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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Thursday, February 22, 2007

Song and Dance

It wasn’t that long ago that Toll Brothers (NYSE:TOL) CEO Robert Toll was talking of “dancing on the bottom” and “A-rated” California markets in an attempt to project a level of optimism that was more fiction than fact.

On December 5th 2006 Toll suggested:

“Fifteen months into the current slowdown, we may be seeing a floor in some markets where deposits and traffic, although erratic from week to week… right now is a great time to buy a new luxury home.”

Well, today brings the Q1 2007 results for Toll Brothers (and as a proxy for the rest of the new construction market) and the outcome is certainly nothing to dance about.

Particularly shocking was that in their FYE 2006 report, Toll Brothers had budgeted $60 million for all of 2007’s pre-tax land write-downs and in Q1 2007 alone they have taken $96.9 million.

Toll is now projects $60 million in land write-downs for the remainder of 2007.

Additionally, in Q1 2007 net income plunged 66.8% as compared to Q1 2006 with total revenue declining 18.7%.

In today’s release Bob Toll now suggests:

“There are too many soft markets at this stage of the selling season to call a general upturn in the new home market. Demand varies greatly from week to week in individual markets.”

Here are some of the interesting data points from today’s release:

First Quarter Results

  • Net income was $54.3 million down 66.8% compared to Q1 2006.
  • Pre-tax land write-downs totaled $96.9 million up 98.8% compared to Q1 2006.
  • Earnings per share declined 66.3% as compared to Q1 2006.
  • Total revenues were $1.09 billion down 18.7% compared to Q1 2006.
  • Net signed contracts were $748.7 million down 34.3% compared to Q1 2006.
  • Quarter end backlog was $4.15 billion down 30.2% compared to Q1 2006.
  • Signed contracts was 1027 down 33.4% compared to Q1 2006.
Current 2007 Projections

  • Deliver 6000 – 7000 homes (prior estimate 6300 – 7300).
  • Net income of $240 - $305 million (prior estimate $260 - $340 million).
  • Additional land write-downs of $60 million.

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Wednesday, February 21, 2007

BNN - MUST SEE BUBBLE TV!


Today brings the following bubbly video clips to BNN:

1. Habib versus Roubini on the Mortgage Meltdown

Barry Habib does his best to keep up appearances in the face of the now obvious collapse of the nations housing and home lending markets.

Habib is the same “expert” that was continuing to repeat the “no housing bubble” sentiment even as late as September of 2006.

Amazingly, Habib suggests that consumers who are in trouble may benefit from what he calls “Two One Buy-downs” which apparently is another contrived interest only loan product that attempts to mitigate the real cost of owning a ridiculously overpriced home.

Nouriel Roubini, as usual, does an expert job at restating the obvious fact that both sub-prim AND prime lending is on shaky ground and that the housing recession is not over but just beginning to unwind.

2. All Eyes on Bies

Federal Reserve Governor Susan Bies suggested yesterday that a bottom may not have been reached in housing as “hidden inventory”, homes that had been taken off the market without sale, come flowing back on as the market shows signs of stabilization.

“There’s a lot of vacant housing out there right now. In fact, the percentage of homes where nobody is living in them is at a record level. So the potential for inventory correction is still very high.” said Bies.

Bies goes on to express surprise that so many 2006 sub-prime mortgages went bad so quickly. “You normally see that delinquencies and defaults and foreclosures tend to peak about two years after somebody has taken out a mortgage… these are going delinquent in just a few months.”

3. Sam Zell on “Mickey Mouse” Financing

An excellent interview with Sam Zell about the state of housing, lending and the prospects for the rental market going forward.

Zell goes on at length about loose lending practices or what he calls “Mickey Mouse” financing as well as the “Rent - Buy” judgment.

Consequently, Zell thinks we will see many more defaults and a significant increase in renting.

4. Peter Schiff, Ben Stein on the Merry-Go-Round!

A whimsical merry-go-round of bulls and bears on the outlook for housing in 2007.

Mike Norman of “BizRadio” seems delusional as he fires off at Schiff “What artificial lending standard are you talking about! We have a tiny default rate in the single digits”.

Apparently Mike doesn’t understand the significance of the excessively loose lending practices that the Federal Reserve is now in the process of cracking down on.

Schiff does and excellent job of reiterating the fact that the problems in lending are not limited to the sub-prime market but are, in fact, seriously out of whack in the prime market as well.

The clip ends with Mike Norman and Tom Adkins of REMAX chuckling ridiculously over Schiff’s closing words.

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Saturday, February 17, 2007

January's New Construction Report

Reported as showing the slowest pace of housing starts in more than nine years, yesterday’s “New Residential Construction” report seemed to have shaken Wall Streets confidence that the housing decline is in the process of stabilizing.

That is, until bullish optimists ran with the notion that this report signaled a good sign for housing as it indicated that home builders were working through inventories and reducing production.

Builders are certainly reducing production and as a consequence, divesting themselves of land options at a much more significant pace than many had expected but the pure and simple fact is that demand has fallen significantly over the past year.

There is still a glut of vacant new construction homes in the nation, by some estimates twice as many as is seen on average.

This leaves homebuilders in the predicament of having to both compete with “investors” to move their existing backlog of homes while continually re-aligning their production to stay on track with today’s reduced demand.

January’s report again shows the momentous drop-off in demand for new construction homes on a year-over-year basis in which every region registered high double-digit declines to both permits and starts.

Except for the Northeast, every other region showed over 30% declines to both permits and starts with the Northeast trailing with 20% declines.

The next few new construction reports should be very telling in that the February-March 2006 time frame was where permits and starts really started to show weakness.

Further significant declines from here on out would unequivocally indicate that the housing market has not yet stabilized.

Here are the statistics outlined in yesterday’s report:

Housing Permits

Nationally

  • Single family housing permits down 4.0% from December, down 32.6% as compared to January 2006.
Regionally

  • For the Northeast, single family housing permits up 6.3% from December, down 21.5% as compared to January 2006.
  • For the West, single family housing permits up 2.2% from December, down 34.7% as compared to January 2006.
  • For the Midwest, single family housing permits up 3.5% from December, down 34.7% as compared to January 2006.
  • For the South, single family housing permits down 10.3% from December, down 32.7% compared to January 2006.
Housing Starts

Nationally

  • Single family housing starts down 11.2% from December, down 38.9% as compared to January 2006.
Regionally

  • For the Northeast, single family housing starts up 19.3% from December, down 25.7% as compared to January 2006.
  • For the West, single family housing starts down 33.5% from December, down 47.8% as compared to January 2006.
  • For the Midwest, single family housing starts went unchanged from December, down 45.5% as compared to January 2006.
  • For the South, single family housing starts down 8.5% from December, down 35.1% as compared to January 2006.
Housing Completions

Nationally

  • Single family housing completions up 0.3% from December, down 7.5% as compared to January 2006.
Regionally

  • For the Northeast, single family housing completions up 24.6% from December, up 20.5% as compared to January 2006.
  • For the West, single family housing completions down 11.1% from December, down 26.6% as compared to January 2006.
  • For the Midwest, single family housing completions down 6.1% from December, down 24.4% as compared to January 2006.
  • For the South, single family housing completions up 3.7% from December, up 4.9% as compared to January 2006.
Keep in mind that this particular report does NOT factor in the cancellations that have been widely reported to be occurring in new construction.

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Friday, February 16, 2007

NAR Hitting Bottom

The National Association of Realtors (NAR) yesterday released the results of homes sales/prices for the fourth quarter of 2006 in a release entitled “Fourth Quarter Metro Home Prices & State Sales Likely Have Hit Bottom”.

Within the lengthy release NAR highlights the many instances of quarterly price increases such as Indiana and Arkansas where home sales rose well over 10% compared with the fourth quarter a year earlier.

The release goes on to note that 71 Metropolitan Statistical Areas (MSA) showed solid price gains as well as recapping the average price increases seen in the last five year period for some of the nations hottest residential real estate markets.

As NAR President Pat Vredevoogd Combs puts it “Since the typical owner stays in a home for six years, it’s more useful to look at the five-year comparison for metro area home prices – most of them are seeing strong gains,” she said. The median five-year price gain is 41.8 percent.

The release wraps up by detailing the strongest metro areas of each major regional market citing areas from Pittsfield Massachusetts to Rockford Illinois.

Overall, the report reads fairly positive, that is, until you delve a little deeper into the data posted at NARs other quarterly metropolitan results page.

What NAR left out of the public release was that Q4 2006 showed 40 states with declining single family home sales with 19 declining 15% or more and 7 declining over 20%.

The hardest hit states continue to be Nevada (-36.1%) Florida (-30.8%) Arizona (-26.9%) Virginia (-26.2%) Washington DC (-22.2%) California (-21.3%) and Maryland (-20.8%) with New Jersey (-19.9%) and West Virginia (-19.5%) bordering on near 20% declines.

Furthermore, 25 states and DC are now experiencing double digit sales declines.

As for prices, NAR only examined 149 of the overall 379 MSAs finding that nearly half (73) of the areas had seen price declines.


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Tuesday, February 13, 2007

2007 Goldman Sachs Housing Conference

Yesterday, Goldman Sachs held its first annual “Housing Conference” which brought together a host of economists, CEO’s and others in an effort to gain some visibility over the fate of the housing market in 2007 and beyond.

In addition to an excellent opening macroeconomic overview by Jan Hatzius, Chief US Economist of Goldman Sachs, the conference included lengthy presentations on sub-prime and non-traditional mortgages, credit quality, and homebuilding.

The following chart (click for larger version) taken from Hatzius’ opening overview shows the effect of the housing decline on GDP. Note how declines to housing related employment, mortgage equity withdrawal, housing wealth, and residential investment all weighed on GDP shaving off over 1.5% in Q3 and Q4 of 2006 and are projected to subtract 1% for the remainder of 2007.


Homebuilders were particularly well represented with Ian McCarthy, CEO of Beazer Homes, Ara K. Hovnanian, CEO of Hovnanian Enterprises Inc., Richard Dugas, CEO of Pulte Homes and Joel Rassman, CFO of Toll Brothers all participating in a panel discussion entitled “Trends in Homebuilding”.

Kicking off the panel, moderator Chris Hussey asked the audience members to vote on a series of three questions with the results being made immediately available after the voting.

The following questions-results were given:

  • What do you think will happen to home prices in 2007? 52% predict prices will go down 0 – 10%.
  • What do you think will happen to new home orders in 2007? 78% predict orders will go down.
  • What strategy do you think home builders should pursue in 2007? Majority indicated that homebuilders should clear inventory.
Richard Dugas and Ara Hovnanian started out the discussion by reiterating a similar point made earlier in the month by Robert Toll by making note of some “encouraging” signs of cancellations abating and increased activity.

Ian McCarthy quickly followed up with an interesting quip about allowing the audience members to vote to kick any particular home builder off the panel then indicating that he’s yet to see any encouraging signs with still overwhelmingly high inventory.

Quickly, Hovnanian interjected that he did not want his prior statement to indicate too much optimism and that he would be hopeful for even a very slow recovery.

When asked about Robert Toll’s interesting “A” rating of the California market in his most recent conference call, Joel Rassman replied “If you looked at the last four weeks, California has shown a remarkable turn around and I think that’s what Bob was indicating”

To that Ian McCarthy suggested that although he did not want to criticize Bob Toll, extrapolating the results of a four weeks for a given market would be misleading and that more data is required to make any real claim of a market turn around.

When asked about what product trends that had been seen during 2006 Hovnanian replied “I can’t claim to see a trend by market segment..” adding “its really supply and demand at the local level”.

McCarthy added “I think affordability is the biggest issue right now… affordability at every price point.”

Rassman added “I think it’s different in every market… I’m not sure I could say that there is a product type that’s immune from the slowdown.”

When asked about what cold be done to reduce cancellation rates Rassman suggested that deposits were a key method but that given the circumstances in the housing market “we’ve seen people walk from $60K – $70K in deposits.”

Hovnanian suggested cancellations for buyers that were less than 30 days into the buying process hasn’t changed measurably but buyers that were in backlog for 6 to 9 months during 2006 dropped out in greater numbers as they witnessed price drops that made their loss of deposit more acceptable.

When asked whether the discounting has reached the point at which consumers will be enticed to buy McCarthy quipped “Pass the crystal ball and let me rub it… We are still selling homes. It’s very early in the selling season to say that we have reached the bottom in discounting… I’m not sure we are there today.”

Rassman added “As soon as they believe prices are no longer falling, consumers will come back.”

The whole conference was originally webcast live but can be listened to in its entirety at the following link.

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Friday, February 09, 2007

New Day for New Century

For those of you who may have missed yesterday’s grotesque flogging of sub-prime lender New Century Financial (NYSE:NEW), here’s a wrap-up.

On Wednesday, NEW announced that it would need to restate earnings for the first three quarters of 2006 in order to “correct errors the company discovered in its application of generally accepted accounting principles”.

Apparently, they wrongly calculated the impact of their repurchased loans (loans that immediately go bad at the first payment and get repurchased by the lender) in the following ways:

  • They did not include the expected “discount upon disposition” of the repurchased loans when estimating their allowance for repurchased loans. In this way it appears that they may have exceeded their reserve for expenses related to bad loans.
  • They incorrectly estimated the volume of repurchase claims for the first three quarters of 2006. Again, it appears that they significantly underestimated the number of bad loans they would be repurchasing thus exceeding their reserve for expenses related to bad loans.
Properly accounting for these errors will reduce all three previously stated quarters of 2006 as well as postpone the Q4 results which the company has preliminarily stated will show a net loss.

The following is a chart showing NEW stock price over the last 12 months (click for larger version) note yesterdays precipitous drop-off… its current price is that little blue nub way down there at the right under $20!!!


I was shorting this stock (along with CFC, KBH, TOL, LEND etc.) for all of 2006 but I had decided to take a breather on the ‘puts’ as I was getting a little crazy with some of my ‘bets’ so you can imagine my dismay when I saw the pounding this stock got yesterday.

In my opinion, the sub-prime lenders (all home/home-equity lenders for that matter) are all essentially in the same position. They were an enabler for an industry that went absolutely wild during this historic housing run-up and now the chickens have come home to roost.

Home lenders, especially the sub-prime lenders, will spend 2007 and beyond digging out of this horrendous ditch, some will survive but many will not.

The result for the housing market will be a further decrease in sales activity as tightening of lending practices removes a significant percentage of buyers from the marketplace that would have otherwise been qualified during the run-up era.

For a daily view of sub-prime lender news and failures see Mortgage Lender Implode-O-Meter.




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Wednesday, February 07, 2007

Constructing Capitulation: December 2006

December showed further evidence that the nations housing market is experiencing continued weakness.

Construction spending was again down significantly declining 12.52% as compared to December 2005.

Single family construction spending was down a more dramatic 22.0% reflecting the significant drop off in demand for new construction homes as well as home rehabilitation.

The following charts show changes to construction spending (click for larger version):





Additionally, the first preliminary Q4 2006 GDP report showed a continued and substantial decline to residential fixed investment.

It’s important to note that although the overall 3.5% increase in GDP was a fairly strong showing, the substantial decline to residential fixed investment still managed to shave 1.16% from its bottom line.

Furthermore, non-residential investment is now declining showing a comparatively small decline of 0.4%, the first decline since Q1 2003.

Also, it seems that the preliminary GDP report may have captured some anomalies that may either be short lived or very well be revised away in subsequent releases.

The current report showed an unusually large 6.9% increase to non-durable goods as well as an 11.9% increase in national defense spending.

Additionally, there was a strong increase to net exports of goods and services and strong decrease to net imports, both working to boost overall GDP.

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



With their latest rate announcement, the Federal Reserve revised their statement on housing indicating that there may be “.. some tentative signs of stabilization have appeared in the housing market”.

This may be taken as a significant change in sentiment considering that just last month they were indicating that they had seen “substantial cooling in the housing market”. On the other had it could be that they are simply acknowledging some recent indicators like mortgage purchase applications.

The National Association of Realtors (NAR) released their “Pending Home Sales” report last week showing that, on a year-over-year basis, home sales were down nationally and in every reported region.

On a seasonally adjusted month-to-month basis there has been an increase from the lows set between September and November but each regions values are still well below their peak values and not enough data exists to yet declare that a bottom has been reached.

This is especially true for the Northeast region where the index has been below 2001 levels since June 2006.

David Lereah, Chief Economist of NAR had the following to say:

“Some of the monthly gain may be weather related, but it appears buyers are becoming more comfortable, sensing the timing is good and that their local market has bottomed out,… I expect modest sales gains throughout the year, with what I believe are sustainable levels of activity. 2007 promises to be the fourth best year on record.”

The following shows a short (top chart) and long (bottom chart) term view of the NAR Pending Home Sales Index with data complete to November 2006:



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