Friday, March 30, 2007

Bull Trap?

Yikes! I don’t know how this one made its way under the radar but I certainly didn’t see the story when it first crossed.

Last December, in the wake of the Greenspan’s “Worst of this may well be over” outlook for housing, a second significant and widely publicized Bullish note was struck when it was announced that the Bill and Melinda Gates Foundation had made a substantial investment in the homebuilders.

At the time, I looked at the SEC filing (13F-HR) for these transactions and found that they were, in fact, taking a substantial position across the board buying whopping numbers of shares of Beazer, Centex, KB Home, Lennar, Pulte and Ryland totaling over $225,400,000.

Business media accounts at the time attributed this to sound, long term investing on the part of the massive trust, further suggesting that home builders had bottomed out in August 2006 permitting investors who take a long term approach an opportunity to scoop these stocks up at relative bargain prices.

Now, of course, we know that homebuilders are likely facing a substantially more problematic environment than any had anticipated last fall.

Experiencing historic declines to profits, massive impairment charges, momentous inventory backlog, the effects of the sub-prime credit crunch, and now even charges of fraud and accounting irregularities, the sector seems almost certainly poised for a new and substantially harsher leg down.

Without a doubt, many “investors” followed the Gates Foundation’s lead pumping plenty of cash into homebuilder stocks and those that continued to follow their lead probably made out pretty well.


Because the Gates Foundation apparently sold ALL their homebuilder holdings sometime in December 2006!

That was according to their latest 13F-HR filing dated February 14 outlining their holdings as of December 31 2006.

So was this a “Bull Trap”?

Not for the Gates Foundation as my estimates have them gaining roughly 12.5% or $28,200,000 on the transactions.

Not bad, but what of the numerous “investors” who likely had been influenced by the disclosure and subsequent Bullish media coverage of the trusts initial investment?

Well, we’ll never know for sure, but it’s safe to say that there was substantially less fanfare for the sale than there was for the purchase, most likely leaving many Bullish “investors” now rethinking the soundness of this long term strategy.

Thursday, March 29, 2007

GDP Report: Q4 2006 Final

Today, the Bureau of Economic Analysis (BEA) released their third and final installment of the Q4 2006 GDP report showing further weakening to fixed residential and non-residential investment.

Residential fixed investment, that is, all investment made to construct or improve new and existing residential structures including multi–family units, continued to accelerate to the downside registering a decline of 19.1% shaving 1.21% from overall GDP.

Additionally, as many had predicted, non-residential investment now appears to be slumping, registering a 3.1% decline for the first time since Q1 2003.

Taken together, fixed investment (both residential and non-residential) depressed GDP by a stunning 1.54%.

To better put the negative effects of the fall-off of fixed investment in perspective, the 1.54% on the downside is roughly equivalent to the 1.53% upward effects from all purchase activity related to all non-durable and durable goods including food, clothing, gasoline, fuel oil, motor vehicles, furniture, all household equipment, all the way to aircraft.

Keep in mind that both Greenspan and Bernanke suggested last fall that the housing decline might depress GDP by roughly 1%.

It appears now that they had significantly underestimated the negative effects of the decline of residential housing as well as totally missing the non-residential slowdown currently brewing.

With the subprime meltdown and its harsh effects on lenders, home builders, home buyers and home owners, the Q1 2007 will likely show even further declines to fixed investment placing even additional downward pressure on GDP.

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

Wednesday, March 28, 2007

The Second Shoe

Something seems afoot…

While vetting clips for BNN last night it seemed that there was no end to the bad news for the housing market circulating the business media.

More importantly, the news was varied with respect to particular topic but perfectly unified in outlook.

First, there was the news of Lennar, the national home builder, reporting a 73% drop in profits in Q1 forcing them to cancel all earnings guidance for the foreseeable future.

"While we are primarily focused on fortifying our balance sheet, we are concurrently focused on rebuilding our profit margins. Given current market conditions, we are continuing to pursue cost reductions, SG&A savings, product redesign and proper land pricing in order to see margin improvement starting in the second half of 2007. Until we see prices stabilize, however, we will not be able to project the timing or the scope of margin recovery, or set earnings goals for the company." said CEO Stuart Miller.

Late day breaking news yielded more trouble for the nation’s home builders as it was reported that Beazer Homes USA was under a fraud investigation by the FBI, IRS, DOJ and HUD related to their internal subprime mortgage workings.

An FBI spokesman offered the following:

"there are potentially all sorts of fraud issues associated with Beazer to included corporate, mortgage, or investments in varying degrees."

Then, there was unquestionably the oddest occurrence I have yet to witness for the new home market when David Seiders, Chief Economist of the National Association of Home Builders was effectively positioned as the “Bear” in a classic Bear-Bull segment on CNBC.

Seiders again reaffirms his “ever revising lower” outlook for the remainder of 2007 currently calling for an 8% decline to new home sales for the year.

It’s important to note that Seiders, expressing true surprise about the effect that the subprime meltdown has had on his industry, has now revised his outlook four times since February.

“Late last year, early this year it really looked like housing demand had stabilized. Sales volume looked pretty stable, other indicators looked pretty good, the Fed concluded that the housing market was stabilizing… and then the entire subprime mess and everything that goes with it in terms of the mortgage market hit, and I’ve been not only following the homes sales numbers which clearly were rather disappointing to say the very least for both January and February, but also surveying the builders on an ongoing basis, both large and small, and I actually have been very surprised by the degree to which the builders say that the tightening of mortgage lending standards has already effected sales volume. We are really sort of in uncharted waters here, I think, in terms of the new leg of the weakening process and how far it will go.” said Seiders.

Next up was the January release of the S&P/Case-Shiller index again showing a precipitous and accelerating drop-off in home prices in most of the tracked metro markets.

Professor Robert Shiller had this to say about the results:

“[the index data] are a good indicator of the dire state of the U.S. residential real-estate market. The dismal growth in the 10-city composite is now at rates not seen since January 1994,"

Don’t forget to check out the S&P/Case-Shiller index tool for a dynamic visualization of the latest results for January.

Finally, there seems to be a dangerous head of steam building with respect to what the federal government’s response should be in cleaning up the home lending mess that has befallen the nation.

Multiple reports of proposed bailouts, new lending standards legislation as well as an FHA “modernization” initiative seem to indicate that we are now beyond the point at which the federal government can remain inactive.

More importantly, with many of the early presidential candidates, most notably Hillary Clinton, remarking on the subprime meltdown, it now seems likely we will soon see Congress attempt to put some teeth behind the latest rhetoric.

One can only hope that in a hectic attempt to help mitigate the massive wave of foreclosures now washing over the country, Congress doesn’t place the burden on the taxpayer to, in effect, bailout “shoddy” lenders and grotesquely wealthy Wall Street financial institutions in the name of unfortunate homebuyers.

Given all the above, I sense a bit of a “second shoe dropping” for housing.

It’s reminiscent of some of the days toward the end of last July and early August of last year when the general understanding that the spring market had come and gone with very poor results seemed to bring a general malaise over the market that was only lifted with Greenspan’s “Market Bottom” sentiment in early October.

Tuesday, March 27, 2007


Today brings four great additions to the BNN lineup, most notably, a Bloomberg interview with David Seiders, Chief Economist of the National Association of Home Builders.

It seems Seiders is now presenting a significantly more Bearish outlook for the new home market suggesting that 30% of home builders surveyed are now suggesting that they are feeling a weakening of sales related to the tightening of lending standards.

“I was surprised… I got about a third of the respondents saying yes [that they were being effected by tightening lending] and of them… among them, a median hit on sales of about 10 percent.”

Watch Seiders turn Bearish on BNN!

Next up there is a great “point – sort of – counterpoint” between Economist Dean Baker and David Michonski, CEO of Coldwell Banker Hunt Kennedy.

Michonski, apparently suffering from all the bad news lately, has a hard time living in the here and now as he suggests that housing supply currently “balanced” and that he expects national median home prices to be up 4% by the end of 2007 and beyond putting an end to all the hubbub over the housing decline.

Watch Michonski delude himself some more on BNN!

Next, although the Fed’s Moskow doesn’t see the subprime slime spilling over to the general economy, CNBC’s Steve Leisman presents findings from a recent “risk conference” that seemingly draws an analogous “easy lending” relationship between the mortgage market and corporate derivatives.

Two other experts, who are both calling for significant spillover and looming recession, discuss the latest developments concerning Morgan Stanley’s recent decision to sell roughly $2.5 billion of New Century Financial mortgages.

Watch the sub-prime slime continue on BNN!

Finally, a nearly perfect example of CNBC “blathering clueless” as they try desperately attempt to understand the month by month changes in the housing market.

Diana Olick was so “Shocked” by the February’s New Home Sales report that her eyebrows were seen raised in surprise after the announcement.

Add to that UBS analyst Margret Whelan’s suggestion that for new homes, the spring selling season is already over (as Bob Toll previously discussed at length) and it’s just about all the two anchor-girls could take… “Come on! It’s not even April yet!” What’s a bull to do?

Watch CNBC Bulls Look Confused on BNN!

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Monday, March 26, 2007

New Home Sales: February 2007

Today, the U.S. Census Department released its monthly “New Residential Home Sales” report for February showing both dramatic downward revisions to November, December of 2006 and January 2007 as well as continued weakness with February’s results.

As was noted before, Bob Toll, who was formally calling a bottom in the new home market, recently clarified both his outlook as well as the general misunderstanding that the spring market will bring the highest numbers of new home sales.

“Most of the markets are having a difficult time. The primary reason is the oversupply left by speculators and investors who got caught up in the mania of the price increases that were brought to the market by the extra demand created by the speculators and investors.”

“… the Spring selling season is over, it’s a misunderstanding that we have been unable to correct over the past 40 years. In the new home business, you start selling immediately after the holidays… then you continue to run-up from after the Super Bowl to Presidents Day weekend… That’s the peak of the market… When you stepped back and looked at it [it was] no where near where it should have been if you were looking at an average of the last 10 years.”

So, if we are to take Toll at his word, February’s results should represent either the peak or near the peak of monthly sales for 2007.

This is clearly not a good sign for the new home market as February’s report showed that sales were down across every region, most notably the Northeast, as well as a 26.6% increase to the months supply.

But probably the most notable aspect of the report was the enormous downward revisions to November, December and January helping to push their respective year-over-year declines into the double-digits.

So, we are now continuing to see significant declines on a year-over-year basis as compared to 2006.

It’s important to keep in mind that these declines are coming on the back of the declines seen in 2006.

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

The following charts shows the extent of sales declines seen since 2006 as well as illustrating the further declines 2007 is showing on top of the 2006 results (click for larger versions)

Look at the following summary of today’s report:


  • The median price for a new home was down 0.03% as compared to February 2006.
  • New home sales were down 18.3% as compared to February 2006.
  • The inventory of new homes for sale increased 1.5% as compared to February 2006.
  • The number of months’ supply of the new homes has increased 26.6% as compared to February 2006.

  • In the Northeast, new home sales were down 36.9% as compared to February 2006.
  • In the West, new home sales were down 5.7% as compared to February 2006.
  • In the South, new home sales were down 17.1% as compared to February 2006.
  • In the Midwest, new home sales were down 32.2% as compared to February 2006.

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Friday, March 23, 2007

Existing Home Sales Report: February 2007

Yet again, the Bulls on Wall Street and CNBC waxed wildly optimistic with the initial “top-line” numbers of a report before delving into the details thoroughly enough to realize that they had gotten ahead of themselves.

Looking more closely at February’s Existing Home Sales report should only result in additional confirmation that the nation’s housing markets are continuing to experience weakness with the majority of regions showing considerable declines to median price and sales as well as all regions showing significant increases to inventory and monthly supply.

In an attempt to squeeze as much press out of the top-line 3.9% increase to sales nationally from January, David Lereah, Chief Economist of the National Association of Realtors (NAR), expresses some surprise but is still cautiously pointing the finger at the weather for the other weaker numbers:

“Some of the rise in home sales may be from mild weather that brought out shoppers in December, but fundamentals have improved in the housing market and buyers see a window now with historically-low mortgage interest rates and competitive pricing by sellers, … Even so, winter storms last month discouraged shopping, and buyers were chilled with the third coldest February on record. These unusual weather patterns mean home sales that close in March may decline before rebounding later this spring.”

Additionally, NAR President Pat Vredevoogd Combs offers this bit of convoluted logic mixed with consumer taunting:

“Over the last year, we’ve seen declining sales in many high-cost areas but rising activity in lower cost markets, … This change in the geographic composition of sales means we aren’t getting apples-to-apples comparisons in median home prices from a year ago.”

“What’s really happening is probably somewhere in between the different measures, but home prices are soft – a year ago we were still seeing bidding pressures and double-digit price growth, … Overall, home prices should rise slowly this year, and many buyers have an opportunity now that was only a dream during the five-year boom.”

Probably the most notable results from today’s report, beside the numerous median price declines, are the even more notable increases to inventory.

At this point, it seems fairly obvious where things are going in terms of inventory, especially in the more seasonal markets, but it will certainly be interesting to see how things shape up during March and April.

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

Particularly notable are the following:

  • Majority of median prices are down.
  • Majority of sales are down.
  • Inventory and Months Supply show double digit increases on a year-over-year basis.

Senators and the Subprime Implosion

Yesterday, the Senate Banking Committee held a hearing titled “Mortgage Market Turmoil: Causes and Consequences” on the topic of the mortgage meltdown.

The hearing presented two panels of witnesses which included government regulators, lending industry representatives, as well as affected consumers.

Opening the hearing, the committee chairman, Senator Christopher Dodd (D-CT) offered a generally accurate, yet slightly disingenuous account of the evolution of the easy lending era in the US which was then followed by a round of opening statements from the other committee members.

During these statements there was an unusual amount of Greenspan bashing, placing a substantial amount of the blame on the former Federal Reserve Chairman’s shoulders.

“In February 2004, the leadership at the Federal Reserve Board seemed to encourage the use of adjustable rate mortgages that today are defaulting and going into foreclosure at record rates. The then chairman of the Fed said in his speech to the National Credit Union Administration, and I quote him ‘American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed rate mortgage.’ … In my view these actions set the conditions for almost a perfect storm that is sweeping over millions of American homeowners today.” said Dodd in his opening statement.

“I’m amazed, sitting here, listening to all of our colleagues on this committee and forgetting who used to come here before this committee and brag about the housing market carrying the economy. None other than our former Chairman the Federal Reserve, Alan Greenspan. And he was in charge of bank regulation at the time that all these kind of sophisticated mortgages came into being. And I didn’t hear him say a word about those when he was here. And now I hear him criticizing everybody that’s in the business of lending. … I think if your going to criticize, and watch a bubble burst, as he did not only in the housing market but in the market prior to that where he predicted the dot-com downfall before it came, I think you ought to at least take some of the responsibility on your shoulders for having it happen under your watch.” said Senator Mike Crapo (R-ID).

The first panel was exclusively allocated to government regulators including representatives from FDIC, the Office of Thrift Supervision, the Federal Reserve, and the Office of Comptroller of Currency.

The following are some notable quotes from the first panel’s opening statements:

“While liberalized underwriting standards allowed more borrowers to qualify for home loans, competitive pressures eventually lead to the abandonment of the two most fundamental tenants of sound lending, approving borrowers based on their ability to repay the loan according to it’s terms, not just at the introductory rate and providing borrowers with clear information to help them understand their loan transaction.” said Sandra Thompson Thompson Director of the Division of Supervision and Consumer Protection, Federal Deposit Insurance Corporation.

“I want to emphasize that national banks are not dominant players in the subprime market. Last year, their share of all new subprime production was less than ten percent. We know of some subprime lenders that have abandoned their plans for a national bank charter rather than submit to the supervision of the OCC [NOTE: this is a reference to the recent filing and subsequent approval of the conversion of Countrywide Financial to a federal savings bank charter from a national bank in it’s successful effort to side-step the basic regulatory provisions related to non-traditional mortgage risk management proposed last September by both the OCC and the Federal Reserve]” said Emory Rushton Senior Deputy Comptroller and Chief National Bank examiner, Office of the Comptroller of the Currency.

The second panel was allocated to representatives from several lenders including Countrywide Financial, HSBC Finance Corporation, and WMC Mortgage a subsidiary of GE as well as several consumer advocates and consumers themselves.

The following are some notable quotes from the second panel’s opening statements:

“[on changes at WMC Mortgage] First, borrowers will be qualified on the fully indexed rate, second on new loans, prepayment penalties will expire 60 days prior to the first interest rate reset date, … third, WMC will not make loans based on stated income except in the case of borrowers who are self employed and then, only with the appropriate verification. Beyond what has been proposed in the guidance, WMC will continue its historic policy to not offer any option ARMs or products with negative amortization and going forward, we will begin to hold a portion of this loan portfolio on our own books.” said Laurent Bossard Bossard, Chief Executive Officer, WMC Mortgage.

“Countrywide is primarily a prime lender, as I’ve mentioned, 93% of our originations are to prime borrowers [NOTE: this is only true for the month of February 2007. Countrywide’s full year 2006 was closer to 10% subprime originations] … Cumulatively over the past 10 years, Countrywide originated almost 540,000 hybrid ARM loans and less than 20,000 less than 3.5% of those hybrid loans have gone through foreclosure.” said Sandy Samuels Samuels, Executive Managing Director, Countrywide Financial Corporation.

During the Q&A portion of the second panel the most notable exchange came from Senator Dodd and Sandy Samuels of Countrywide:

When asked by Senator Dodd about what the point of a “teaser rate” was, Samuels suggests.

Samuels: “It makes the loan affordable… ”

Dodd: “Yea but if it’s only for a year or so her [a consumer] circumstance is not going to change… if she’s 70 [years old] with a teaser rate, and [then] she’s 72 what’s her circumstances?”

Samuels: “If she makes the payment on time, for the period of those two years, her FICO score will go up and we will be able refinance her into a prime loan…. She’ll pay less because she would have gone from a subprime loan into a prime loan.”

For my money, the best testimony came from Consumer Attorney Irv Ackelsberg (which kicks in at 3 hours 24 minutes) Ackelsberg who states:

“What we are seeing, I believe, is a run away train that is only starting to gather speed. These recent foreclosures reflect large numbers of early payment defaults, that is, homeowners defaulting before the fixed rate periods on their loans expire and the adjustments kick in. We have yet to see the full effect of those adjustments. It is not unreasonable to predict as many as 5 million foreclosures over the course of the next several years, a number that represents one out of fifteen homeowners in this country.”

“But think it would be a really bad mistake for this committee to think that the problem can be solved by reining in the brokers, we have to understand that they are selling the products that the lenders want them to sell and the lenders themselves are selling the products that Wall Street has ordered. The ultimate consumer here is not the homeowner. There’s no real market demand for being ripped off. The real market is on Wall Street, for bond securities. And the broker and the lender and everybody else in between is part of a factory that’s producing bond securities for Wall Street. That’s the real market, and that’s the real culprit.”

The entire hearing can be viewed here in Real Audio format.

Unfortunately, I wasn’t able to capture the feed as a Windows Media file so I can’t add it to BNN. If anyone knows of a reliable RM to WMV conversion utility, I would greatly appreciate the information.

Wednesday, March 21, 2007

Crashachusetts Existing Home Sales: February 2007

So, it appears that last month’s optimistic market “rebound” sentiment was short lived.

As I had noted last month, the Northeast had experienced exceptionally warm weather in January most likely resulting in an increase in the number of days suitable for home sales when compared to an average January.

This inevitably resulted in a bump up in residential real estate activity, noticeably affecting indicators from home sales to residential construction permits.

The weather in February, on the other hand, was far more typical for winter in the Northeast with a few snow storms and lots of bitter cold days pushing single family homes sales 12.2% below January’s results and holding reasonably flat compared to the February 2006 results.

These results become even more interesting when you consider that the February’s slower sales came even as the median home price declined 4.4% from January and 4.1% as compared to February 2006.

Additionally, although February registered a 17% decrease to inventory of residential properties (single family and condos combined… unfortunately MAR seems to no longer report the inventory and supply statistics separately) as compared to February 2006, there has been a 15% increase to the number of months supply since January indicating again that the sales pace is slowing.

In fact, the average number of “days on the market” now stands at 148 days compared to 115 days for February 2006.

It now appears that the Spring market may present a pretty ugly spectacle as I believe that inventory levels may significantly exceed last years results.

It appeared to me, at least anecdotally, that an unusually large number of listings were pulled from the market during the October-November timeframe, far more that I had witnessed in the fall of 2005.

In a matter of days, the number of listings had been more than halved in virtually every town inside 128.

Those listings have yet to resurface and, although this is the typical pattern seen during this time of year, I believe that, in the face of an uncertain housing market, sellers that got stuck with stale listings last year are attempting to time their listings to a greater extent than has been seen in past seasons.

Don’t forget to use the Inventory Tracking Tool If you would like to get a “bead” on inventory.

It’s still fairly basic, but now that I have nearly a years worth of data captured, Ill soon add some more advanced analytical functionality.

Finally, the Federal Reserve Bank of Boston recently released a paper titled “Understanding Foreclosures in Massachusetts” within which the authors discuss at length the sudden increase in foreclose rates seen recently.

Massachusetts has now exceeded New England’s average for foreclosure rates and is quickly closing in on the national average as well.

The paper attributes this increase to both an increase in the use of risky loan products as well as the decline of the housing market.

“Since the 1990s, products featuring changing monthly payments have grown increasingly popular. These can include adjustable-rate mortgages (ARMs), where monthly interest rates and payments size are linked to some index, such as the prime rate; or products with features like “teaser rates” where initial interest rates are low, but are set to increase after fixed time periods. While some ARMs are structured to have only moderate shifts in monthly payments, some have dramatic increases, often occurring a fairly short time after origination.”

“The weakening housing market has likely played a strong role in the recent foreclosure increase. Since 2004, rates of housing price appreciation in Massachusetts and New England have slowed dramatically, and by some estimates, property values have declined.”

The following is one interesting chart (click for larger version) from the paper that shows how in 2003, when affordability really hit the wall, the percentage of market share of traditional fixed rate loans dropped nearly 15% from their 5 year average while prime ARMs and subprime products simultaneously picked up that 15% slack. This resulted in roughly 30% of all loans being either a prime ARM or subprime product.

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

February’s Key Statistics:

  • Single family sales declined 12.2% from January and increased 1.2% as compared to February 2006
  • Single family median price declined 4.4% from January and declined 4.1% as compared to February 2006
  • Condo sales declined 0.6% from January and increased 4.5% as compared to February 2006
  • Condo Median Price increased 0.7% from January and declined 1.8% as compared to February 2006
  • The number of months supply of residential properties stands at 12.3 months.
  • The “days on market” for residential properties stands at 148 days.

Tuesday, March 20, 2007

New Residential Construction Report: February 2007

Popularly reported as showing a “bounce back” to housing starts, today’s New Residential Construction Report continues to indicate significant weakness in the nations housing markets and for residential construction.

Although it’s a widely held belief that the best selling season is the spring, leading some to look for signs of strength later the year, it may be that this report is showing us the best numbers we are going to see for residential construction in 2007.

As Bob Toll recently recounted, the period between January and Presidents day weekend is considered the “hot” selling season in the new home market and by his account this year was a “bust”.

“Well the Spring selling season is over, it’s a misunderstanding that we have been unable to correct over the past 40 years. In the new home business, you start selling immediately after the holidays.. it increases in number and then there’s a pretty substantial jump right after the Super Bowl because ‘she’ hasn’t been able to get ‘him’ out of the seat to go and see the product on Sunday, which is our big day, then you continue to run-up from after the Super Bowl to Presidents Day weekend… That’s the peak of the market… We have had this substantial jump from the December sales into January, we had this substantial jump from January into February but that jump cam no where near on a per-community basis to what it’s been on an average over the past 10 years.”

Today’s report shows permits and starts down high double-digits both nationally and in every region with completions now accelerating to the downside as had been widely speculated.

In fact, the report shows that completions from January as well as on a year-over-year basis are now declining in every region with particularly steep declines as compared to February 2006.

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

Here are the statistics outlined in today’s report:

Housing Permits


  • Single family housing permits down 3.1% from January, down 32.9% as compared to February 2006

  • For the Northeast, single family housing down 23.8% from January, down 38.9% as compared to February 2006.
  • For the West, single family housing permits up 4% from January, down 30.0% as compared to February 2006.
  • For the Midwest, single family housing permits down 16.9% from January, down 43.2% as compared to February 2006.
  • For the South, single family housing permits up 1.4% from January, down 30.3% compared to February 2006.
Housing Starts


  • Single family housing starts up 10.3% from January, down 32.7% as compared to February 2006.

  • For the Northeast, single family housing starts down 26.0% from January, down 37.2% as compared to February 2006.
  • For the West, single family housing starts up 37.4% from January, down 35.9% as compared to February 2006.
  • For the Midwest, single family housing starts down 19.3% from January, down 52.3% as compared to February 2006.
  • For the South, single family housing starts up 16.4% from January, down 23.5% as compared to February 2006.
Housing Completions


  • Single family housing completions down 11.3% from January, down 23.1% as compared to February 2006.

  • For the Northeast, single family housing completions down 24.1% from January, down 16.4% as compared to February 2006.
  • For the West, single family housing completions down 10.9% from January, down 38.0% as compared to February 2006.
  • For the Midwest, single family housing completions down 20.4% from January, down 36.4% as compared to February 2006.
  • For the South, single family housing completions down 6.6% from January, down 11.5% as compared to February 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.

Monday, March 19, 2007

Charting the Bubble (Slight Return)

Last year, I released the Office of Federal Housing Enterprise Oversight (OFEHO) Home Price Index Charting Tool that allowed users to mix and compare home price data from any number of over 400 statistical regions on the same chart.

Today, I’ve released the S&P/Case-Shiller Charting Tool which complements the OFHEO tool, allowing you to compare home price data from any number of the 22 different metropolitan and composite statistical series currently supported by Standard & Poor’s.

The S&P/Case-Shiller Home Price Indices, which is published monthly under agreements between Standard & Poor’s, Fiserv, and MacroMarkets LLC, provide a “reliable and consistent of housing prices in the United States.”

The “repeat sales” methodology used to calculate the indices was developed in the 1980’s by Professors Karl E. Case and Robert J. Shiller and is highly regarded by financial institutions.

In fact, it provides the basis of the Chicago Mercantile Exchange (CME) housing marketplace that has emerged over the last year.

The following excerpt taken from a CME Housing Market FAQ explains why the S&P/Case-Shiller is more accurate than both the National Association of Realtors (NAR) index as well as the OFHEO index:

There are two other major housing indexes: the National Association of Realtors (NAR) Indexes and the Office of Federal Housing Oversight (OFHEO) Indexes.

The NAR Indexes quote median values without recourse to a repeat sales methodology, which creates a significant potential for bias.

The OFHEO indexes do utilize a repeat sales methodology but are confined to Fannie Mae and Freddie Mac conforming mortgages, which are skewed to the lower end of the housing market.

This is a significant issue because only approximately one-sixth of housing in California is sold with a conforming mortgage. OFHEO indexes also utilize appraisal data to supplement their samples, which creates the possibility of bias that reflects the interests of those who are paying for the appraisal.

However, as all three indexes generally track the same phenomenon they are likely to move more or less in parallel.

So, what is the S&P/Case-Shiller Home Price Indices currently telling us?

Most of the country’s major metropolitan areas are registering significant declines after having experienced an unprecedented run-up in the last 10 years.

As Professor Shiller put it recently on CNBC:

“We are just emerging from the biggest housing boom in the history of this nation. It’s been driven by unrealistic expectations.”

Take a look at virtually any of the statistical areas and you will see roughly the same patter of huge surge, especially after 2000, followed by an abrupt rounded turn around in 2006.

The following are charts for some of the bubbliest markets:


Both the OFHEO HPI Tool and the S&P/Case Shiller Tool now support two ways of dynamically linking so that you can integrate the charts into your blog or website.

You can link directly to the tool by simply building out the chart with the data your interested in, and then copying the URL link from the address bar of your browser and including it in your site.

Alternatively, if you would like to actually “embed” a dynamic chart (as I have done above… the chart view will actually automatically update when I update the data every month) into you blog or website do the following:

  • Build out a view of the chart with the data your interested in.
  • In the address bar of your browser, add the following to the URL: &width=300&height=300&ext=.jpg
  • In your web page, add an image tag with this URL set as the src.
Now, when your page is fetched, this “dynamic” image is fetched as well and the chart will always remain “up-to-date”.

Also, you can choose your preferred image size by adjusting the height and width and image format by specifying either .jpg, .gif or .png.

As usual, let me know if you have any issues or comments on both tools.

Sunday, March 18, 2007

Zero Down at Countrywide

A couple of weeks ago, when in the initial malaise of the sub-prime meltdown was just settling over the nation, Countrywide Financial appeared to scramble to take some action that might allay the fears of an increasingly volatile market.

Then came a widely publicized account of an “urgent” email which specified that Countrywide brokers were to no longer provide any 100% financing deals as of March 12.

"Please get in any deals over 95 LTV (loan-to-value) today!... Countrywide BC will no longer be offering any 100 LTV products as of Monday, March 12."

At first glance, this was a fairly positive development for the company as most would easily agree that lending first time home buyers 100% of their purchase price was probably a bit too risky let alone lending it to buyers with sketchy credit histories.

But still, it seemed a bit light on substance given that home buyers, even ones with sub-prime credit quality or low to no verified income, could still borrow 95% of the purchase price of their home, not to mention that there was never an official follow up release from the company substantiating the changes.

Either way, the traditional media ran with the news of the changes and fact or fiction, company stunt or legitimate development, it eventually made it's way onto CNBC and into the Wall Street Journal.

Then a few days ago, I managed to get my hands on a few Countrywide BC rate sheets dated March 12th as well as several underwriting matrices and was quickly able to arrive at the truth behind the reported changes.

First, although Countrywide may have limited the availability of their 100% LTV products, they did NOT eliminated them entirely.

In fact, 100% financing is still an option, allowing “full documentation” borrowers with credit scores of 620 or better to borrow up to $1 million using either a 100% or 80%-20% product.

Borrowers with credit scores as low as 580 can receive 95% financing allowing them to borrow up to $550,000 and even “no-doc” borrowers with credit scores of 640 or better are eligible for 95% LTV loans of up to $600,000.

Finally, Countrywide is still offering these loan products in the form of risky “interest only” option ARMs as well as continuing to serve borrowers who are “out of bankruptcy less than a year” as one of their ads had promoted.

All in all, I’d say not much has changed over at Countrywide and although their CEO Angelo Mozilo has gone to great lengths recently to assure the markets that they were operating in a sound manner, you would be hard pressed to tell that from their underwriting guidelines.

So, was this a surprise?

Truthfully, given the state of affairs that has been unfolding in the last month, I was a bit surprised… that is, until I read the following press release titled “Countrywide Home Loans Assures Homeowners and Home Buyers That They Still Have Many Mortgage Loan Choices” published late Friday evening.

Here is the most pertinent excerpt:

"We want to assure homeowners that there is still an extensive selection of mortgage loans to suit a multitude of personal and financial circumstances," said Tom Hunt, managing director of Countrywide Home Loans. "We recognize it's been widely reported that some major lenders, like Countrywide, no longer offer 100% financing. In fact, we have made changes to certain subprime and other special mortgage programs, but we have not eliminated 100% financing. We still offer one of the widest selections of low- and no-downpayment options to qualified customers, including those with less-than-perfect credit."

So, it appears that Mozilo may have summed it up best when he told Maria Bartiromo of CNBC the following:

“There’s been a rush to judgment, an overreaction, a baby out with the bathwater… “

Friday, March 16, 2007

Dancing with Toll

Yesterday, Toll Brothers executives were out in force, stumping simultaneously at two separate investor conferences.

First, there was the UBS US Home Building and Building Products Conference which featured several panels of home builder and product COOs and CFOs speaking about their respective companies as well as the outlook for the housing market.

In somewhat of a reversal of prior statements made by Bob Toll, Fred Cooper, Senior Vice President of Toll Brothers suggested the following regarding the effect of the sub-prime mortgage market had on housing demand:

“In 2004 2005 suddenly you had a ratcheting up of demand … so you had home price increases that were very rapid. As it turns out, in retrospect, a bunch of that home price increases were being fueled by speculators and I expect when the dust settles its going to turn out that a lot of the speculators were being fueled by the sub-prime mortgage market because they would be able to control five or six homes at a time without having to put up much capital.”

When asked about the credit quality of Toll Brothers buyers, Copper responded:

“Our buyers typically borrow just a little bit North of 70% of the purchase price of their homes so they’re not really overstretching. I would say 1% to 2% of our buyers use sub-prime and they generally use it for a bridge.. so it really wasn’t a big factor in our buyers buying ability. ”

Formally, Bob Toll made statements downplaying the effects that sub-prime mortgage lending had on their sales, suggesting that Toll Brothers buyers generally aren’t sub-prime buyers although he did note that there were quite a few investors buying Toll Brothers homes during the housing run-up.

Possibly the reality is somewhere in the middle whereby those who bought Toll Brothers homes for their primary residence generally used prime or Alt-A funding but speculating investors used sub-prime loans as Cooper suggested.

Cooper later makes the following statements:

“To say that we were wrong in 2004 2005… I don’t think we were wrong, we went from $400 million in profits to $800 million in profits and I don’t think that we would have wanted to forego those… Well I think what we missed was, I think we misjudged how impactful the speculators were.”

Listen to the entire presentation and Q&A here with Fred Cooper here.

Simultaneously, Robert Toll, CEO of Toll Brothers addressed Citigroup's Small & Mid-Cap Conference where stated that “housing is in a considerable slump”.

“Housing is a market of sub-markets and really shouldn’t be spoken about in general. Some markets are knocking them dead right now but their few and far between. Most of the markets are having a difficult time. The primary reason is the oversupply left by speculators and investors who got caught up in the mania of the price increases that were brought to the market by the extra demand created by the speculators and investors.”

Toll then goes on to play out a strange fictional scenario to demonstrate that in some markets, Toll is actually attempting to prove to buyers, with a little tough love, that there really is more demand than they think.

“somebody will come to the office and say ‘Ill take it but I need $10,000 more in incentives’… we’ll say ‘no’ and they’ll say ‘well I’m very sorry’ and they leave. Then they come back next week.. ‘how we doing…’ and we say ‘well I’m very sorry we’re doing well but we’ve had a two thousand dollar price increase and we are still maintaining the same incentives’ but we have posted a price increase because we want to show the market that we have more demand than the market believes we have and then that person will buy.”

Later, when asked to elaborate on these selective price increases during this spring selling season Toll offered this telling analysis:

“Well the Spring selling season is over, it’s a misunderstanding that we have been unable to correct over the past 40 years. In the new home business, you start selling immediately after the holidays.. it increases in number and then there’s a pretty substantial jump right after the Super Bowl because ‘she’ hasn’t been able to get ‘him’ out of the seat to go and see the product on Sunday, which is our big day, then you continue to run-up from after the Super Bowl to Presidents Day weekend… That’s the peak of the market… We have had this substantial jump from the December sales into January, we had this substantial jump from January into February but that jump cam no where near on a per-community basis to what it’s been on an average over the past 10 years.”

“As a matter of fact, it was probably as bad in traffic as a half, which is terribly down, now this is on average… the Spring selling season, or the prime selling season is pretty much a bust on a per-community basis.”

“When you stepped back and looked at it [it was] no where near where it should have been if you were looking at an average of the last 10 years.”

Then Toll goes on at length about speculators and the sub-prime market:

“By the way, speculative investors have not left the market entirely. There are still speculator investors that are now circling the market as the buzzards would on the carcass because prices have gone so far down on standing inventory that investor speculators are doing anything they can to try and get an additional incentive on that property and to buy it with as little as possible which was made possible by the idiocy of the sub-prime market until very recently. But it’s not done yet.”

“Sub-prime originators will struggle to continue to deliver sub-prime product because if they can’t they’re out of business, and before they go out of business they are just going to continue as hard as they can to be able to produce no-doc loans 100% financing… speculators eat this up.”

In a funny conclusion, Toll delivers another dancing anecdote:

“I remember in 1974 literally having to dance on top of the desk of the Third Federal CEO Mr. Greenberg who said if I got up and danced on his desk he would give me three mortgages so that I could take them and sell homes. Those were tough times… We may get there… I hope we don’t but we’re certainly not there right now.”

Listen to the entire presentation and Q&A here with Bob Toll here.

Thursday, March 15, 2007

Ask Again Later

With all the ugly sub-prime news lately, it’s been easy to neglect our friends over at the National Association of Realtors (NAR).

Taking a look at the latest market forecast from their Chief Economist David Lereah though, you’d think he’s resorted to using a Magic-8-Ball.

I can see him now, crouched in the corner of his locked office muttering “Ask Again Later… Concentrate and Ask Again… Outlook Not So Good… Dammit!”

It appears that the NAR is hopping on the sub-prime bandwagon to an extent, suggesting that the latest developments are now affecting their ability to forecast the remainder of the year.

Lereah now states:

“Lending problems in our nation's subprime marketplace are building, which could inhibit future housing activity and further dampen our forecast.”

Additionally, Lereah seems to be unusually preoccupied with the weather suggesting again that:

“… extraordinary weather variations are skewing home sales and clouding the picture,”

“In December, unusually mild weather brought out shoppers and January existing-home sales rose, … However, a sudden chill in January slowed shopping activity relative to December and pending sales, based on contracts, fell.”

“We have yet to see the biggest weather impact – February’s winter storms brought markets to a halt in much of the country, and it was the coldest February since 1979 – that should drag sales down in March,”

Interesting analysis for an economist who has seemingly overlooked virtually every economic rain could that has peaked over the horizon.

Wednesday, March 14, 2007

Mozilo’s Bluff

As the sub-prime market continues to unwind it would be easy to feel almost sad to watch as desperate mortgage lenders, particularly their CEOs, struggle to hang on if it weren’t so ironic.

For about a decade now the mortgage lending industry has worked tirelessly to provide virtually anyone, good credit or bad, collateral or zero-down, commensurate income or undocumented with debt that would have been considered exceptional during any prior era.

Gone were the days of “rule of thumb” lending limits, deposits or mortgage insurance, replaced by an ever increasing menu of “exotic” mortgage products purportedly created to suit the present modern needs of the market.

There were many “independent” observers, inside and outside the mortgage industry, who justified and even supported the implementation of this lowering of credit standards.

Famously there was Alan Greenspan’s testimony back in 2004 when he suggested “many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade,”.

Not as well know though are the numerous mortgage industry “analysts” and insiders who worked tirelessly to justify the new mortgage products while they downplayed the risks as well as the possibility of things ending up in the predicament that we see today.

Two notable names in this category are Barry Habib CEO of the Mortgage Market Guide, and Michael Youngblood, analyst with Friedman Billings Ramsey & Co. both of whom, even very recently, continued to express support for “toxic” mortgage products as well as deny risk that they introduced into the industry.

But probably worst of all are the recent, subtly desperate attempts by Countrywide Financial CEO Angelo Mozilo as well as his executives to calm the market especially as it relates to the interest of their organization.

Speaking to CNBC’s Maria Bartiromo yesterday Mozilo suggested that Countrywide will actually benefit from the sub-prime melt-down (WATCH THE FULL VIDEOS ON BNN! Part 1 and Part 2):

“This will be great for Countrywide at the end of the day because all the irrational competitors will be gone.”

Mozilo then continued on at length about a few very key items that if put under further scrutiny shows definitively that he is truly feeling pressure and, in an attempt to manipulate a more desirable outcome, is beginning to show his cards.

First, Mozilo suggested that of all the loans originated by Countrywide, only 7% are considered sub-prime.

It only takes a quick pass at their financial disclosures to see that what Mozilo was actually referring to was the results for February 2007.

In actuality, Countrywide produced closer to 10% sub-prime loan for the full year 2006, a fact that was even noted by Countrywide CFO Eric Sieracki last week during a Raymond James-sponsored investment conference.

Additionally, roughly 15% of all loans originated by Countrywide in 2006 are considered Alt-A leaving a astounding 25% of all 2006 originations squarely in the category of extreme risk.

Second, Mozilo attempted to persuade Maria and the viewers that his concern is really with the country, who apparently in his mind, will be severely damaged if they are prevented access to Countrywide’s services.

“My concern, Maria, is for… the Country, and for first time homebuyers who are the beginning of the housing chain. And the only way that lower income minorities can get into middle income.. the primary way is through housing.”

This can only be described as one of the most disingenuous, preposterous and, in fact, reprehensible presentations of the realities behind the sub-prime lending environment as has ever been offered.

As we have seen in the past decade, sub-prime lending has time and time again been shown to be biased and advantageous at best and predatory at worst.

Millions of people of moderate income including minorities, the elderly and recent immigrants have been falling prey to unscrupulous lending practices leading to a nationwide wave of state and local laws that attempt to regulate dishonest lenders.

Countrywide may not necessarily be in the worst category of lender but as anyone who has listened to the radio or watched TV in recent years can tell you, Countrywide is probably best know for its advertising of teaser loans such as their “Combo Loan” that seeks to persuade homeowners to refinance all their debt, including automobile and revolving credit into their home loan.

There’s nothing like providing services for financing cars or some Lord and Taylor purchases over 30 years to help strengthen the middle and lower income strata of the country.

Mozilo then paradoxically goes on to suggest that the problems with the mortgage market is not the loan products but the borrowers themselves.

“These are not new products nor are they exotic products… [the problem is that] some of these products were sold to people they shouldn’t have been sold to… the loans themselves are not problematic.. its who they were sold to and how they were used.”

Mozilo then struggles to suggest that the problems they are seeing now are as a result of making “good” loans to investors and speculators to buy investment properties.

Clearly, this is certainly partly true.

Rampant speculation was an obvious factor in the housing boom but attempting to suggest that all the defaults and delinquencies are coming from borrowers that are attempted to game the system and not the lending industry is purely disingenuous.

Mozilo further misses the point when he suggests that the “rules are changing” on first time home buyers, limiting refinance activity and leaving them stranded with bad loans.

“These first time homebuyers that are in homes who need to refinance because the resetting now can’t get refinancing simply because the rules changed on them after the game started.”

Again, this is true and certainly highlights a potentially enormous problem soon to materialize in the housing market but Mozilo completely and disingenuously forgets to mention that it was the lenders that got these first time homebuyers into bad, rate resetting, loans in the first place.

Finally, Mozilo mentions just a bit about the indemnifications that Countrywide provides on the loans they sell to larger financial institutions. This, of course, is the “Achilles Heal” of their business.

As was seen with New Century Financial, as loans went bad and loan holders called in this indemnifications, the cost far out paced what New Century had reserved.

Will Countrywide fair any better… Mozilo suggests it will.

In a final thought, last week there was a widely publicized “urgent” email which specified that brokers were to no longer provide any 100% financing deals as of March 12.

"Please get in any deals over 95 LTV (loan-to-value) today!... Countrywide BC will no longer be offering any 100 LTV products as of Monday, March 12."

This event was very reminiscent of the complete about-face publicized by New Century Financial last October when, in a public release, they stated that they would virtually completely adopt all the provisions that the Federal Reserve had suggested for better managing risk in their operations.

Obviously though, these reforms, if even implemented, were too late incoming for New Century and one has to wonder, with all the possible “smoke and mirrors” currently being presented now by Countrywide executives, whether they are seeing their dynasty slip fast away as well.