeting minutes reveal that Bernanke et al. are finding that housing downturn is likely to be more severe than they had expected [wished!] earlier.

This is all good news. Members on this blog have been right all along. Consensus here seems to be that we should check the condition of the patient again next year and till then should starve him of our cash. So, tomorrow (6/1) I am going to tell my landlord that I will be pleased to renew the rental lease for another year. This means more cash goes into my bank account, to the tune of $22.8 K/year extra [based on $3000 housing cost - $1100 rent cost incl utilities per month].
Life is good!

Comment by Groundhogday
2007-05-30 13:08:32

Me too Neil, $25k/year renting vs. owning. Even if home prices just flatten (not likely) I come out way ahead. If they fall…

 
 
Comment by beachhunter
2007-05-30 12:50:01

can someone tell me what Builder confidence is? I have not seen a builder with any confidence? Is there a better name for this?

Comment by Duane Lapinski
2007-05-30 16:16:39

Builder confidence; the builder is still confidend he can go to the bank and get a loan. If he can’t get a loan there is no builder confidence.

 
 
Comment by snake charmer
2007-05-30 12:50:38

“‘Even with explanations, most borrowers didn’t really understand what types of loans they were getting,’ says Maureen McCormack, a former Secured Funding employee.”

Maureen McCormack? Marsha, Marsha, Marsha! “Here’s the story, of a lovely lady, who was living with three very lovely girls .. all of them had hair of gold, like their mother, the youngest one in curls.”

 
Comment by wmbz
2007-05-30 12:54:42

“‘Even with explanations, most borrowers didn’t really understand what types of loans they were getting,’ says Maureen McCormack, (a) former Secured Funding employee. ‘They just cared about the monthly payment.’”

That’s it in a nut shell! How much a month.

Comment by Backstage
2007-05-30 21:37:17

But here is the killer: there are 360 months in a 30 year mortgage. Howmuchamonth has got to work for each and everyone.

 
 
Comment by Xpovos
2007-05-30 12:55:09

Can someone help me to understand a little better how the 10-year Treasury bond is going to affect this situation? I consider myself educated, but a novice in this area. I got from the article that 10-year T roughly corresponds to the 30-year mortgage rate, and obviously, a rise in mortgage rates will pinch the FB harder. Personally, I think a few point rise in mortgage rates would solve a lot of the problems pretty fast. But as noted above, this isn’t where I excel.

 
Comment by loafer
2007-05-30 13:03:53

The link to 10 year T-Bills is about fixing interest rates. Fixed rate mortgages are linked to swap rates, and if T Bill rates go up, so do interest rate swaps. This makes fixed mortgages more expensive.

How T Bills hedge floating rate CMBS notes I am unclear, other than by balancing an investors portfolio between fixed and floating.

Perhaps I am missing something.

Regards,

Loafer

 
Comment by ShaunT79
2007-05-30 13:12:13

Isn’t it good for renters that homebuilders keep on building? We really don’t want them to slow down, do we? I guess that would effect GDP, which could effect credit contraction, but overall, it seems like we should be rooting for the builders, correct?

 
Comment by GetStucco
2007-05-30 13:39:35

“The component of the MCMI that tracks current conditions in the condo market stood at 23.1, down nearly 14 points from this time a year ago. A rating of 50 generally indicates that the number of positive responses is about the same as the number of negative responses.”

I am guessing 23.1 must be near (if not at) the all-time low for the MCMI. For historical perspective, here is a blurb from the NAHB website, which shows the 23.1 level is quite a bit below the level of 61.3 measured in 2005Q2:

“Builder’s Confidence In Condo Market Dips Again In Second Quarter According To New Multifamily Index
August 22, 2006

The component of the MCMI that tracks current condo supply conditions fell to an index value of 32.0, compared to a value of 61.3 during the second quarter of last year. It was the third time since NAHB began tracking this data that the for-sale index has fallen below 50. A rating of 50 generally indicates that the number of positive responses is about the same as the number of negative responses.

The MCMI is a quarterly, nationwide survey of multifamily builders and property owners who are asked a series of questions about market conditions as well as their expectations for the next six months. Survey answers are assigned numerical values to calculate two separate indexes, one tracking rental demand and the other tracking supply conditions for rental and for-sale units. The index gauging builder sentiment about condo production over the next six month also declined, down to 34. The scale is from 0 to 100.”

http://www.nahb.org/news_details.aspx?sectionID=238&newsID=3121

Comment by GetStucco
2007-05-30 14:21:41

“23.1″

Does anyone else think the condo investing craze may be over until the next cycle (at least ten years out in the future)?

Comment by Former FB
2007-05-30 15:53:05

Better yet, does anyone think it’s not? There are the dead debtors walking who maybe don’t see the tsunami yet and might give you an optimistic quote for a few more months but I don’t think they can buy much more in that time. So yeah, I think that everyone who counts thinks it’s over…

 
 
 
Comment by polly
2007-05-30 13:52:06

“Citing a difficult market for home builders, Pulte Homes Inc said on Tuesday it would cut 16 percent of its work force, adding to previously announced job cuts.

Don’t know that much about Pulte, but Toll should fire its architects (yeah, I know they are probably contractors). My boss gave me the shiny info package from a Toll condo building that went up recently not too far from my apartment. None of the basic floor plans had coat closets! Not one. You had to go into the bedrooms to get to a closet of any kind. These buildings had wishing prices from the mid $300’s for a small (app. 600 sq ft) one bedroom. Yo, dude, this is Maryland. People wear coats. People have umbrellas.

The rest of the design stunk too: tiny little areas (6 1/2 feet wide!)designated as dining rooms, very small bedrooms, no place to put a TV in the living room area, etc.

The two bedroom/2 bath 1247 sq foot one I thought looked almost livable was listed in the high 500’s, I think. I’d give them $180K for it. Maybe up to $210K. The area isn’t all that “nice” but it is very convinient to public transportation.

Comment by snake charmer
2007-05-30 14:34:46

I think a lot of builders should fire their architects. Some of the stuff in Florida, including single-family houses, looks like a bad imitation of cubist art. Either that or someone drew up the plans on an Etch-a-Sketch.

My theory on condos is that they were built with the expectation that the owners wouldn’t care about interior design, or about anything other than perceived immediate resale value.

Comment by MacAttack
2007-05-30 15:09:39

I can show you a Horton townhouse complex with two stories over a garage… both the furnace and the hot water heater are in the third-floor CEILING!!!

 
Comment by Former FB
2007-05-30 15:58:35

Exactly. What do flippers need with closets? Even a person living there probably doesn’t want to have anyone over until they have furniture, which will be after they move up to the next place…or the next one after that. In the meantime everything goes in the bedroom closet or on a hook in the garage. A closet by the front door is useless because nobody goes out that way anyway.

 
Comment by Flic
2007-05-30 18:05:20

The brand new house I am renting in Bradenton FL doesn’t have one closet outside the bedrooms. It’s 2500 sq/ft and I don’t have a closet to store some odds & ends. I guess that’s why most Floridian’s have garages that are used for storage and cars stay outside. Kind of ridiculous considering I grew up in a modest 2000 sq/ft house and had closet/storage space out the wazoo.

 
Comment by tcm_guy
2007-05-30 19:58:09

I rented a two bedroom townhouse for several years in Bowling Green, KY. Two closets in the two bedrooms upstairs, no closet downstairs. I thought this was very strange. Have never seen anything like it before, have never seen anything like it since.

Got 10% down?

 
 
 
Comment by GetStucco
2007-05-30 13:54:23

“The pressure on Treasury yields would be compounded if the 10-year yield hit 5 percent, some analysts said. ‘There could be some pain at 5 percent,’ said Wachovia’s Gordon.”

Which is why I believe the Fed is currently stepping outside it’s traditional role of controlling only the FFR to “contain” the long-term T-bond yields below 5%. Most people believe the Fed only controls the short end of the yield curve, but I believe it is different this time.

http://www.bloomberg.com/markets/rates/index.html

Comment by GetStucco
2007-05-30 14:20:32

P.S. “Containing” l-t T-bond yields is also a good way to ensure that the stock market “always goes up.” T-bonds and stocks are substitute assets in portfolio allocations — what is bad for T-bonds (conundrumishly low yields despite burgeoning inflation pressures) is good for stocks.

Comment by House Inspector Clouseau
2007-05-30 16:24:54

perhaps. But I’m of the opinion that the fed has lost control of the Long term rates.

otherwise, we would NOT have had an inverted yield curve for so long. it is a harbinger of recession, and should have been avoided.

Low long term rates can be simply explained: too much money chasing too many goods (including treasuries). The price thus goes up, then the yield obviously falls.

The fed can simply keep long term rates by flooding the system with cash (as they are doing), thus removing the need for direct market participation (in long term yields).

the war on savers began around 2000, and has only intensified.

Comment by Linda O
2007-05-30 18:32:58

Yield curve is not so inverted as of today. 5-30-07 2 yr bonds have a yield of 4.88 and 10-yr bonds have yield of 4.87.

(Comments wont nest below this level)
 
 
 
 
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