Housing Bubble Bursting?

[Brad Ellis]

Randolph,

I am not 100% sure but I do believe that by end 1996 and early 1997 the effects of the economic problems caused by the cancellation of aerospace and defense contracts in CA was already over.

When it was going on I was getting calls from my CA clients to add current listings to my reports. Of course, nothing was going on in Chicago back then so it was silly- but from the timing perspective I do know I merged my firm with a CA firm in 1998 and that those requests were long since done.

Can you check that- you are the expert at ferreting out the raw data?

Brad

 

[Randolph Kinney]

Randolph,

I am not 100% sure but I do believe that by end 1996 and early 1997 the effects of the economic problems caused by the cancellation of aerospace and defense contracts in CA was already over.

When it was going on I was getting calls from my CA clients to add current listings to my reports. Of course, nothing was going on in Chicago back then so it was silly- but from the timing perspective I do know I merged my firm with a CA firm in 1998 and that those requests were long since done.

Can you check that- you are the expert at ferreting out the raw data?

Brad

Taken from Legislative Analyst's Office:

http://www.lao.ca.gov/analysis_1996/p962.pdf

California's 1995 Performance

Industries losing jobs included aerospace, which continues to be
affected by national defense cutbacks; the combined finance, insurance,
and real estate sectors, which continue to undergo consolidations and
restructurings nationwide and in California; and the federal government
sector, which is being negatively affected by defense base closures.

There is a lag affect of when the event happens and the economic affect happens.

We had this discussion before of what happened in the 1990's to drag house prices down, remember?

Looking at the following year analysis from Legislative Analyst's Office:
http://www.lao.ca.gov/analysis_1997/part_2_econ_demographics_pi97.pdf

Economic Growth. The national economy completed its fifth year of
sustained economic expansion in 1996. Following a sharp slowdown in
late 1995, the economy regained momentum during 1996. Despite considerable
quarter-to-quarter volatility during 1996, real gross domestic
product (GDP) grew by about 2.5 percent for the year as a whole.

Some Problem Areas Remain

Construction—Slow to Recover. Although the economic news for
California was mostly positive in 1996, several problem areas remain.
Two are particularly significant. The first is the persistent weakness in
California’s residential construction sector. Permits for new housing
increased only modestly in 1996 from the prior year, and fell short of
most forecasters’ expectations. The continuing weakness in this area may
be partly due to ongoing declines in real estate values, particularly in the
inland regions of the state. These declines, which may reflect supplydemand
imbalances, are leading to uncertainties among developers and
prospective home buyers.

Restructuring—Still Taking a Toll. A second area of concern involves
the further consolidations taking place in certain key industries, such as
aerospace. For example, there have been recent mergers involving major
California aerospace-related companies such as Hughes Electronics,
McDonnell Douglas, and Rockwell. Presumably, these restructurings
make economic sense to the companies involved, and may even boost
California’s economic health in the longer term. However, they also
produce various economic dislocations, at least in the near term. Thus,
even though the worst of aerospace job losses are over, the job outlook for
many workers remains uncertain. The finance sector is another area
where ongoing uncertainty persists regarding continued restructuring.
Although such restructuring is aimed at making the companies involved
more efficient and thus competitive in the longer term, it produces a
variety of negative economic outcomes in the shorter term, including job
losses.

 

[Randolph Kinney]

D.R. Horton Profit Slides on Writedowns, Lower Orders

http://www.bloomberg.com/apps/news?pid=20601206&sid=anS_j3CU8FXQ&refer=realestate

April 19 (Bloomberg) -- D.R. Horton Inc., the second- largest U.S. homebuilder, said fiscal second-quarter profit plunged 85 percent as the weak housing market cut orders and spurred the company to write down land.


Chairman Donald Horton said the housing market remains ``challenging in most of our markets as inventory levels of both new and existing homes remain high.'' Orders dropped 37 percent and D.R. Horton had an $81.2 million expense to write down its land inventory and deposits on parcels it no longer intends to buy.


``With closings falling shy of our expectations and cancellations higher as a percentage of backlog than last quarter, we believe D.R. Horton may be experiencing difficulty in closing buyers due to the tightening of credit,'' Ivy Zelman, an analyst at Credit Suisse, wrote in a note to investors.
Cancellations as a percentage of backlog, or houses under contract and not yet sold, was 28 percent in the quarter, the highest ever for D.R. Horton, Zelman wrote.


Home construction companies are in their second year of slowing sales as prospective buyers postpone purchases amid falling housing prices. The failure or sale of 50 subprime mortgage companies, which make loans to consumers with poor or limited credit histories, has also tightened the supply of money for lending and pushed some purchasers out of the home market.


Last week, Horton said the ``spring selling season has not gotten off to its usual strong start.'' More than half of all U.S. home sales are made during a period that begins in February, so homes can be completed in time for school to start in September.

 

[Greg Bell]

Now the builders are in full meltdown , the Enron crowd can buy up all the builder stock they can find and then cry when in folds.The bigger fool theory is in full swing on wall street..

 

[Randolph Kinney]

Capital One Profit Drops on Bad Debts, Mortgage Loss

http://www.bloomberg.com/apps/news?pid=20601208&sid=adAka3NepmPI&refer=finance

April 19 (Bloomberg) -- Capital One Financial Corp., the biggest independent U.S. credit-card issuer, said first-quarter profit plunged 24 percent because customers missed debt payments and its mortgage business had a loss. The company also cut its full-year earnings forecast by as much as 5.4 percent.


Capital One expanded in mortgages with the $13.6 billion purchase of Long Island's North Fork Bancorp in December just as defaults on subprime loans rose to the highest in four years. Credit cards now make up less than half of Capital One's business, after revenue fell 18 percent in the first quarter.


Fairbank said Capital One's mortgage business may not recover this year and probably will post a ``modest loss.'' Bids for Alt-A mortgages, those made to creditworthy borrowers who don't meet standards for prime loans, ``fell sharply'' at the end of the quarter, Fairbank said.


``This is clearly a very challenging time for our mortgage- banking business,'' he said.


Mortgage originations fell 13 percent in the quarter to $6.8 billion, and Fairbank said a tightening in Capital One's underwriting standards may lead to further declines.

 

[Randolph Kinney]

H&R Block Sees Full-Year Loss on Mortgage Unit Sale

http://www.bloomberg.com/apps/news?pid=20601208&sid=a0LH52o72XpA&refer=finance

April 19 (Bloomberg) -- H&R Block Inc., the largest tax preparer in the U.S., said it expects the pending sale of its money-losing subprime home-loan unit to cause a net loss in fiscal 2007, signaling a deal was near completion.


With discussions for the sale of Option One Mortgage Corp. continuing, H&R Block decided that an impairment charge ``materially greater'' than the unit's goodwill of $152.5 million is required, according to a regulatory filing.

H&R Block, based in Kansas City, Missouri, wrote down about $250 million linked to bad home loans in the last three quarters as defaults by borrowers with weak credit hit four-year highs.


H&R Block put the mortgage unit on sale in November and has already missed one self-imposed deadline when it failed to conclude talks with potential buyers at the end of last month. Turmoil in the subprime market ``affected the process,'' the company said at the time.

 

[Randolph Kinney]

GMAC, GE Announce More Than 1,400 Job Cuts on Subprime Mortgage Decline

http://www.bloomberg.com/apps/news?pid=20601206&sid=a1aDbqHnfYIs&refer=realestate

April 19 (Bloomberg) -- GMAC LLC's Residential Capital home- lending unit and General Electric Co.'s WMC Mortgage division announced more than 1,400 job reductions as losses mount in the U.S. subprime loan industry.

``The subprime mortgage market is going to shrink by 75 percent in terms of jobs and volumes of origination,'' said Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California at Berkeley. ``These companies got too big. They were giving people loans they shouldn't have and now they're getting rid of all that.''

``There will be a decline in employment in virtually every part of the economy that's real estate-related,'' said Christopher Cagan, director of research and analytics at First American CoreLogic, a Santa Ana, California-based provider of mortgage risk data. ``Just as these industries expanded during the boom, so there will be a tightening.

Subprime loans grew to be 20 percent of new mortgage loans in 2006. ``My guess is it will go back to 5 percent'' in terms of originations, Rosen said in a telephone interview.


Commercial rents could fall in some areas where subprime lenders are cutting jobs, Rosen said. ``The office market in certain loans is going to be hurt badly. Orange County is the biggest place where it's going to be felt.''

 

[Greg Bell]

No problem , mortgage stocks will go up tomorrow.Enron lives on...

 

[Brad Ellis]

Randolph,

Of course I remember that discussion. My problem remains, however.

I believe that at least the bulk of the SoCal economic impact occured prior to 1995 and even though it continued into 1995, the market was already recovering a bit by 1996 and certainly into 1997.

If I do have this timing right, then the reasons for the high foreclosure rate back then is only partially attributable to that economic situation. In cA it does not take that long to foreclose.

Brad

 

[Randolph Kinney]

Randolph,

Of course I remember that discussion. My problem remains, however.

I believe that at least the bulk of the SoCal economic impact occured prior to 1995 and even though it continued into 1995, the market was already recovering a bit by 1996 and certainly into 1997.

If I do have this timing right, then the reasons for the high foreclosure rate back then is only partially attributable to that economic situation. In cA it does not take that long to foreclose.

Brad

Brad, I cannot help with your memory problem. I gave you a source (California's Legislative Analyst's Office) and cited what their memory was at the time. They certainly are saying that:

1) 1995 - Industries losing jobs included aerospace, which continues to be affected by national defense cutbacks; and the federal government sector, which is being negatively affected by defense base closures.

2) A sharp economic slowdown did occur in late 1995.

3) 1996 was characterized by a declining real estate market.

4) California aerospace-related companies and the finance sector continued to layoff people during 1996.

It is no surprise to me that 1996 prove to be the peak year of foreclosures given that the housing market was declining and major employers in the state were laying off with base closures.

I found a source that gives the timing of base closings and when the decision was made.

http://www.answers.com/topic/military-base-closings

In June 1995, the commission recommended closing seventy-nine bases and realigning twenty-six others. Although President Bill Clinton expressed strong concern about the economic impact of base closings in Texas and California, he approved the recommendations in July.

States such as California, with more than 300,000 people employed at sixty-seven bases in 1991, felt the loss of jobs and income disproportionately. Including all base closures through the 1995 recommendations, Senator Diane Feinstein of California estimated that 108,900 Californians employed at these bases would lose their jobs.

Here is another source for base closings: Military Base Closures: A Historical Review from 1988 to 1995

http://www.fas.org/sgp/crs/natsec/97-305.pdf

On June 30, the Defense Base Closure and Realignment Commission sent its 1995 Report to the President to President Clinton. The report recommended the closure of 79 bases (including 28 major ones), the realignment of 26 bases (including 21 major ones), and a number of disestablishments or relocations.

The biggest closures would be McClellan AFB, CA, Long Beach Naval Shipyard, CA, and Fort McClellan, AL.

It is obvious to me Brad that California had not felt the total impact of base closings by 1995, and the state was experiencing the benefit of the peace dividend (massive cuts in the defense budget affecting California's aerospace industry) by the end of 1995.

If you have a source that you can quote, other than your memory, that states the peak foreclosures in California 1996 was not economically produced, please contribute.