Tuesday, March 13, 2007

Move Over Sub-Prime

With all the news lately concerning the sub-prime meltdown and its considerable effects on commercial (private and public) lending institutions it’s easy to forget that nearly 50% of all mortgage debt is held by the two main government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

These two organizations, though purportedly operating both to the benefit of the public and within certain constraints not required by commercial lenders are not immune from the very same risks that commercial lenders face when managing a large portfolio of debt.

To the contrary, it appears quite possible that because of the GSEs special status and federal entanglement, they may actually be presenting a greater risk of failure, and the possible systemic fallout that could follow, than any of the larger commercial lenders.

Although the GSEs don’t technically write sub-prime or alt-A loans and restrict their lending activities exclusively to conforming loans, they have not been immune from the current culture of excessive lending.

It’s important to note that nearly 6% of GSE debt is composed of ARM loans.

Additionally, at least 3% of GSE fixed and adjustable rate loans have “interest only” options.

Furthermore, the OFHEO limit for conforming single family loan soared to a lofty $417,000 during the historic housing boom.

In a speech given last week, Federal Reserve Chairman Bernanke suggested that the GSEs have taken on more risk than typical commercial lending institutions, function with far less “market force” scrutiny than comparable commercial lenders and don’t even fulfill the public objectives set out for them by the federal government.

“The regulatory framework under which the GSEs operate has two principal objectives: first, to support the GSEs’ mission of promoting homeownership, especially access to affordable housing; and second, to ensure that these two companies operate in a financially prudent manner.”

“This line of business [the GSEs] has raised public concern because its fundamental source of profitability is the widespread perception by investors that the U.S. government would not allow a GSE to fail, notwithstanding the fact that--as numerous government officials have asserted--the government has given no such guarantees.”

“Consequently, the GSEs’ ability to borrow at a preferential rate provides them with strong incentives both to expand the range of assets that they acquire and to increase the size of their portfolios to the greatest extent possible.”

“… they [GSE Portfolios] are not only large but also potentially subject to significant volatility and financial risk (including credit risk, interest-rate risk, and prepayment risk) and operational risk. Many observers, including the Federal Reserve Board, have expressed concern about the potential danger that these portfolios may pose to the broader financial system; that is, the GSE portfolios may be a source of systemic risk. … with possibly serious implications for the performance of the broader economy.”

“Unlike other private firms, however, the GSEs face little or no market discipline from their senior debt holders because of the belief among market participants that the U.S. government will back these institutions under almost any circumstances.”

“… because of both regulatory requirements and the force of market discipline, banks hold much more capital than GSEs hold. The very largest bank holding companies generally hold equity capital equal to 6 percent or more of assets, and the largest regional banks generally have capital ratios of about 8 percent. (As I am sure you are keenly aware, community banks often have a capital-to-assets ratio exceeding 10 percent.) In comparison, the GSEs hold capital equal to roughly 3.5 percent of assets. The justification for the low capital holdings of GSEs relative to banks is unclear.”

“However, evidence that Fannie and Freddie have had beneficial effects on the supply of affordable housing (over and above the benefits of their securitization activities for the mortgage market as a whole) has been difficult to find. After conducting several studies of the effects of GSEs on the mortgage market and establishing the GSEs’ disappointing results”

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Friday, March 09, 2007

Whaler or a Yatch?

Today, Ara K. Hovnanian, CEO of Hovnanian Enterprises Inc., presented the results of Q1 2007 showing a net loss of $57.3 million.

This reflected a significant series of pretax impairment charges related to their Fort Myers-Cape Coral Florida operations which totaled $93 million.

Apparently, Hovnanian acquired land and started building in the Fort Myers area in August 05, the exact month that MLS listings in that area soared from less than 5000 to over 20,000.

The first quarter also showed a 36% cancellation rate, the highest Hovnanian has recorded since the downturn began.

Hovnanian is now projecting a decline in deliveries of 14.8% to 20.8% below the 2006 actual of 20,201 units resulting in an 8.2% to 16.4% decline to total revenue from the 2006 $6.1 billion total.

But with all this, Hovnanian, although sounding very tentative and even explicitly reiterating that he is tentative, suggests that many markets may be starting to stabilize.

“Its not getting worse and it is slow and steady.”

“To use a weather analogy, it’s not longer a monsoon but it’s been downgraded to scattered thunder showers”

Making another analogy, Hovnanian suggests that the market is possibly near a bottom with a “boat hull” shaped recovery.

“Consequently, we are optimistic that the market may be near a bottom or could achieve a bottom some time soon, perhaps near the sales pace and prices that we are experiencing. When we do find the bottom, of this market downturn we are not anticipating a V-shaped or even a U-shaped recovery rather we believe the recovery is more likely to first exhibit a prolonged period of stabilization and fairly flat performance before turning up. I visualize this projected pattern of improvement as being similar to the shape of a boat hull, moving from the stern to bow, with the stern representing a recent sudden fall-off in the market and the bow representing the ultimate recovery with a more gradual smoother shape after a flat period in between.”

“What we don’t know is whether the boat is an 18 foot Whaler or a longer sea-going yatch.”

As for the percentage of buyers using sub-prime loans in order to finance Hovnanian homes, Hovnanian reported that based on roughly 70% of transactions, 18% of fiscal 2006 and 14% of Q1 2007 were financed with sub-prime loans that were either brokered or originated by Hovnanian’s own inside mortgage company.

When asked about the 30% of transactions that wasn’t captured, Hovnanian’s CFO J. Larry Sorsby answered:

“The real answer is we don’t know for sure but it wouldn’t surprise us if that 30% was more highly weighted towards sub-prime than our 70% was but that’s just a guess, we just don’t keep that data… and you know the overall markets use of sub-prime.. I’ve seen statistics around 20% so my belief is that our use of sub-prime is not unlike the overall market.”

“If you had asked me two weeks ago, frankly we hadn’t really focused on this a great deal, we would have been working under the premise that we were 5%, 6% or 7% use of sub-prime but once actually did the analysis and got the data put together, were telling you what our mortgage company originated.”

Sorsby goes on to suggest that California has always had the most use of creative loans and that the likely outcome of tightening standards will shrink the market of buyers but that it was hard to quantify.

Ara Hovnanian the added:

“The sub-prime mortgage market has not gone away, they’ve just tightened the criteria … that clearly does shrink the pool of potential qualifying buyers but that market has not gone away.”

Additionally, it appears that Hovnanian has taken some fairly significant steps to contain costs reducing the company’s head count of the company by 20%.

Larry Sorsby suggested:

“We have already reduced head counts for the last three quarters by 20%... What we are going to do going forward is as particular markets experience slower sales we will obviously right side the organizations market by market and if they have great sales we wont have to make adjustments.. It’s a market by market situation.”

The complete audio of the conference call can be listened to here.

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Thursday, March 08, 2007

Coming Home to Roost

With the sub-prime meltdown now in full swing, federal regulators seem to be working feverishly to crank shut the recklessly spewing spigot of easy lending.

A little late to the party maybe but at least its confirmation that something other than useless lip-service regarding “toxic” loans and “rate shock” needed to be paid to the situation.

Of course, we did see the initial signs of official concern back in June of 2005 when former Federal Reserve Chairman Alan Greenspan suggested that “the apparent froth in the housing markets may have spilled over into the mortgage markets” while raising concern about “exotic” mortgage products during his testimony to the Joint Economic committee.

This was later followed by the drafting and subsequent finalization in September 2006 of the Federal Reserve’s “Interagency Guidance on Nontraditional Mortgage Product Risks”, a series of new regulatory guidelines that clearly had the effect of creating concern among some of the most aggressive lenders.

About that same time, Congress expressed some interest in the issue, hosting a Senate Banking Committee hearing entitled “Calculated Risk: Assessing Non-Traditional Mortgage Products” in which many government and industry experts spilled their guts on the topic.

Unfortunately, these efforts, although sound an necessary, were essentially all in vain as the real damage had already been inflicted over an unrestrained period years that saw Americans go on a home-buying-investing-building-rehabbing-flipping binge of epic proportions.

While lenders hit new lows of standards and ethics the nations housing markets surged to highs not seen before in history.

Well now the “chickens have come home to roost” so to speak leaving federal regulators in the position of playing catch-up for the years of negligent regulatory oversight.

To that end, late yesterday afternoon the FDIC issued an “Order to Cease and Desist” to Fremont Investment and Loan of California, asserting that Fremont and it’s affiliates Fremont General Credit Corporation and Fremont General Corporation have been practicing “unsafe or unsound banking practices and violations of law and/or regulation”.

Certainly, this effort is to be expected in this new found era of regulatory risk management but what’s most interesting about this initiative is that many of the corrective actions that FDIC is requiring of the company could easily be applied to countless other lending institutions including those not know to be primarily sub-prime lenders.

This is, in fact, the key take-away from this action.

Fremont may have been primarily a sub-prime lender but it is being “spanked” for committing the very same “unsafe” practices that were exceptionally common during the housing run-up.

Most, if not all of the nations lenders, including the largest institutions, have engaged in either direct sub-prime lending or some form of “pseudo-prime” lending, turning a blind eye to both risk and ethics.

Foolishly though, many on Wall Street are refusing to see the writing on the wall, instead favoring a point of view that seeks to recognize the sub-prime fiasco as merely isolated circumstances, contained only to those participants at the lowest end of the economic spectrum and with the poorest credit quality.

One only needs to recount some of the circumstances we have all observed over the last five to ten years and contrast that to prior eras to see the insanity that has become commonplace in the home lending market.

Zero-down, low-doc no-doc, hybrid-piggyback-blended loans, ARMs, rate-shock, interest only, reverse amortization, teaser rates, cash-out refinance, cash-back at closing, 40-50 year terms, the list goes on and on.

There is simply no doubt that, although the melt-down has begun in the sub-prime market it will end, and in a significantly more ugly fashion, in the pseudo-prime market.

The following is the list of actions that the FDIC is requiring of Fremont but could be applied to nearly every lender sub-prime or not:

  • Bank’s analysis of a borrower’s debt-to-income ratio include an assessment of the borrower’s ability to meet his or her overall level of indebtedness and common housing expenses, including, but not limited to, real estate taxes, hazard insurance, homeowners’ association dues, and private mortgage insurance.
  • In any case in which a loan would result in a debt-to-income ratio greater than 50 percent, the Bank’s policy should set forth specific mitigating factors (e.g., higher credit scores, significant liquid assets, mortgage insurance) that will permit the Bank to determine that the borrower possesses the demonstrated ability to repay the loan.
  • Bank must verify the borrower’s income, assets, and liabilities, including the use of recent W-2 statements, pay stubs, tax returns, or similarly reliable documentation, and verify that the borrower remains employed.
  • Provisions which require that when the Bank uses risk-layered features, such as reduced documentation loans or simultaneous-second lien mortgages, the Bank shall demonstrate the existence of effective mitigating factors that support the underwriting decision and the borrower’s repayment capacity, which mitigating factors cannot solely be based on a higher interest rate.
  • Bank shall develop, adopt, and implement a policy governing communications with consumers t0 ensure that the borrowers are provided with sufficient information to enable them to understand all material terms, costs, and risks of loan products at a time that will help the consumer select products and choose among payment options.
  • All communications with consumers, including advertisements, oral statements, and promotional materials, provide clear and balanced information about the relative benefits and risks of the products, and that such communications shall be provided in a timely manner to assist consumers in the product selection process, not just upon submission of an application or at the consummation of the loan.

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Wednesday, March 07, 2007

Breaking News… Homebuilding Sucks!

D.R Horton's Donald J. Tomnitz is hands down the greatest (or at least the most honest) CEO in history.

First he gave us the “Death Spiral” comment during his participation in last years UBS Homebuilder conference and now he’s delivered his outlook for 2007.

At today’s Citigroup Industrial Manufacturing conference, Tomnitz suggested that 2007 “is going to suck” for home builders.

When asked if he would expect the tougher markets to bring about more M&A activity Tomnitz responded:

“I think from our perspective clearly it’s a little early to be talking about M&A largely because of one good reason, as I said earlier the reason your going to buy another builder is primarily for their land and lot positions… and as we work through 07 and I’ve clearly said,… I don’t want to be too sophisticated here… but 07 is gonna suck. All twelve months of the calendar year. ”

Here's the link to the full audio of D.R. Horton's presentation. The "Suck" comment kicks in at 33:30.

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Constructing Capitulation: January 2007

Despite unseasonably mild weather, the start of a $40 million National Association of Realtors PR campaign, a roaring stock market and a constant flow of bullish “housing has hit bottom” sentiment, January continued to show significant weakening to the nations housing market.

January gave us the following:

  • NAR's Pending Home Sales report showed increasing declines to existing home sales both nationally and regionally, but most notably in the Midwest and South regions where home sale activity dropped more than 10% on a year-over-year basis.
  • The Census Department’s New Residential Home Sales report showing the third worst monthly drop-off in new home sales since the housing recession began including an over 50% decline in sales in the West region.
  • NAR’s Existing Home Sales report showing that for single family homes, prices have declined year-over-year in every region especially the West where the median price declined 4.4%.
  • The Census Department’s New Residential Construction report showing a momentous drop-off in demand for new construction homes. On a year-over-year basis, every region registered high double-digit declines to both permits and starts.
Furthermore, the Census Department’s Construction Spending report for January again demonstrated the significant extent to which private residential construction spending is contracting.

With the weakening trend accelerating, total contraction spending fell 13% while private single family construction spending declined by a grotesque 25.6% in January.

Key Report Details:

  • The seasonally adjusted annul rate of private residential construction spending has now dropped 13.5% from the peak set back in December of 2005.
  • Overall private residential construction spending dropped 13% as compared to January 2006.
  • Single Family residential construction spending dropped 25.6% as compared to January 2006.
  • The latest 13.01% year-over-year decline is the LARGEST percentage drop in 12 years and the greatest drop to date for this year and for this cycle.
The following charts show changes to construction spending (click for larger version):






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Tuesday, March 06, 2007

Pending Home Sales: January 2007

Today, the National Association of Realtors (NAR) released their pending home sales report for January 2007 showing continued year-over-year declines in every region with particularly significant declines seen in the Midwest and South regions.

According to David Lereah, Chief Economist of NAR, the declines are as a result of weather “disruptions”:

“We are seeing temporary near-term weather disruptions in much of the country, but there is an underlying pattern of stabilization in the housing market, … As a result of these weather disruptions, it may take a couple months for the picture to fully clarify, but a modest recovery is likely. Housing remains a great long-term investment. The rapid shift in January to frigid air in much of the country had a cooling affect on home shopping that went beyond normal seasonal factors, … Weather disruptions have continued since.”

Just when you though things couldn’t get any worse for housing enter the “El Nino” effect!

Apparently, Lereah is having a hard time just accepting that sales are continuing to slide even on a year-over-year basis on top of last years historic fall-off.

As usual, looking more closely at the results one might draw a less optimistic conclusion:

  • Nationally the index was down 8.9% as compared to January 2006.
  • The Northeast region was down 1.3% as compared to January 2006.
  • The West region was down 7.0% as compared to January 2006.
  • The Midwest region was down 10.8% as compared to January 2006.
  • The South region was down 11.8% as compared to January 2006.
So it appears that, year-over-year, contract activity is still dropping rather with ALL regions continuing to show significant declines.

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Monday, March 05, 2007

New Century Old Problems

It's hard to say what would be the most fitting audio clip to play while browsing the stock chart of New Century Financial (NYSE:NEW) this morning... possibly "Taps"... or that "It's over Johnny.. Over!" clip from the first Rambo.

Well, I guess it truly is over as New Century is opened down 50% this morning!

Apparently, not only is it likely that New Century will go bankrupt but it's executives may be facing criminal charges.

There is no doubt that the sub-prime market is now collapsing and will soon likely be followed by a significant portion of the prime market as well.

The events surrounding the demise of New Century Financial may well serve as a turning-point in the "easy lending" meltdown both making the company and it's executives the ENRON of this era as well as helping to pull down many other lenders as well.

In fact, Novastar Financial (NYSE:NFI), Countrywide Financial (NYSE:CFC), and Accredited Home Lenders Holding Company (NASDAQ:LEND) are all down significantly today as shareholders apparently race for the exists in hopes of avoiding a similar fate to NEW.

Given that sub-prime and the "pseudo-prime" lending accounted for as much as 40% of all loans originating in 2004 - 2006 the lending collapse will inevitably take a significant portion of buyers out of the home buying market as the number of truly qualified buyers declines dramatically.

With it's lifeblood now quickly being cut off, the nations precariously inflated housing markets will undoubtedly face significant future pressure.

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OFHEO Home Price Index: Q4 2006

The Office of Federal Housing Enterprise Oversight (OFHEO) released the Q4 2006 results of their housing price index (HPI) last Thursday showing a bit of a strengthening trend in the index.

Recall that the Q3 2006 results showed that Massachusetts, Michigan, New Hampshire, New York and Rhode Island were all experiencing an actual contraction to home prices.

In Q4 on the other hand, all the contracting states are now expanding again and for all but Massachusetts and Michigan, have surpassed their prior peak prices.

Click the following char for a larger version.



As Patrick Lawler, Chief Economist of OFHEO puts it:

“The continuing strength in the economy and decreasing interest rates for borrowers prevented a harder landing in housing markets during the second half of last year… Last quarter, though sharper drops occurred locally, no state had average price declines of as much as one percent,”

One interesting aspect of the OFHEO data that the release didn’t highlight very well was the fact that the national “purchase only” index actually declined. The “purchase only” index tracks changes to appreciation associated to only home purchases by excluding refinancing activity in the source data.

Click the following char for a larger version.




It’s important to note that this is the largest decline to the “purchase only” index since the series was initiated in Q1 1991.

Although the OFHEO report comes to several conclusions (appraisal bias, refinance home types, etc.) as to why the standard index and the “purchase only” index are showing such a dramatic difference, I would argue that prices for new and existing homes for sale have been feeling (and will continue to feel) the most pressure during this downturn.

Lending is still very loose in the prime market and it’s not inconceivable that home appraisers are still essentially supplying current home owners with “blank checks” when appraising home values for refinancing purposes.

The free market, on the other hand, mat not be so forgiving as record sales declines coupled with historic levels of inventory and vacancy backlog lead to significant downward pricing pressure.

To better help visualize the OFHEO home price index, I have implemented a tool that allows you to dynamically view and mix any of the 442 different statistical regions that are reported on.

Click HERE to use the tool which is also found in the upper right list of “Cool Tools”.


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Wednesday, February 28, 2007

New Home Sales: January 2007

Today, the U.S. Census Department released its monthly “New Residential Home Sales” report for January showing the third worst monthly drop-off in new home sales since the housing recession began.

This is particularly important as it has been suggested recently, most notably by Bob Toll, CEO of Toll Brother, that the new home market was finding a bottom.

Clearly though, this is not quite the case as every region showed a substantial decline to seasonally adjusted home sales from December of 2006.

Furthermore, nearly every region (save a small increase in the Midwest region) showed declines on a year-over-year basis with the West registering a frightening 50.4% fall-off.

Interestingly, even with the unseasonably warm weather that clearly had an effect on existing home sales, the Northeast fell back into the negative column (as I had noted last month, the December figure was revised down this month) for new home sales plunging 18.7% from December and declining 1.6% below the January 2006 results.

But easily the most notable decline comes from the West region where sales sunk 37.4% from December putting that region 50.4% below the results of January 2006.

So, we are now seeing significant declines on a year-over-year basis to the first month in 2006 where new home sales stared to show weakness.

This should not be understated as it is clearly showing continued and even accelerating weakness to new home sales.


Look at the following summary of today’s report:

National

  • The median price for a new home was down 2.0% as compared to January 2006.
  • New home sales were down 20.1% as compared to January 2006.
  • The inventory of new homes for sale increased 2.7% as compared to January 2006.
  • The number of months’ supply of the new homes has increased 28.3% as compared to January 2006.
Regional

  • In the Northeast, new home sales were down 1.6% as compared to January 2006.
  • In the West, new home sales were down 50.4% as compared to January 2006.
  • In the South, new home sales were down 11.2% as compared to January 2006.
  • In the Midwest, new home sales were up 0.6% as compared to January 2006.



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Fueling the Fire

Today, the Bureau of Economic Analysis (BEA) released their second installment of the Q4 2006 GDP report showing a series of significant downward revisions to the preliminary estimates released last month.

Remember that last months preliminary report showed GDP growing at an annualized rate of 3.5% giving many Wall Street bulls optimism that the 2.0% growth seen in Q3 2006 could have represented a temporary anomaly.

But today’s release revises down the preliminary estimate 1.3% to an annualized rate of 2.2% with significant revisions to, amongst other things, non-durable goods and net imports (as I had suggested last month might occur) as well as durable goods.

Additionally, residential investment is showing a continued and dramatic fall-off registering a decline of 19.1% shaving 1.16% from overall GDP.

Furthermore, the decline to non-residential investment that first showed up in last months report as a meager 0.4% was today revised to a far more substantial decline of 2.4%.

Taken together, the declines to both residential and non-residential fixed investment are now depressing GDP by a stunning 1.43%.

As with last months estimate, today’s release is still showing unusually large increases to non-durable goods, net exports of services, and defense spending as well as an unusually large decrease to net imports, all working to boost overall GDP figure.

Be on the lookout for these values to be revised in next months final Q4 2006 GDP report possibly depressing GDP further still.

The following chart shows real residential fixed investment and nonresidential fixed investment versus overall GDP since Q1 2003 (click for larger version).


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Do You Feel Lucky?

To say that today is a critical day on Wall Street, and for the whole US economy for that matter, would be a gross understatement.

Today is one of the most critical trading days in decades. Will steady hands prevail or shirk back in order to avoid a falling knife?

Will all the unfettered bullish optimism seen in recent months finally break in the face of some reasonable skepticism about our economy’s outlook?

I guess we will just have to wait until 9:30 AM EST to find out for sure.

But was Tuesday’s sell off really a reaction to an unexpected dip in China's markets or is there a bigger issue?

Could we be experiencing a time in which bullish optimism runs white hot while actual confidence is, in fact, very low?

After all, there have been many recent signals indicating that our economy is not only slowing but may have grown on some fairly shaky ground.

The final Q3 2006 GDP came in well under the expectations, weighed down by a historic decline to residential investment.

The nation's housing market has been in recession for a full year (in some areas even longer) and has shown unprecedented and widespread declines to both home sales and prices, even in the face of unusually low interest rates and a solid job market.

Durable goods orders have been dropping off for several months, further indicating that consumers may be pulling back a bit as a result of loss of real and perceived housing wealth.

The sub-prime melt-down (soon to be the prime-meltdown) is well underway, wreaking havoc across lending institutions of all shapes and sizes providing some substantial evidence that the easy lending heyday of the past will end with a final, sloppy hangover.

The dollar is weak; the yield curve inverted; savings rate negative; our lifestyle is as interest rate sensitive as it has ever been in history.

To top it all off, Greenspan has mentioned the “R” word. Egad!

Tomorrow will no doubt make for great dramatic effect on CNBC and Wall Street as both the New Home Sales report and the second installment of the Q4 2006 GDP report are released.

Only time will tell if we are at a turning-point but given the circumstances, you've got to ask yourself one question: “Do I feel lucky?”

Well, do you, punk?



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Massachusetts Home Sales Rebound?

The headlines said it all… “Bay State Home Sales Rebound in January”, “State’s Home Sales Rebound”, “Mass Housing Market Bouncing Back”.

Or, maybe MAR President Doug Azarian summed it up with the following guarded optimism:

“We are encouraged about the way January has started off… As sellers continue to price their homes correctly, we should begin to see demand pick up, inventories go down, and the market becoming more balanced.

Obviously, looking at the numbers there is a significant increase to single family home sales this January versus the results of January 2006.

Of course we could debate about the MARs numbers and The Warren Groups numbers but for sake of simplicity let’s just consider the MAR numbers.

First, keep in mind, Boston as well as the whole of the Northeast has experienced exceptionally mild weather in January allowing for many more days of buying activity than would have otherwise occurred.

But even given the mild weather, the 2744 units sold are still under the January 2002 and 2003 results as well as 7.5% below the 2005 results.

Additionally, prices have been falling fairly regularly since June 2005 and again dropped 2.1% in January.

So, we are continuing to see a decline, both sales and prices are significantly below the peak values and soon the spring inventory will rejuvenate competition putting further pressure on prices.

As in months past, be on the lookout for the inflation adjusted charts produced by BostonBubble.com for an even more accurate "real" view of the current market trend.

Unfortunately, MAR seems to have trimmed their reporting of inventory and days on the market so, for now, we will have to live with the following key statistics for January 2006:

  • Single Family Sales increased 12.6% as compared to January 2006
  • Single Family Median Price declined 2.4% as compared to January 2006
  • Condo Sales increased 5.3% as compared to January 2006
  • Condo Median Price declined 0.7% as compared to January 2006

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Tuesday, February 27, 2007

Existing Home Sales Report: January 2007

Today, the National Association of Realtors released its monthly “Existing Home Sales” report for January along with some guarded optimism.

As David Lereah puts it:

“Although we’re expecting existing-home sales to gradually rise this year, and buyers are responding to the price correction, some unusually warm weather helped boost sales in January”

“We shouldn’t be surprised to see a near-term sales dip, but that will be followed by a continuing recovery in home sales.”

Looking at the data it does appear that sales in the Northeast have been fairly strong with some solid increases on a year-over-year basis to both single family homes and condos but given that this winter season has been exceptionally mild, that result is not very surprising.

Another key factor in the Northeast regions up-tick in sales seems to be some significant downward price movement.

In fact, for single family homes, prices have declined year-over-year in every region especially the West.

It will be interesting to see if the mild weather continues to help prop up sales or if it will provide even more time for inventory to swell thus providing a more competitive marketplace.

Below is a chart consolidating all the year-over-year changes reported by NAR in their January 2007 report.

Particularly notable are the following:

  • Single family home prices were down in ever region.
  • Excluding the Northeast region, sales of both single family and condos were down in every region.
  • Inventory and Months Supply show double digit increases on a year-over-year basis.


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Monday, February 26, 2007

Dance of the Maestro

Its days like this that you get the feeling that paying too much attention to the “Maestros” terse and infrequent comments may be a bit naïve.

Greenspan spills little dribs and drabs of wisdom generally separated by months of silence and to a certain extent it appears that the Wall Street still yearns for every word.

But today Greenspan is no longer the Federal Reserve Chairman and many of his comments originate from speaking engagements that range from celebratory dinners to business conferences.

That being said, today addressing the “VeryGC Global Business Insights” conference in Hong Kong, Greenspan suggested that the US might slip into recession as early as the end of 2007.

Here are some of his quotes made during his address:

“When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign,”

“For example in the U.S., profit margins . . . have begun to stabilize, which is an early sign we are in the later stages of a cycle.”

“While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008…”

“The American budget deficit is clearly a very significant concern for all of us that are trying to evaluate both the American economy's immediate future and that of the rest of the world”

“We are now well into the contraction period and so far we have not had any major, significant spillover effects on the American economy from the contraction in housing,”



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Friday, February 23, 2007

Homebuilder Blues

Yesterday’s conference call with Toll Brothers (NYSE:TOL) CEO Robert Toll elaborated a bit more on the details published in their Q1 release.

Firstly, it appears that Bob Toll is already a bit disappointed about the market activity he has seen thus far this year, especially with respect to the “bump up” in sales normally seen during and just after Presidents day weekend.

Additionally, Toll seems to be following the lead of Ara Hovnanian who recently pointed out the builder cancellation rates should begin to come down as an inherent result of making fresh agreements.

According to Toll, 55% of Q1 2007 cancellations were made to contracts entered into from one year to over one and a half years ago when the market was peaking.

The assumption is that now that buyers know that the market has peaked, the agreements they enter into will be less likely to result in a cancellation.

It’s interesting though to hear Toll admit that many of the buyers they were selling to during the run-up were in fact actually “investors” but I don’t buy his asserting that they didn’t know this was so until closing.

Toll also backed away and strongly constrained his strangely contrived analogy (published in the Q1 release) of the supposed recent health of the New York City market as possibly being an indicator of the health of the nations housing market.

The entire conference call can be listened to here.

The following is a series of interesting questions and responses from yesterday’s conference call:

When asked by Steven Kim of Citigroup about the outlook for cancellation rates Toll responded:

"About the only indication that I can give you Steven is that we had a total of 55% of out 'can' rates [in Q1 2007] from agreements that are more than a year old... 173 that were from one year to one and a half years and 53 from agreements that were more than one and a half years old so that, presumably, as we catch up with production and have shaken out those agreements that were entered into during the absolute top of the cycle or near there too, the 'can' rates should go down... of course, read your prospectus carefully, you know, no representation is made here, but that’s just and observation that I think will not only to Toll but to most. I think basically what happened was we all were fooled by the great number of investors that we weren’t selling to that showed up when it came time to close and who walked instead of closing."


When asked by Dave Golberg from UBS about a shift in the tone of today's quarterly release as compared to the pre-conference release two weeks ago Toll responded:

"I would say we are a little more disappointed than we were two weeks ago because the top selling weeks of the year for the new home business are the weekend that runs into Presidents day week and then following weekend which we have coming and for presidents day weekend, we had good sales but we didn’t have anywhere near the bump up that we normally see... so that’s disappointing."

When asked about the analogy Bob Toll made in the Q1 release between the health of the New York City market and the health of the overall market Toll replied:

"What I implied in the monologue [and the Q1 release] is that here was a market that admittedly had not gone down to the extent that the average markets have.. other average markets have in the United States, but that did go soft to some extent in the second half of 2006 that now is roaring back... and by implication what I am saying is that you may find that traditional luxury markets come back faster than is expected though I don’t mean to imply at all that it will be as rapid as the New York market's recovery was from it's decline that was minimal. But I’m making a statement that pent-up demand is such that when confidence returns I think it will return possibly with a vengeance."

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