Interest Rate Roundup

Monday, March 19, 2007

Lots to cover in housing and mortgage land

There has been a deluge of stories published in the last two days on the housing and mortgage crunch. Let me touch on some of the most important:

First, the New York Times dared to ask the question: Should we really try to make everyone a homeowner? Aren't there some people that, frankly, shouldn't be owners? A key excerpt:

"Hundreds of thousands of families who bought houses in the last two years — using loans with low teaser interest rates and no down payments — are now losing them.

"Their short tenure as homeowners calls into question whether the nation’s long drive to increase homeownership — pushed by both public policy and financial innovations — has overstepped some boundary of demographic and economic sense.

“Clearly we went too far,” said Joseph E. Gyourko, a professor of real estate and finance at the Wharton School of the University of Pennsylvania. “It’s not the case that high homeownership is always good.”

My take: Homeownership used to be something you worked for and saved up for. But the advent of ridiculously easy financing -- and the rolling out of tons of government subsidies and programs designed to promote homeownership -- changed all that. Ironically, a lot of these things helped fuel the incredible run up in home prices, thereby making housing LESS affordable instead of MORE.

Second, Bloomberg covered a major study published by First American CoreLogic. The study's conclusion: homeowners, lenders, and investors may lose $112.5 billion over the next seven years due to defaults tied to adjustable rate mortgages. Some $2.3 trillion in ARMs were made between 2004 and 2006, with most resetting over the next couple of years. First American estimates 1.1 million, or $326 billion worth, may go into foreclosure. Total losses are somewhat less because of the assumption the lenders will get some money back from foreclosing and selling.

Third, a couple smaller home builders with heavy exposure to the Florida housing market are reporting their earnings. They confirm what I've been saying for a while -- the Florida market is one of the weakest nationwide.

Technical Olympic USA said Q4 2006 orders dropped 34% year-over-year, with cancellation rates jumping to 49% from 22%. Some comments: "Our margins declined due to our reducing prices and increasing incentives in order to maintain sales velocity in light of the larger issues of adverse market conditions, which include increased cancellations, decreased demand, too much supply, and low affordability."

Meanwhile, Tarragon Corp. said orders dropped around 15% to 448 from 527 a year earlier. The company cut prices aggressively to generate those sales, too -- with its average sales price sinking to $227,000 from $263,000.

Lastly, I shared some thoughts on conditions in the rental/apartment market with Dan Dorfman at the New York Sun. In a nutshell, I believe the rental market is loosening up due to all the rental supply coming online from "stuck" flippers and/or investors who can't sell. See this post from several days ago for more details.


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