Housing Bubble Bursting?

[Randolph Kinney]

Builders see big problem coming

Home inventories, land investments hold risk for builders

BOSTON (MarketWatch) -- With many predicting the battered housing market will get worse before it gets better, home builders' cash flows stand to take a further hit due to rising home-inventory levels and investments in risky land assets, according to analysts at Deutsche Bank.

"Based on our detailed analysis of inventory trends, we do not think investors should be overly optimistic regarding the home builders' ability to generate cash flow in the next 12 to 18 months," analysts Nishu Sood, Lou Taylor and Rob Hansen wrote in a lengthy report this week.

By most accounts, the spring selling season has been a bust and hopes for a housing recovery are firmly on hold.

"With housing prices declining, inventory rising and adjustable-rate mortgages resetting; we believe the probability the situation worsens is high," says Edward Maraccini, portfolio manager at Johnson Asset Management.

Some of the supply overhang has been fueled by speculators and investors flipping homes for profit who tried to get out when the market turned. The problems in the subprime mortgage market and foreclosures have also had a negative impact, while the recent rise in interest rates is also lessening buyer demand as mortgages get more expensive. To make matters worse, builders' cancellation rates have surged the past year.

Sellers of existing homes may have to give in and lower their asking prices, which could put pressure on builders of new homes to follow suit in order to compete.

 

[Terrel L. Shields]

Deutsche Bank

just did an appraisal of a repo, sold for $43K in 02, sold in foreclosure by Option One via Deatche Bank, for $58....owed? over 80k. The borrowers went back to the kitty every other year until they were way too deep in debt.

 

[moh malekpour]

Asset Deflation 9: Metals and Real Estate Closer to Comatose

http://www.safehaven.com/article-7854.htm

Real estate deflation continues to drag down all markets. It is an insidious disease that continues to eat away everyone's flesh one ugly blotch at a time. Investors ignore those pesky red spots, hoping they will go away on their own despite the fact there is no known cure. Meanwhile, growing legions of Americans are coming to their senses; they're figuring out that the massive and unwieldy real estate and credit bubbles are unwinding/contracting and they're losing their appetite to borrow, buy and risk. Those pinning their investment hopes on inflation and "The Fed!" are at the mercy of the New Silent Majority -- those concerned consumers, investors and borrowers (and even lenders) who are in ever-greater numbers saying, "No more!"

While setting their money aside.

I feel for real estate owners and those wacky, ever-passionate metals bugs, who desperately hold onto the notion that the Fed is firmly in control of their investments and/or that hyperinflation is the only indicated outcome. They ignore the fact that the Emperor Has No Clothes -- that the homebuilder's index has fallen like a skydiver without a parachute, that interest rates are showing no such trend, that the subprime mess is dangerously infecting mortgage securities markets and hedge funds, that consumer spending is waning and that commodities markets are exhibiting ever-greater signs of weakness. Denial is not just a river in Egypt, as the old saying goes.

 

[Randolph Kinney]

Another builder hit again with woe

KB Home swings to loss on tough market

Cites inventory glut, weak demand; $308 million charge taken

BOSTON (MarketWatch) -- KB Home reported Thursday a second-quarter loss, a reflection of how builders are attempting to slog through a U.S. housing correction marked by an oversupply of homes for sale and slackening demand.

"Housing affordability challenges and tighter credit conditions in the subprime and near-prime mortgage market have also exacerbated current market dynamics, keeping prospective buyers out of the market, slowing the absorption of excess supply and further delaying a housing market recovery," Mezger noted.

"Pricing pressure intensified in many of our markets during the second quarter, compressing margins and requiring inventory-impairment charges in certain of our communities," Mezger said.

Against this backdrop, KB Home said it was using more price concessions and sales incentives "to meet competition." Meanwhile, the land charges were driven by "marked price reductions in housing markets across the country during the spring selling season."

 

[Randolph Kinney]

GDP Growth & Housing

Inflation worry in GDP data

Core consumer prices rose at 2.3% pace in past year, above Fed's zone

The U.S. economy grew at a 0.7% real annual pace in the first three months of the year, the slowest pace in four years, compared with the 0.6% estimate reported last month. Final sales increased 1.7% annualized, a tenth better than last month's estimate.

Core consumer prices rose at a 2.4% annual pace in the quarter, revised up from a 2.2% pace previously reported. Core prices -- which exclude food and energy -- are up 2.3% in the past year, revised up from 2.2% earlier. The upward revision was due to higher prices for physician services.

Economy-wide inflation jumped 4.2% in the quarter, the fastest inflation in 16 years, led by first-of-the-year pay raises for government workers.

Investments in houses dropped at a 15.8% annual pace, revised from 15.4% earlier. Residential investments cut 0.9 percentage point from growth, the sixth consecutive quarter that housing has been a drag on growth.

 

[Randolph Kinney]

Oh woe, woe is subprime

No end in sight to subprime woes

CHICAGO (MarketWatch) -- An end isn't anywhere in sight to the meltdown in subprime mortgage markets, the chief investment officer at Los Angeles-based TCW Group Inc. warned a gathering of investment professionals on Wednesday.

"The subprime market is a total unmitigated disaster and it's going to get worse," Gundlach told money managers and financial advisers.

"The delinquency rate is still climbing," he added. "At the same time, the ability of people to refinance is also going down. It's just not a very attractive situation."

 

[Randolph Kinney]

Hedge funds biting the subprime bullet - worst yet to come

Subprime shakeout claims another fund

SAN FRANCISCO (MarketWatch) -- Caliber Global Investment Ltd., a London-listed fund that controlled almost $1 billion of mortgage assets, said on Thursday that it's shutting down after turmoil in the subprime market cut demand for its shares.

Caliber is the latest casualty of rising delinquencies in the subprime mortgage market, which caters to poorer borrowers with blemished credit records. Bear Stearns Cos. is trying to salvage two of its hedge funds that focus on the space, while another run by UBS AG shut down earlier this year.

Subprime mortgage problems have also disrupted some initial public offerings. Everquest Financial, which had ties with Bear's troubled hedge funds, pulled its IPO registration earlier this week.

Queen's Walk Investment Ltd., a similar London-listed fund run by Cheyne Capital, one of the largest hedge funds in Europe, has also been hit by the subprime shakeout.

 

[Randolph Kinney]

American Home sees second-quarter loss

Lender stops offering stated-income loans with high loan-to-value ratios

SAN FRANCISCO (MarketWatch) -- American Home Mortgage Investment Corp. forecast a second-quarter loss late Thursday because of rising delinquencies on some of its mortgages.

The company, which offers fixed-rate and adjustable-rate mortgages and so-called Alt-A loans, also withdrew its full-year guidance and said it obtained an investment from $9 billion hedge fund firm Marathon Asset Management LLC.

Charges related to delinquencies on mortgage loans will be "substantial" during the second quarter, American Home explained.

Charges from the company being required to buy back loans that it had previously sold on to secondary mortgage market investors will also have a significant impact on second-quarter results, it also said.

American Home said late Thursday that credit problems have mainly been caused by its strategy of offering three-month "timely payment" warranties to investors who bought stated-income loans with high loan-to-value ratios from the company. (Timely payment warranties are common in the industry and are also known as early payment default warranties.)

As more borrowers fell behind on payments quickly, American Home has had to buy back those loans from investors.

American Home said it's stopped offering these types of loans and that's helping to cut the amount of loans it has to repurchase from investors.

 

[Randolph Kinney]

Regulators crack down - new subprime rules for lenders

New subprime mortgage rules from regulators

WASHINGTON (MarketWatch) -- After years of abuse in the subprime mortgage marketplace, federal regulators are cracking down on banks by issuing new rules Friday to make sure that borrowers get loans they can actually afford.

The new rules are for adjustable-rate mortgage products that can cause payment shock. These loans start off with low "teaser" rates that balloon, and end up being more expensive than borrowers initially anticipate.

The new rules call for banks to beef up their disclosures, limit prepayment penalties, limit the use of "stated income" loans, and include a fully indexed, fully amortized qualification for borrowers.

The new rules do not include a "suitability standard." That is, borrowers will continue to be responsible for making sure that they choose appropriate loans for their needs and circumstances.

The interagency guidance comes from the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., Office of Thrift Supervision and National Credit Union Administration. The rules apply to all banks, bank holding companies and their non-bank subsidiaries, savings associations and their subsidiaries, savings and loan holding companies and their subsidiaries, and credit unions.

The regulators noted that they will take action against institutions that exhibit predatory lending practices, violate consumer protection laws or fair lending laws, engage in unfair or deceptive acts or practices, or otherwise engage in unsafe or unsound lending practices.

The Fed has been criticized by consumer advocacy groups and some lawmakers for not taking action sooner.

 

[Randolph Kinney]

Compare GDP to Housing