Saturday, March 31, 2007
Friday, March 30, 2007
A home building chart: Shampoo, anyone?
It's Friday and I haven't thrown a chart up on my blog for a while. So here's one to consider as we head into the weekend. It's a weekly chart of D.R. Horton, the second-largest public home builder (and the one whose CEO said 2007 would "suck").
If you know anything at all about technical analysis, then you may be familiar with the dreaded "Head and Shoulders" pattern. That's when you get a rise to an initial peak, a pullback, then a rise to an even higher high. That's followed by a sharp decline to the base of the initial peak (or "neckline"), a subsequent rally to a lower high, and then, a collapse through the neckline.
It's not really as complicated as it sounds. The bottom line is that it's a long-term topping pattern, one that signals the end of a powerful trend in almost any stock, index, commodity, etc. As you can see, this chart looks a heck of a lot like such a pattern to me (I've labelled the left shoulder, head, and right shoulder in the chart). And it's not just D.R. Horton -- many other home building charts look the same.
The pattern won't be complete until and unless the neckline gives way. But I just thought I'd share what I see going on, technically speaking. I've made no secret of my fundamental view on the sector already, though ultimately, only time will tell if my views are right.
Well, THAT sure was a surprise ...
Construction spending was also above expectations, at +0.3% vs. a -0.4% forecast. The strength was all in commercial construction (+1.5% from January). Residential construction slumped again, by 1%.
Bonds are getting taken apart on these stats, as you might expect. The long bond is now down 12/32, its 11th down day out of the past 13 sessions.
Decent income and spending, with more inflation pressures
Here's the catch -- those inflation pressures the Fed keeps pretending don't exist are building. The core Personal Consumption Expenditures (PCE) index climbed 0.3% in February, above expectations for a 0.2% gain. That's also the biggest monthly rise since August. The market-based core PCE, which excludes certain types of hard to figure price changes, jumped 0.4%, twice the gain in January. Core inflation is now up 2.4% year-over-year, the fastest rate of inflation since September.
Bonds are roughly flat after the number, apparently because it was bad but not absolutely awful. But the trend remains the same -- inflation is NOT abating.
Thursday, March 29, 2007
Five-year auction flop, inflation thoughts, and more
* The pathetic 5-year Treasury Note auction we just had. Treasury just tried to move $13 billion of these puppies. But it had to sell them at a yield of 4.535%, worse than pre-market forecasts of 4.52%.
Moreover, only 16.7% of those notes were sold to indirect bidders, a category that's considered a proxy for foreign central banks. That was down from 26.5% a month earlier and the worst reading since all the way back in June 2003. The bid-to-cover ratio also slumped to 2.14 from 2.43 at the last sale. That was the lowest reading for this measure of demand since October.
* Could it be that bond traders, unlike Ben Bernanke of "What me, worry about inflation?" fame, are concerned about pricing pressures? I think so.
* Speaking of inflation, anyone see that crude oil futures are up almost $2 to $65.83 ... the highest level since September? Or that the 10-year TIPS spread is up again to 246 basis points? Or that long bonds have fallen in price for 10 out of the past 12 sessions?
Wednesday, March 28, 2007
Parsing Bernanke's comments...
Bernanke on housing:
"Following an extended boom in housing, the demand for homes began to weaken in mid-2005. By the middle of 2006, sales of both new and existing homes had fallen about 15 percent below their peak levels. Home builders responded to the fall in demand by sharply curtailing construction. Even so, the inventory of unsold homes has risen to levels well above recent historical norms. Because of the decline in housing demand, the pace of house-price appreciation has slowed markedly, with some markets experiencing outright price declines.
"The near-term prospects for the housing market remain uncertain. Sales of new and existing homes were about flat, on balance, during the second half of last year. So far this year, sales of existing homes have held up, as have other indicators of demand such as mortgage applications for home purchase, and mortgage rates remain relatively low. However, sales of new homes have fallen, and continuing declines in starts have not yet led to meaningful reductions in the inventory of homes for sale. Even if the demand for housing falls no further, weakness in residential construction is likely to remain a drag on economic growth for a time as home builders try to reduce their inventories of unsold homes to more normal levels."
My take: I don't believe the near-term prospects for housing are "uncertain." I believe they are grim. We simply have far too many homes on the market at prices that are still unrealistic given current market conditions. The builders are starting to "get it" -- they're cutting back production, piling on incentives, and slashing base prices to clear the decks. But with inventory levels sky-high, it's going to take a long time to get inventory back to normal.
On the existing home side of things, sellers have proven stubborn. They're still reluctant to cut prices. After another weak spring selling season, I expect more will see the light. And as prices come down to more reasonable levels, sales will pick up. But again, this is a long-term process. We're going to be dealing with a significant, fundamental supply/demand mismatch throughout 2007 and well into 2008.
Bernanke on subprime mortgages:
"Delinquency rates on variable-interest-rate loans to subprime borrowers, which account for a bit less than 10 percent of all mortgages outstanding, have climbed sharply in recent months. The flattening in home prices has contributed to the increase in delinquencies by making refinancing more difficult for borrowers with little home equity. In addition, a large increase in early defaults on recently originated subprime variable-rate mortgages casts serious doubt on the adequacy of the underwriting standards for these products, especially those originated over the past year or so. As a result of this deterioration in loan performance, investors have increased their scrutiny of the credit quality of securitized mortgages, and lenders in turn are evidently tightening the terms and standards applied in the subprime mortgage market.
"Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency. We will continue to monitor this situation closely."
My take: Where were these guys a year, or two, or three ago? Why wasn't something being done when lenders were writing all these junk mortgages and when standards were being thrown out the window? The mortgage "guidance" the banking regulators released had no teeth to it, and was roundly ignored. Now, we all have to deal with the fallout.
What about "spillover?" Well, I believe we will see spillover into the Alt-A segment of the mortgage market. After all, excessive risks were taken there, too. The prime market will hold up better. But even there, credit performance is worsening. The delinquency rate on prime mortgages hit 2.57% in Q4 2006, the highest since Q2 2003, and there's absolutely no reason to expect this trend toward higher DQs to reverse course.
Bernanke on inflation:
"Core inflation slowed modestly in the second half of last year, but recent readings have been somewhat elevated and the level of core inflation remains uncomfortably high. For example, core CPI inflation over the twelve months ending in February was 2.7 percent, up from 2.1 percent a year earlier. Another measure of core inflation that we monitor closely, based on the price index for personal consumption expenditures excluding food and energy, shows a similar pattern."
"Core inflation, which is a better measure of the underlying inflation trend than overall inflation, seems likely to moderate gradually over time. Despite recent increases in the price of crude oil, energy prices are below last year’s peak. If energy prices remain near current levels, greater stability in the costs of producing non-energy goods and services will reduce pressure on core inflation over time. Of course, the prices of oil and other commodities are very difficult to predict, and they remain a source of considerable uncertainty in the inflation outlook."
"Another significant factor influencing medium-term trends in inflation is the public’s expectations of inflation. These expectations have an important bearing on whether transitory influences on prices, such as changes in energy costs, become embedded in wage and price decisions and so leave a lasting imprint on the rate of inflation. It is encouraging that inflation expectations appear to be contained."
My take: Inflation has persisted at levels well above the Fed's professed 1%-2% comfort zone for many moons now. It's been nine months since the Fed stopped hiking short-term interest rates and we're still at 2.7% YOY in the core CPI. Meanwhile, oil prices are rising again, and frankly, it's not all Iran. It's too darn much money and liquidity chasing all kinds of assets, including commodities. And that is the fault of central bankers, who aren't being tight enough on the monetary policy front.
As for inflation expectations, they are NOT contained. The TIPS spread, as I've pointed out numerous times, is rising sharply. And the public's perception of future inflation is climbing as well -- respondents polled by the Conference Board expect inflation to be running at a 4.9% rate 12 months from now. That's up from 4.8% a year ago and the highest reading since October 2006. So I think the Fed has a real credibility issue here.
Lousy durable goods orders
Tuesday, March 27, 2007
Inflation and interest rate concerns on the eve of Ben's big show
Why do I say that? Look at the market setup going into this speech. Stocks have rallied back from the recent crack. I believe that's based on the assumption Ben will cave on inflation and signal that the housing problems are enough to prompt the Fed to back off ... or even cut interest rates. Measures of risk appetites, like emerging market bond spreads and carry trade currencies such as the Australian and New Zealand dollars, reflect that thinking as well.
The problem? Treasury bonds think Ben is full of it. They can't believe the Fed is even thinking about going dovish. Indeed, since the Fed ever-so-slightly moderated its anti-inflation rhetoric last week, long bonds have gotten shellacked and the yield curve has disinverted rapidly.
Me? I think Bernanke simply can NOT afford to take the wimpy way out. We keep hearing about how inflation is a lagging indicator, how it will come down with time, blah, blah, blah. But here we are nine months after the Fed stopped hiking and inflation is STILL not coming down. The year-over-year change in core CPI was 2.6% when the Fed stopped hiking in June 2006, and it's 2.7% now. There is NO evidence whatsoever that measured, core inflation is falling.
On top of that, MARKET-based, real-time indicators of inflation are rising fast. The 10-year TIPS spread is blowing out to the widest since September. And buried within today's consumer confidence report was news that expectations of future inflation are rising.
Here's one last thing to consider: If Bernanke comes out and signals that the Fed will try to "save" housing by cutting short-term interest rates, it might achieve the exact opposite effect. How? By causing long bonds to sell off and the yield curve to steepen even more. That would help drive UP rates on the very same longer-term loans (read: plain-vanilla, 30-year fixed rate mortgages) that are supposed to save consumers from unaffordable ARMs.
In other words, the Fed is in quite a box here. We'll have to see if it can find its way out.
A spirited housing debate on CNBC
Some of the main points I tried to make:
* Existing home sales for February did rise 3.9% on the month. But they also dropped about 3.6% from a year earlier.
* The real problem? For sale inventory climbed even faster than sales – by 5.9% to 3.748 million units. That’s up 25.6% from the same month in 2006. We have more than 1 million more existing homes on the market now than was customary throughout the 1990s.
* That excess inventory is helping drive prices lower. Median home prices dropped 1.3% year-over-year to $212,800, the seventh straight month in a row that prices fell (that, in turn, is a record negative streak).
* Lastly, January's pending home sales index dropped 4.1%. That means we'll probably see existing home sales slip again.
* New home sales are in much worse shape. They dropped 3.9% between January and February, and 18.3% year-over-year. Measured from the July 2005 market peak, new home sales are down a whopping 38%. Moreover, February's Seasonally Adjusted Annual Rate of sales -- 848,000 -- was the slowest since June 2000.
* There are inventory problems in the new home market as well. In fact, the supply of homes for sale remains very high from a historical standpoint – about 175,000 more units than we had at any time during the 1990s. Cancellations aren’t captured in the orders or inventory data. That means demand could be overstated, and supply could be understated.
* Median new home prices are down 0.3% year-over-year and about $7,000 off their April 2006 high ($257,000).
Monday, March 26, 2007
Some long-term perspective on new home supply, sales
This chart shows the seasonally adjusted annual rate of new home sales going back to 1990 ...
I think it helps to look at the long-term trends when we get disappointing numbers like those out today. The thing that jumps out at me is the magnitude of the supply glut out there in the new home market. We have never had this many homes on the market ... ever. Granted the economy is a different place now than it was in the 1970s. Our population has grown over time. And financing conditions have gotten easier, raising the "natural" level of housing demand. But even after accounting for those factors, we're still sitting on an Everest-sized mountain of homes. The way to work through that supply is via lower home prices.
New home sales nightmare
* New home sales DROPPED 3.9% between January and February, versus expectations for a gain of 5.4%. On a year-over-year basis, new home sales were down by a sharp 18.3%. And it gets even worse -- the seasonally adjusted annual rate of sales – 848,000 – is the lowest going all the way back to June 2000!
* Sales were down in three out of four regions (Northeast, Midwest, and South).
* The supply of new homes for sale rose to 546,000 in February from 538,000 in January. That’s the highest since October, and it reverses the improvement in inventory trends we had seen the past few months. Worse, it represents 8.1 months of supply at the current sales pace. That is a huge deterioration from 7.3 months in January and a fresh cycle HIGH.
* Median prices? They rose to $250,000 from $243,200 in January. However, median prices are still down 0.3% year-over-year.
There is simply no sugar-coating these numbers. They show a new home market that is weak, weak, weak. The fact median prices rose, but sales dropped sharply, tells me that any attempt by home builders to raise prices will be met by stiff consumer resistance. The only way companies are going to be able to work through the major supply glut we have is by cutting prices and adding more incentives.
I’ve been saying for a while that the housing market would remain depressed in 2007 – that forecast looks spot on, given the deterioration evident in the Census Bureau figures. It’s worth noting that the subprime mortgage market didn’t really start falling apart until late February. That means these statistics do NOT include a big chunk of the fallout from tightening lending standards. Sales could be even worse in March, April, and May if lenders cut back on 100% LTV loans, stated-income financing, high-risk, short-term subprime ARMs, and more.
February foreclosure follies ...
* Overall foreclosure activity came in at 130,786. That's down about 5,300, or 3.9%, from January.
* Time to break out the party hats? Well, not really. January's reading of 136,113 was the highest for this data series, which began two years earlier. Moreover, foreclosure activity was up 11.6% from February 2006.
* About one in every 884 U.S. homes is in some stage of foreclosure. Nevada, Colorado, and Florida top the list in terms of foreclosures per household. Vermont, Maine, and West Virginia are the best-performing states.
Friday, March 23, 2007
Surprisingly strong existing home sales, but keep an eye on that inventory!
* The seasonally adjusted annual rate of sales rose 3.9% to 6.69 million units. That was well above the 6.3 million unit forecast and the fastest rate of sales since April 2006. However, it was still down 3.6% from a year earlier.
* The supply of homes on the market climbed 5.9% from a month earlier to 3.748 million units. That's also up 25.6% from the year-ago figure of 2.985 million and equal to 6.7 months of inventory at the current sales pace.
* Median home prices dropped 1.3% year-over-year to $212,800. Single-family homes accounted for the decline; condo/co-op prices actually rose slightly YOY.
Color me surprised -- these sales numbers were definitely stronger than expected, especially since the pending home sales index dropped 4.1% in January. Weather may have influenced the results to some degree, as the Northeast region showed an outsized 14.2% month-over-month gain. But sales in all regions were either flat or up.
The real problem remains inventory. Just as I expected, we're seeing the "March of the Re-Listers" show up. These are the people who pulled their homes from the market for the holidays, and who are now re-listing them to capitalize on the seasonal uptick in sales we see every spring. Indeed, the 5.9% monthly rise in supply outstripped the 3.9% gain in sales. The current inventory count (shown in the chart above) is also not far below the multi-year high of 3.861 million units set in July 2006. It's likely we'll get very close to that benchmark -- or surpass it -- in the months ahead.
Naturally, that means pricing should remain weak. Median home prices have now fallen below their year-ago level for seven straight months. Tighter lending standards will reduce buying power as well, providing another headwind for home sellers during the key spring real estate season.
Oh the irony ...
However, I find this speech just a bit ironic given that literally yesterday, long-term bonds got pasted and the yield curve reached its most UN-inverted state in several months. Are bonds questioning the Fed's inflation-fighting credibility for the first time in a long time? That's what it looks like.
Thursday, March 22, 2007
Yield curve inversion ending amid rising inflation fears
So many mortgage and housing stories, so little time
First, Connecticut Democratic Sen. Christopher Dodd lambasted federal regulators yesterday for their failure to get ahead of the subprime mortgage mess before it devolved into a crisis. As I write this, he's holding a hearing on the lending problems, with testimony from mortgage lending officials, regulatory officials, and consumer groups.
Emory Rushton from the Office of the Comptroller of the Currency said before the Senate Banking Committee that:
"It is clear that some subprime lenders have engaged in abusive practices and we share the committee's strong concerns about them" and "We are now confronting adverse conditions in the subprime mortgage market, including disturbing but not unpredictable increases in the rates of mortgage delinquencies and foreclosures.''
You can read more coverage from Bloomberg here.
Second, it's clear that the subprime lending problems are also impacting other parts of the lending business. That includes the Alt-A market. That's where loans are made to borrowers who fall somewhere between prime and subprime, and where many of the funkiest loans (Interest only, option ARMs, etc.) have been made.
According to this story ...
* Lenders are shunning potential home buyers who can't put 5% down or who want to "state" (often translated as: lie about) their income
* Alt-A loans accounted for about 20% of all mortgages last year. Subprime loans were roughly another 20%. 18% of the Alt-A loans made were made at a 100% Loan-To-Value ratio; another 16% featured an LTV of 90% or more.
* While the absolute level of defaults is lower on Alt-A loans than subprime mortgages, the rate at which defaults are rising is roughly equal.
Third, one of the top home builders, KB Home, released its latest earnings report. Profit plunged 84% while sales dropped 19%.
Its cancellation rate did fall, and companywide net orders only slumped 12% year-over-year. That's a smaller decline than some other builders have reported. However, the average price of homes sold declined year-over-year in three out of four U.S. regions -- by as much as 12%, or about $40,000, in the Southwest. And if you exclude the company's French division, you see U.S. orders were actually off by a little more than 18%.
If I had to sum things up, I'd say that as usual, the regulators and the public policy makers are behind the curve. They're trying to crack down on subprime mortgage lending long after most of the junk loans have been made. As a result, it's too late to prevent a surge in delinquencies, foreclosures, and mortgage losses -- they're already "baked in."
Regarding lending standards, it's naive to think that only the subprime sector will get hit by this serious housing downturn. There was plenty of "junk" lending in the near-prime and Alt-A sectors as well. Even prime mortgages are showing a rise in delinquencies because the unprecedented surge in home prices forced all kinds of borrowers to stretch to get into homes -- including those with good credit.
Wednesday, March 21, 2007
so THAT's why they're throwing a party
The old statement said:
"The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. "
The new statement said:
"Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."
The bullish spin is that the last statement referred to the possibility of "additional firming," while the new statement referred to possible "adjustments" -- meaning a move could be a cut instead of a hike. Frankly, I think people who are making a big deal out of this have too much time on their hands, given the other hawkish language. But that explains the market reaction.
Incidentally, my call on the yield curve dis-inverting seems to be right on target, though I expected the cause would be a liquidity drain from the carry trade unwinding. Instead, the cause today is a bond market interpretation that the Fed is primed and ready to cut short-term rates. So does that count as being "right" or "wrong?" You got me!
Hawkish talk from the Fed?
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.
Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.
In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh
At first blush, this statement looks hawkish to me -- meaning it clearly focuses on the risk of inflation. And no wonder, as I pointed out in this post on the Consumer Price Index and this post on the Producer Price Index, the key inflation indicators are not moderating. Core CPI is running at a 2.7% year-over-year rate, well above the 1% to 2% Fed comfort zone. The core PPI jumped twice as much as expected in February, and both core intermediate and crude goods climbed at the fastest rate in months.
The Fed's growth outlook was somewhat tempered this time around. Last time, the Fed highlighted indicators that "suggested somewhat firmer economic growth" and added that "some tentative signs of stabilization have appeared in the housing market." But I don't see much, if any, reason to expect an imminent rate cut based on this statement.
Here's the skinny on February home sales and inventories in my neck of the woods
So how did things look in February?
* Sales plunged 43.6% year-over-year to 623 from 1,105.
* Median prices were unchanged -- $285,000 last month vs. $285,000 a year earlier
* The real story is on the supply front. I've been saying for a few months that the winter decline in inventory was seasonal, NOT the start of a new trend. I've also been on the lookout for the "March of the Re-Listers" -- people who pulled their homes from the market for the holiday season giving it another try in early 2007.
That appears to be exactly what's happening. For-sale inventory climbed yet again to 23,713 in February. That's up 34.4% YOY, and equal to a whopping 38 months of supply at the current sales pace. On an absolute basis, the February count appears to be a fresh cycle high (the previous peak was 23,695 in 9/06).
Let's be realistic: Given the very large supply glut evident in these figures, we're going to see a lot of disappointed sellers this spring. You are simply not going to see a lasting rebound in home prices until home inventories are whittled down -- and there are currently more than three years' worth on the market. Plan accordingly.
Here are the complete stats if you’re interested.
Tuesday, March 20, 2007
The yen addiction
Case in point: The yen came into today's U.S. session trading weak. That's because the Bank of Japan kept interest rates unchanged and because BOJ Governor Toshihiko Fukui said interest rates will stay relatively low for some time. But this afternoon, the yen started getting frisky again. And wouldn't you know? The Dow started giving back some of its gains.
Since that's the case, we have to ask ourselves: Where is the yen headed next? That depends on what Ben Bernanke and his Fed buddies have to say tomorrow. Do they talk tough because the latest inflation reports, to put it bluntly, sucked? Or do they talk easy because they're worried sick about the housing and mortgage market problems? Any sign of weakness in the Fed's inflation-fighting resolve would likely whack the dollar. Stay tuned -- the Fed's latest statement will come out around 2:15 p.m. tomorrow.
Housing starts bounce, permits fall
The housing starts figures have been incredibly volatile the past few months. Big down months (October 2006, January 2007) have been followed by partial rebounds, like we saw in February. However, the trend in starts is clearly down. Given the still-enormous overhang in new and existing homes for sale, I expect to see further declines in 2007 as builders try to get inventory back in line with sales.
Monday, March 19, 2007
NAHB index slumping again...
* The overall index dropped to 36 from 40 a month earlier. That was below the 38 reading expected by economists.
* All three sub-indices dropped. The index measuring present single family sales dropped to 37 from 40, the index measuring expectations for future sales dipped to 50 from 53, and the index measuring prospective buyer traffic fell to 28 from 29.
* Regionally, the biggest drop was in the South (-4 points). The Midwest and West saw 1-point gains, while the Northeast saw a 2-point dip.
At the risk of sounding like a broken record, we've just received another batch of disappointing housing stats. It's clear that the small housing rebound seen in late 2006 is fading fast under the weight of excessive inventories, rising mortgage delinquencies and foreclosures, slumping home prices, and tightening credit standards. Indeed, the NAHB figures just put an exclamation point on my forecast that the 2007 spring selling season will fall flat.
Lots to cover in housing and mortgage land
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.
Friday, March 16, 2007
Closing out the day and week
CPI shows ongoing inflation pressures
* The headline CPI gained 0.4% in February, above expectations for a 0.3% change and twice the gain (0.2%) in January. That pushed the year-over-year inflation rate UP to 2.4% from 2.1%.
* The core (ex-food and energy) CPI was up 0.2%, in line with the 0.2% gain forecast and slightly below the 0.3% gain a month earlier. Importantly, the year-over-year rate of core inflation came in at 2.7% again -- well above the Fed's 1% to 2% preferred range.
* Price gains were fairly widespread. Housing costs rose 0.4%. Services inflation rose 0.4%. Energy prices climbed 0.9%. Apparel was up 0.5%. Medical care climbed 0.5% and education and communication rose 0.3%.
The Fed keeps saying inflation will ease. The numbers don't show it. Can the Fed really afford to breathe a sigh of relief in the face of data like this? I doubt it. Treasuries are getting hit on this news, with the Long Bond down 13/32 in recent trading and 10-year yields up about 1.7 basis points.
The dollar came into this data trading very weak against all currencies. It's bouncing a bit on the news. But if it can't hold that bid, key currencies like the euro could stage significant technical breakouts. Interesting times, to say the least.
Thursday, March 15, 2007
Chart of the day -- OSB
Toll CEO: Spring selling season "a bust"
Back in December, if you recall, Toll said: "We may be seeing a floor in some markets" and that deposits and traffic "seem to be dancing on the bottom or slightly above." Then in early February, he commented in a press release that January and February activity "definitely feels encouraging." These latest comments sound much more pessimistic. They come on the heels of comments in London by Pulte Homes CFO, Roger Cregg. He said: "There's been a lot of buyers that have moved to the sidelines."
Philly Fed: Stagflation, Take Two
* The reading on new orders improved, but only to 1.9 from -0.5 a month earlier. This figure has been hovering just above or just below 0 for the past five months.
* An employment subindex also rose a bit -- to 2.3 from -0.4. This reading was much stronger a few months ago (10.4 in October 2006, for instance, and 10.3 in September 2006)
* Prices paid? It shot up to 21.8 from 15.8. That's the highest since November 2006. Prices received? That almost doubled to 16.3 from 9.4. The March reading is the highest since October 2006.
Bottom line: Another batch of stagflationary stats.
Morning stats: PPI hot, Empire index not
* The Empire Manufacturing Index for March stunk. It came in at just 1.9. That was down from 24.4 a month earlier, far below expectations of 17.5, and the worst reading since May 2005. The prices paid index popped up to 30.2 from 26.9 a month earlier, though the prices received reading ebbed a bit. New orders tanked, while a measure of employment was down ever so slightly. Indices that measure expectations for FUTURE inflation jumped.
* Meanwhile, the Producer Price Index came in much hotter than expected. The overall PPI surged 1.3% in February, more than twice the 0.5% change expected. More importantly, "core" PPI climbed 0.4%, twice the 0.2% rise that was expected. There was a large rise in tobacco prices (+4.1%) that's a bit out of the ordinary. But even measures of intermediate and crude goods prices look bad. Core intermediate goods prices were up 0.2%, the biggest monthly gain since August 2006. And core crude goods prices jumped 2.7%, the biggest monthly rise since May 2006.
Last but not least, Treasury International Capital (TIC) data for January just hit the tape. Foreign investors bought a net $97.4 billion in U.S. stocks, Treasuries, and other bonds, up from $14.3 billion a month earlier. That topped the $70 billion forecast. Private investment surged, while central bank buying dropped.
The net market impact: Long bonds are down 7/32 in price, but off their lows of the day post-PPI. 10-year yields are essentially unchanged.
Wednesday, March 14, 2007
Putting a big chunk of the blame for this mess where it belongs
"As I have explained several times, the Federal Reserve, through their easy and easier monetary policy, has itself created several asset bubbles, the latest being housing. They have basically made money “free,” thus encouraging speculation…borrowers to take out loans and spend or buy assets. They have purposely encouraged risk taking behavior of the most egregious kind in an attempt to reflate asset prices. Reflate them they have, with massive amounts of debt."
And here's another zinger from Bloomberg. An excerpt:
"The Federal Reserve and the Office of the Comptroller of the Currency took little action in public to police the $2.8 trillion boom in the U.S. mortgage market -- whose bust now risks worsening the housing recession.
"The Fed, which is responsible for the stability of the banking system, didn't publicly rebuke any firm for failing to follow up warnings on home-lending practices between 2004 and 2006. The OCC, which supervises 1,793 national banks, took only three public mortgage-related consumer-protection enforcement actions over the same period.
"Consumer advocates and former government officials say the regulators, by acting behind the scenes rather than openly advertising the shortcomings of some firms, failed to discipline an industry that loaned too much money to borrowers who couldn't repay it."
I couldn't agree more with these sentiments. Over and over and over again, for the past several years, the Fed has opened a floodgate of liquidity and interest rate cuts at the first sign of trouble. Long-Term Capital Management blow up? Here's some free money. Tech bust? Here's some free money.
And if you can believe it ... despite the rolling bubble/bust cycles we keep seeing ... the Fed still believes this policy is sound. In fact, Fed governor Frederic Mishkin defended this "let no asset bust go un-fought" approach back in mid-January in a speech I criticized harshly. My take:
"As I see it, the problem with the Fed's "asset prices are not our problem" argument is the asymmetry of the whole thing. The Fed claims it can't identify an asset bubble as it builds ... and that it shouldn't be in the business of deciding whether the current level of asset prices is appropriate when those prices are rising.
"But when an asset bubble bursts, and prices start falling, the Fed essentially believes it should swoop in and save the day. It should prevent financial institutions who took on too much risk ... and who helped speculators bid asset prices through the roof ... from failing. And it should work to stabilize asset prices -- in other words, it should substitute its judgment for the market's judgment that those asset values should decline even further.
"You can call it the "Greenspan put" ... "Moral Hazard" ... or whatever you want. I just call it flawed monetary policy. It encourages speculators to go nuts and throw a gigantic party in asset market after asset market because A) They know the Fed won't intervene and take the booze away and B) Even if they get behind the wheel, drive drunk, crash into a tree, and go to jail, the Fed will be there to bail them out ... over and over again."
As for the regulators, they defend themselves in the Bloomberg article. They say they examined plenty of lenders and cracked down on home loan abuses behind the scenes, even if there were very few public actions taken. If that's the case, there is scant evidence the lending industry overall noticed. If anything, they pushed the envelope even FURTHER in 2005 and 2006 -- and that's why we're seeing so many loans go bad today.
Import prices tame, current account gap shrinks
* A 0.2% increase in overall import prices, vs. a forecast for a 0.8% increase. The year-over-year change in import prices dipped to 1.3% from 1.4%. If you strip out oil, you get a 0.1% decline. And if you strip out ALL fuels, you get a 0.2% drop. That's a tame reading on core import inflation any way you slice it.
* By category, durable goods prices showed an outsized drop of 0.8%, with prices for building materials and metals falling. Capital goods prices also dropped 0.3% in price, led by a big decline in nonelectric machinery.
* The current account balance came in at -$195.8 billion, an improvement from -$229.4 billion in Q3. Lower crude oil prices helped a lot on that front. That was equal to about 5.8% of the economy, vs. 6.9% in the third quarter. The full-year current account gap hit a record $856.7 billion, up from $791.5 billion in 2005.
Treasury prices are roughly unchanged on the data, while the dollar has seen a modest pop.
Tuesday, March 13, 2007
Q4 mortgage delinquencies jump
* The overall mortgage delinquency rate climbed to 4.95% in the fourth quarter. That's up from 4.67% in Q3 and 4.7% Q4 2005. Historically speaking, it's the highest in three-and-a-half years.
* Subprime delinquencies jumped to 13.33%. That's up from 12.56% in Q3 and 11.63% in Q4 2005. It's also the highest in just over four years.
* But it's NOT just subprime, and it's NOT just ARMs that are starting to show problems. Even the prime, fixed rate category showed a spike in delinquencies to 2.27%. This number had been in a tight range of 2% to 2.11% for several quarters.
* The foreclosure rate popped to 1.19% from 1.05% in Q3 and 0.99% in Q4 2005. The last time it was higher was in Q1 2004.
This survey covers more than 43.5 million first mortgages on 1-4 unit residential properties. It's one of the broadest delinquency and foreclosure surveys in existence.
The subprime saga continues -- and what about the CDO fallout?
* New Century Financial is now under investigation by the Securities and Exchange Commission. Speculation of a bankruptcy filing is everywhere because the company's lenders are demanding the subprime mortgage company repurchase the outstanding mortgages they helped finance.
* Accredited shares are getting crushed ... again ... in early pre-market trading. The company said it's seeking waivers on its debt agreements, is looking at raising new capital, is planning to cut more jobs, and will likely miss the March 16 deadline for filing its annual report. The company has had to pony up $190 million in margin calls in 2007, two thirds of that in just the past few weeks, per Bloomberg.
Another interesting angle to this story: The subprime problems are causing bond investors to look more closely at collateralized debt obligations, or CDOs. CDOs are a fancy form of fixed income investment. They hold bundles of loans, bonds, and derivatives. You can buy various pieces of a CDO, from the lowest-rated, highest risk, highest return piece on up to the highest-rated, lowest-risk, lowest-return piece.
Investors have been snapping up CDOs like candy to boost their returns. A whopping $918 billion in CDOs were sold last year. That aggressive demand has fueled the aggressive creation of new CDOs, which in turn, has sparked aggressive bidding for risk assets -- including high-risk mortgages -- to go into those CDOs.
It has been a virtuous circle that drives funding costs down for consumers and corporations and suppresses risk premiums. But if fears of subprime-driven CDO losses spread, it could cause CDO demand to wane. That would raise borrowing costs market-wide, leading to potential liquidity problems, especially in the high-flying leveraged buyout/private equity takeover markets. After all, most of these mega-deals rely on a steady stream of incredibly cheap debt.
Serious stuff -- so you may want to read this Bloomberg story if you're looking for more details.
Monday, March 12, 2007
$225 billion in mortgage defaults ... 1.5 million foreclosures ... hundreds of thousands of workers in housing-related industries fired
Mortgage Defaults May Reach $225 Billion, Lehman Says
Foreclosures May Hit 1.5 million as U.S. housing bust deepens
On the other hand, this Wall Street Journal story (subscription required) takes the stance that the housing and mortgage carnage will not really spill over to the broad economy.
I've been talking about these issues for a long time, so I won't repeat all of my arguments here. Suffice it to say that I have been bearish on housing for more than two years, and that I don't see any reason to change that stance yet. I believe it's only natural to expect that the biggest housing bubble in U.S. history will be followed by a painful bust.
Watching that yen...
I won't go so far as to say this is the ONLY chart that matters right now. But I do think it's extremely important because it's a proxy for the "add more risk/cut risk" fight going on in the market. Further yen gains would signal to me that investors are more fearful than greedy, and that risk reduction will rule the roost.
More liquidity/default issues at New Century ... and a NEW round of global market turmoil
As for the broader market impact, the NEW news appears to be igniting another global you-know-what storm. Stock futures have reversed and started falling. The Japanese yen has started to rally. Bond prices have started to rise. We first saw these "reduce risk" trades emerge in late February. That was followed by an "Opposite Day" environment, one I said last Thursday that I was skeptical of. Now, traders are back to cutting risk. Talk about a roller coaster ride!
Saturday, March 10, 2007
More stories on how subprime MBS problems are "trickling down" to everyday borrowers
But this also means developments in the capital markets can have a major "trickle down" impact on borrowers. Simply put, if something causes MBS demand from pension funds, hedge funds, mutual funds, and the like to dry up, front-line mortgage lenders and brokers have to react fast. They have to charge higher rates to their borrowers. They also have to tighten standards. And they have to eliminate some of their loan programs entirely.
That's what is happening right now. This Washington Post story covered the topic in more detail today. You can see my comments, as well as a few examples of how your average borrower is being affected by this mess.
Reuters also has a story chronicling the demise of 100% loan-to-value subprime financing at Countrywide Financial, the largest subprime mortgage lender in the U.S. And this New York Times story really goes to town on the mortgage securitization machine, talking about how it's breaking down due to the delinquency surge.
Friday, March 09, 2007
Thoughts on the FL housing market
"I expect that for most of Florida, prices are as good as they're going to get," said Wayne Archer, director of the Bergstrom Center for Real Estate Studies, which conducted the report. "This is comforting news."
My take is more bearish, frankly. We are one of the most overbuilt states. We were one of the biggest hotbeds for speculation during the boom. That means tons of our existing home inventory is in "weak" hands, the kind much more likely to walk away and give homes back to the bank.
We are also one of the states showing the sharpest year-over-year sales declines. Single-family home sales plunged 27% YOY statewide in January, for instance, while condo sales were down 30%. That compares with a national YOY decline in existing home sales of 4.2% (SFH) and 5.7% (condos).
I am also seeing evidence of the "March of the Re-listers" -- people who couldn't sell last year giving it another try now that we're entering the key spring selling season. That's driving supply in the wrong direction ... up.
I would also add that a couple of the major, public home builders have specifically said their Florida business stinks ...
* Levitt Corp. said on the 7th that "Market trends in Florida continue to reflect soft demand, declining new orders, lower conversion rates, and an increase in buyers failing to fulfill their contractural obligations to purchase homes." The company reported net orders of 82 for the fourth quarter, compared with 490 a year earlier. That's an 83% decline for anyone keeping score.
* Hovnanian Enterprises, for its part, said net contracts dropped 23.3% YOY, with its Southwest FL operations particularly weak. In fact, it took charges totaling $93 million partly to write off the purchase of a Florida builder.
Long story short, I believe 2007 will be another weak year for Florida real estate, with lackluster sales, elevated inventories, and declining prices. Once we get further into 2008, it's possible the situation will improve if the economy and interest rates cooperate. But we'll cross that bridge when we come to it.
Jobs report looks strong on the surface, but ...
* Overall nonfarm payrolls were up 97,000 vs. forecasts for a gain of 95,000
* The unemployment rate dipped to 4.5% from 4.6%, vs. forecasts for a stable reading
* Average hourly earnings rose 0.4% vs. a forecast for 0.3% growth. On a year-over-year basis, average hourly earnings were up 4.1%, vs. 4% a month earlier.
But -- BUT -- look behind the numbers and you find a few nits to pick (or at least, I do). For instance ...
-- There are two jobs surveys every month -- a survey of businesses and a survey of households. The business survey IS considered the more authoritative and comprehensive of the two. But the household survey was divergent enough this month that it deserves mentioning. It actually showed a change of -38,000, meaning the economy lost jobs. There has only been one other negative reading (-56,000 in 7/06) in the past couple of years.
-- Construction activity tanked 62,000, a sign the housing slowdown is starting to cause real problems. Government hiring (+39,000) had an outsized impact on total employment, not what you want to see in a healthy economy. Other big jobs gains were in non-cyclical categories -- like hospitals, nursing facilities, doctor's offices -- and low-pay categories like food service, and food and drinking establishments.
-- Total private hours of work slipped to 33.7, down from 33.8 a month earlier and the weakest since August 2005.
Bottom line: The report does have some warts. But in early trading, the market isn't showing much skepticism. Long bond futures were recently down 24/32, while 10-year Treasury yields were up almost 6 basis points to 4.57%. Stocks like the number as well, and so does the dollar. It'll be interesting, to say the least, to see how the day closes.
Thursday, March 08, 2007
Some noteworthy stuff from the Q4 Flow of Funds
Wednesday, March 07, 2007
Toll Brothers sings a happy tune on housing ... while D.R. Horton says business will "suck"
On the ... er ... slightly more negative side, D.R. Horton just said business would "suck" this year. The quote, from Bloomberg:
"I don't want to be too sophisticated here, but 2007 is going to suck, all 12 months of the calendar year,'' D.R. Horton Inc. CEO Donald Tomnitz said. "Our future is not as bright as what we would like it to be.''
It's worth noting that Toll has been somewhat inconsistent in its market forecasting, to say the least. As Bloomberg puts it ...
"After predicting that the home market was nearing a ``bottom'' in December, Toll last month reversed course as deposits failed to live up to expectations. Today, he tempered his comments by saying the market 'is still beset by speculation'' and that it may take longer in some areas to pare the number of unsold properties."
Personally, I think Horton is on the money -- the housing market will kind of suck this year for all the reasons I've spelled out on my blog.
Watching the 2-10 Spread
Tuesday, March 06, 2007
Apartment market conditions deteriorating
To some extend, that's true. But it ignores a simple fact: A huge chunk of the homes bought during the boom were snapped up as investments -- meaning they were bought by people who intended to rent them out. Still more homes that were initially bought as flips have ended up as "unintentional rentals." The speculators who bought them can't sell, so they're renting to staunch the cash flow bleed.
Put another way: Lots of condos, town homes, and single-family homes were built to meet speculative demand, and now those units are being dumped on the rental market. That, in turn, is causing apartment market conditions to deteriorate.
You can see the evidence in a just-released multifamily report from the National Association of Home Builders (available on this page) ...
* The group's index that measures apartments available for rent jumped to 54.8 in Q4 2006 from 38.9 in Q3 2006. The higher the number, the "looser" the rental market is. According to this indicator, rental conditions haven't been this loose in two years.
* A subindex measuring asking rents dropped to a seven-quarter low of 62.2, while a subindex measuring effective rents (net of concessions) has slumped to a five-quarter low. A lower reading means more survey respondents said rents were lower in the current quarter than in the previous quarter.
* Apartments aren't being filled as quickly, either. The percent of new apartments rented within 90 days dropped to 42.6 in Q4 2006. That's the worst reading going back to at least Q4 2002 (the earliest I have data for).
* Lastly, 9.5% of the apartments were sitting vacant as of Q4 2006, according to the NAHB. That's up from 6.3% a year earlier and the worst going back to at least the end of 2002.
These findings come on the heels of a separate survey from the National Multi Housing Council. The group's quarterly "market tightness" index slumped to 54 in January 2007 from 70 in October 2006. That's the lowest reading in 12 quarters, or three years. The percentage of respondents who said conditions were looser than three months ago jumped to 21%f rom 14% in the October survey and just 4% in the January 2006 poll.
January pending home sales disappoint
This report confirms that the housing market remained weak in early 2007. We're entering the key spring selling season with elevated home inventories, a lack of speculative demand, and now, a tightening of mortgage lending standards. All of these factors tell me this spring will ultimately prove another lackluster one for home sales. Consequently, further declines in home prices are likely.
Monday, March 05, 2007
Interesting action in COMMERCIAL R.E. shares
The biggest question going forward: What impact does the mortgage meltdown have on the broader housing market as we head into the key spring selling season? Here's my advice for interested parties ...
Home buyers: Recognize that tighter mortgage standards reduce your buying power. For example, you may have to come up with a larger down payment to qualify for a loan. That’s especially true if you have a lower credit score. Stated income financing and some higher-risk ARMs may also be tougher to find.
Home sellers: You may have to be more flexible on pricing. You’re already competing with a near-record number of new and existing homes on the market. Now, you have to worry about potential buyers not being able to obtain mortgage financing.
Homeowners: If you’re stuck in a loan you cannot afford, contact your lender. You may be able to negotiate a loan modification, where your lender willingly changes the terms of the mortgage to make it more affordable. Another option is a short-sale, where your lender allows you to sell your home for less than you owe and forgives the remaining debt.
Investors: You simply have to understand that the housing bust will not go away overnight. Central banks the world over are pumping money and liquidity into the market to try to support housing but ...
That excess money will not make all those empty homes disappear. It will not keep bad-credit borrowers from defaulting on their home loans. And it will not help if banks, spooked about potential loan losses, decide to cut back further on mortgage lending.
Bottom line: I think we’re looking at a long, drawn out, housing market downturn that lasts at least through 2007 and likely into 2008 as well.