Notable Quotes:
Chuck Ponzi June 12th, 2007
From Bloomberg today:
“The worst housing slump since the Great Depression.”
That’s quite a claim to fame.
Archive for June, 2007
Beat Down: 10 Year Treasuries
Chuck Ponzi June 12th, 2007
The most recent selloff in the market is due to a correction of sentiment related to the FED’s next move. Previous to last week, it was widely believed (incorrectly) that the central bank’s next move would be a move down.
If you ever wanted to see a credit even happening in real-time, this just might be it. And it doesn’t bode well for the housing market in affordability-crunched housing markets like Socal.
To put it in perspective, this is the 10 year 5 day chart:
It doesn’t get much scarier than that in the bond market. All risk is being repriced. Which makes me wonder why I’m still seeing advertisments like this one on Yahoo finance.
Is it just that they had already allocated the advertising dollars?
However, just as importantly, the news out on the street is that the foreclosure numbers for California could be as high as 3 times the amount last year: A stake through the heart of the bubble apologists. Total nationwide, they are up 90% from last year.
But, to hear it like the MSM tells it, there is a balanced story in all cases: Brian Wesbury from First Trust Advisors squares off against Nouriel Roubini.
Foreclosures were up 19% in May from April and up almost 90% from May 2006, though First Trust Advisors Chief Economist Brian Wesbury thinks foreclosures won’t have much of an effect on the housing market.
He said the peak in the housing market already occurred in the fourth quarter of last year, as there was a 1.2% subtraction from gross domestic product.
“I think the worst is behind us,” Wesbury said.
However, RGEMonitor.com chairman Nouriel Roubini thinks the worst is actually ahead of us.
He said that foreclosure is only one channel of four that puts pressure on home prices.
The other three, he mentioned, are the credit crunch subprime that causes demand for new homes to fall, falling of home prices that causes people to sell homes, and maturity of adjustable rate mortgages at higher interest rates, which people won’t be able to afford.
Nevertheless, Wesbury thinks that “we can absorb these losses. It’s going to be painful, and there’s still some losses to come, but it’s not the kind of thing that will drag the entire economy down.”
While Mr. Wesbury may be right for the overall economy (I wouldn’t hold my breath), it certainly cannot be the case in our real estate centric economy of SoCal.
Any way you look at it, Wesbury sums it up: “Rates are still low” and “it’s going to be painful”. Roubini says: “There is a credit crunch in subprime.” You decide what is going to happen in the future. Neither of them were bullish on housing, just a question of the overall economy.
Which, once again, begs the question, what should we call this summer. Since I already used the term “Spring Smackdown ‘07″ which included a Subprime meltdown, a bond meltdown, and a stock market schizophrenia, the Summer of ‘07 needs a catch name.
Any suggestions?
Sphere: Related ContentBubbles that Go Pop in the Night
Chuck Ponzi June 7th, 2007
If you haven’t heard the news, California’s Senate passed additional legislation to tighten lending requirements. Calculated Risk has more details.
The newly adopted rules are referred to as CSBS-AARMR guidance.
Here’ s a taste of the meatier stuff:
When a provider offers nontraditional mortgage loan products, underwriting standards should address the effect of a substantial payment increase on the borrower’s capacity to repay when loan amortization begins.
That pretty much rules out much of the borrowing public in Southern California. It continues:
Central to prudent lending is the internal discipline to maintain sound loan terms and underwriting standards despite competitive pressures. Providers are strongly cautioned against ceding underwriting standards to third parties that have different business objectives, risk tolerances, and core competencies. Loan terms should be based on a disciplined analysis of potential exposures and compensating factors to ensure risk levels remain manageable.
Qualifying Borrowers—Payments on nontraditional loans can increase significantly when the loans begin to amortize. Commonly referred to as payment shock, this increase is of particular concern for payment option ARMs where the borrower makes minimum payments that may result in negative amortization. Some providers manage the potential for excessive negative amortization and payment shock by structuring the initial terms to limit the spread between the introductory interest rate and the fully indexed rate.
Nevertheless, a provider’s qualifying standards should recognize the potential impact of payment shock, especially for borrowers with high loan-to-value (LTV) ratios, high debt to-income (DTI) ratios, and low credit scores. Recognizing that a provider’s underwriting criteria are based on multiple factors, a provider should consider these factors jointly in the qualification process and may develop a range of reasonable tolerances for each factor.
There’s a lot more there. Take a look when you have some time to read.
It has been suggested before that these guidelines being accepted by the state is nothing more than a rubber stamp approval, one that is as toothless as 100 year old paper tiger. I’m inclined to agree.
However.
I also think that this puts additional pressure on brokers(not from the guidelines themselves); rather makes it easier for consumers to file and win in predatory lending lawsuits.
Consider this… if the broker did not do due diligence in ensuring that a client could actually make payments to the loan in the long run, there is little or no reason according to these guidelines that they should have had the product that was given them. The new guidelines state that the broker or loan agent has to ensure that the client isn’t doing themselves potential harm by exercising caution. If that doesn’t scare some brokers out there, you will probably not exist long enough to test your theories. Don’t worry about the regulatory body from the state of California, worry about your “customers” becoming “plaintiffs”.
In a nearly identical vein of choking off affordability (or closing the barn doors after the cows are gone) as it were, top story on Yahoo Finance today is the movement of the 10 year bond.
The bond market has been on a tear recently. While many pundits argued over the past 6 months that the FED will lower rates by mid-year, I have been stating ever since that the “phantom deflation” has turned to “phantom inflation”. There’s a whole lot of USD out there, and it’s going to find its way back somehow. When it does, we’ll have some much worse inflation than we do now unless the FED starts choking off liquidity.
However, the bond market is where to look for the action. Rising 10 year yields signal that we are not looking for a rate cut, but rather a rate raise later this year.
The 10-year Treasury note’s yield surpassed 5 percent. With rates rising in the market, the Federal Reserve is expected to be less inclined to cut short-term interest rates. And a dip in applications for unemployment benefits last week, which indicates a healthy labor market, also made a rate cut seem less likely.
That’s putting it mildly. The title of the article is “Stocks Plunge as Bond Yields Rise”.
Bonds fell sharply, with the yield on the benchmark 10-year Treasury note jumping to 5.11 percent from 4.97 percent late Wednesday. The dollar was mixed against other major currencies, while gold prices fell sharply.
That’s quite a plunge.
With rising interest rates, tighter requirements around qualifications, along with the full impact of the subprime storm not yet visible in the housing market, I don’t think we’ll be seeing a bottom in OC anytime soon. Not with 5% affordability.
Sorry Jonathan. This time your readers are dead wrong.
Sphere: Related ContentWho’s the Fanatic Now?
Chuck Ponzi June 6th, 2007
A fanatic is one who can’t change his mind and won’t change the subject.
Winston Churchill
Let’s take a look back on some of our favorite local real estate guru’s predictions.
Gary Watts told us earlier this year that we’d have a “Little Bit of Heaven in ‘07“.
Maybe if he meant a market that is so slow it might be considered dead, he might have been right. But, I might have to take issue with his assertion that it was automatically going to Heaven. I think we might revisit some of the words of Kurt Cobain on the matter:
Where do bad folks go when they die
They don’t go to heaven where the angels fly
Go to a lake of fire and fry
see them again ’till the Fourth of July
His predictions were as follows:
1. The economy will continue to show positive growth while the Fed continues to stay in the pause mode.
2. The interest rates will continue to remain around 5.78% to 6.25%, with some downward pressure.
3. Number of home sales may actually rise when compared to last year’s decline of 13.4%!
4. The media will have to compare last year’s numbers to this year and things will begin to look good!
5. However, resale appreciation may not rise when compared to the big increase in 2006’s 1st quarter!
First off, I have to commend him on his restraint on using !!!! Exclamation Points !!!! Most agents have a problem with CAPS LOCK and !!!! Exclamation Points !!!! Kudos to him.
His first assertion that the economy will continue to show positive growth was pretty much a given. It doesn’t take much outside of a plot and graph of the last few quarters to see a trend. However, the .7 reading nominal was quite low (and negative in real terms). Not a great showing, but not too bad either.
Unfortunately, interest rates didn’t have a single showing for Jan, Feb, or March in his range. The actual numbers were 6.33%, 6.37%, and 6.27% (got close in March). This is typical of a strong economy. The stronger the economy, the less likely to have lower rates. We won’t likely see lower rates until the economy does worse, and even that’s a crapshoot with inflation at the high end of the FED’s comfort zone.
Home sales also repeated their smackdown. Southern California sales were down 24% in the first quarter according to Dataquick. The actual stats were:
January 2007: Down 17%
February 2007: Down 20%
March 2007: Down 32%
Anyone see a trend here? It’s getting worse, not better. Unfortunately, but Dataquick changed their methodology of counting sales, and has not revisited their publicly available data, so it’s impossible to see what the 2 year drop from the peak was, but it’s ugly no matter how you look at it.
The media has looked at the numbers (according to #4), and it’s not liking what it’s seeing. There is no way to spin this. We are firmly entrenched in the beginnings of a housing bust.
His last point that resale appreciation may not rise when compared to previous year was nevertheless correct. This is because affordability has nowhere to go but up. Our beloved Orange County shows a YOY price increase of .6%. (Hey, only 9 more years of this to recover your full-service realtors’ fees! Gotta look on the bright side, right?). However, the median belies what is really happening in most neighborhoods around SoCal. Most areas, prices have already dropped 10-15%, while better and/or larger housing stock selling than previously at similar price points). We have not yet felt the fallout of the Subprime meltdown. We can look forward to what that means.
In fact, recent news from Ben Bernanke tells us that the economy is more prone to overheating, and therefore, rate cuts are all but out of the question for the rest of this year. This is more in line with my statement that the next move would likely be a move up, not down. In fact, these are now front and center on the markets’ mind.
The Fed chief hardly downplayed the severity of the housing recession. Indeed, he admitted that the slump is going to last longer than the Fed previously thought in a speech made via satellite to the International Monetary Conference. But Bernanke thinks weakness in the sector shouldn’t keep the rest of the economy down. The Fed chairman said the central bank remains focused on inflation, as “risks remain to the upside.” The remarks appeared to catch financial markets off guard, sparking an 81-point drop in the Dow Jones industrial average June 5.
Coming soon, as soon as Q2 data is available, we’ll review his predictions for Q2.
Here’s what he predicted:
1. The Federal Reserve should begin reducing the Fed rate, and mortgage rates should decline further.
2. Inventory should begin to rise, but at a moderate rate.
3. The media will have to report dramatically increasing home sales when compared to last year.
4. Home prices should continue to rise, and condo prices should begin to appreciate once again.
I still firmly believe that Gary will come over to the housing bubble camp sometime soon. While he completely lost his mind in 2005-2006, so did everyone else in his industry. But, unfortunately, by then, his believability will be gone.
Sphere: Related ContentPrisoner’s Dilemma – Homebuilder Style
Chuck Ponzi June 1st, 2007
Calculated Risk today had a lively discussion about Hovnanian’s utterances on Briefing.com. titled Many Builders building Spec Homes to Liquidate Land.
To quote CR’s quotes:
[Land sales have] “just really slowed to a complete trickle with very few buyers of any type out there”
and
“that’s part of the reason why you do see many home builders resorting to selling spec homes because there’s really a way of liquidating the land portfolio.”
Conventional wisdom reported for the past few years that homebuilders had learned their lessons with building spec homes and that the bankruptcies of homebuilders from the 1990’s was not to be repeated again. I even went so far as to say that all of that speculation was taken up by individual investors; a kind of democratization of speculation. I believe now that this was not correct and that homebuilders would in fact, repeat their same mistakes.
It might be a good time to revisit Ara Hovnanian’s prediction that 2007 would be the turnaround for housing. See it here. He even went so far to say that prices were rising in some areas already in 2006.
The first thing that made me rethink this was Ara Hovnanian’s comments to Bob Toll when first suggested that builders would throw a house on a piece of land just to move the land inventory off the books. That was at a builder’s conference.
If looks could kill, Bob Toll would have committed first-degree murder that day.
In the meantime, Ara has confirmed that this is their practice.
Which brings me to the prisoners’ dilemma. Basically, a prisoner’s dilemma is created when groups can better themselves as a whole only when they supress their own individual benefit. (Nash equilibrium theory plays in here).
Will the two prisoners cooperate to minimize total loss of liberty or will one of them, trusting the other to cooperate, betray him so as to go free?
This is the place that homebuilders find themselves. They can maintain prices as long as all of them restrict supply. As soon as one of them breaks ranks, the rest will too. Builders are breaking ranks… and in a big way.
Southern California builders have begun to influence the markets in a dramatically negative way regarding prices to move product. There are some scenarios where builders are already undercutting recent home buyers by more than $100K. In the near future, I will dig a little deeper to get more information on this practice and provide a compelling argument to show what is happening and how it will impact the local pricing in an area.
For now, enjoy the weekend.
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