Housing: 2006 thread, use the 2007 thread instead.

[dullard]

Originally posted by: Vic
BTW, I'm more than a bit dissapointed with dullard here. He pulled a you with the thread title and summary. The article he posted does not say anywhere that this is the "worst slump in 40+ years."

Well, the CNN headline does say "Oversupply slump worst in 40 years". Sorry that I used that headline for the article I linked as a basis for my summary. I guess I did goof by writing "builders" instead of "builder". That is a factual error on my part, I will edit it to make it singular.

Combine this article with last months article stating that unsold new homes is at an ALL TIME record high, and with the July builder sentiment at a 15 year low and you see that there is a problem brewing with home builders. I suspect that they just kept on building and there wasn't the same level of demand any more. So they are now starting to cut back on how much they build.

 

[Vic]

Originally posted by: dullard

Originally posted by: Vic
BTW, I'm more than a bit dissapointed with dullard here. He pulled a you with the thread title and summary. The article he posted does not say anywhere that this is the "worst slump in 40+ years."

Well, the CNN headline does say "Oversupply slump worst in 40 years". Sorry that I used that headline for the article I linked as a basis for my summary. I guess I did goof by writing "builders" instead of "builder". That is a factual error on my part, I will edit it to make it singular.

Combine this article with last months article stating that unsold new homes is at an ALL TIME record high, and with the July builder sentiment at a 15 year low and you see that there is a problem brewing with home builders. I suspect that they just kept on building and there wasn't the same level of demand any more. So they are now starting to cut back on how much they build.

As you well know, new homes represent only a tiny fraction of the overall market. And this builder did not say it was the worst slump, he said it was a unique slump, i.e. one caused specifically by oversupply and not by the usual macroeconomic factors like skyrocketing interest rates or massive unemployment, etc. What he basically said, if you wanted to boil it down into real financespeak, is that the market went too hard and fast there for a while, is now stopping to take a breather and reassess for a while, so the short term looks down but the long-term still looks strong. That analysis BTW jives with most of the other experts out there, and mirrors the overall picture in the markets (look at the T-bond yield curve for example).

 

[dullard]

Originally posted by: Vic
As you well know, new homes represent only a tiny fraction of the overall market. And this builder did not say it was the worst slump, he said it was a unique slump, i.e. one caused specifically by oversupply and not by the usual macroeconomic factors like skyrocketing interest rates or massive unemployment, etc. What he basically said, if you wanted to boil it down into real financespeak, is that the market went too hard and fast there for a while, is now stopping to take a breather and reassess for a while, so the short term looks down but the long-term still looks strong. That analysis BTW jives with most of the other experts out there, and mirrors the overall picture in the markets (look at the T-bond yield curve for example).

Yes, they are just a tiny fraction, as I say in my OP. But to builders, the rest of the market is not as important. They are only directly interested in the buildup of unsold new homes. The uniqueness is what makes it the worst type of slump. There is a slump without common underlying causes. If this "stopping to take a breather" combines with a hypothetical downturn on other issues, the result could be disasterous for builders.

I'm just the messenger here. Your complaint should be with CNN for implying that the builder said it was the "worst slump".

Either way, a 45% drop in revenue, record high of unsold homes, new home sale contract cancellations rising, etc. is not a good sign for home builders right now. Tomorrow things may change, but it so far looks like rough times in the short to mid-term.

Edit: there is more detail on their statement here.

Orders fell 47.5% in the company's fiscal third quarter that ended July 31, which is far bigger than the 32% decline the company experienced in its fiscal second quarter.

Toll blamed an inventory glut, surge in cancellations and waning consumer confidence for the higher-than-expected drop-off in demand. He said the company's cancellation rate was 18% in its fiscal third quarter, more than double the 8.5% rate reported in its fiscal second quarter.

"We have no idea how long a phenomena it will be. It appears it will last for at least six months more, but it may last two years more - we don't know," he said.

 

[Slew Foot]

You wont see the bottom until most of the ARMs are done resetting. Until then, youll have large amounts of people who are forced to sell because of payments they cant afford. Add to that, with flat prices and cost-to-carry being substantially higher than rental return, no more speculators are buying, and are for the most part, dumping.

 

[Vic]

ARM's do not "reset." They "adjust." And it's good for the refi business.

 

[Zorba]

Aren't a lot of ARMs fixed for a few years, and then start adjusting? So the market probaly wont get better until after all of the ARMs start adjusting.

 

[Genx87]

Originally posted by: Zorba
Aren't a lot of ARMs fixed for a few years, and then start adjusting? So the market probaly wont get better until after all of the ARMs start adjusting.

Yes

Currently on a 7 year arm.

Fixed rate until 2012.

 

[dullard]

Originally posted by: Vic
ARM's do not "reset." They "adjust." And it's good for the refi business.

It is definately good for the refi business. Hopefully, the home owners with them can afford to do the refinance instead of selling. Because if a significant number need to sell, then the housing market will have tremendous downward price pressure on it.

What would you personally say the difference is between "reset" and "adjust". It seems that everyone uses the term "reset" for the period when ARMs adjust. Even the VP of Freddie Mac calls it "getting ready to reset". I'm just curious as to what the exact terminology is because people tend to use them interchangably.

 

[LEDominator]

Originally posted by: Genx87

Originally posted by: Zorba
Aren't a lot of ARMs fixed for a few years, and then start adjusting? So the market probaly wont get better until after all of the ARMs start adjusting.

Yes

Currently on a 7 year arm.

Fixed rate until 2012.

I am just curious, but isn't that a good thing for the buyer if you got it before the interest rates went up?

 

[dullard]

Originally posted by: Zorba
Aren't a lot of ARMs fixed for a few years, and then start adjusting? So the market probaly wont get better until after all of the ARMs start adjusting.

Yes, that is what an ARM is: a usually short-term fixed period followed by a usually longer-term periodically adjustable period.

When the ARMs start adjusting, some people will just absorb the difference. That means they spend far more on interest, and probably that'll be offset with them spending far less on other consumer goods. Expect a fundamental shift in spending patterns over the next few years. That doesn't mean the economy will do bad, it just means people will be spending in different ways.

However, a select number of people won't be able to afford the new ARM rates. What do they do then? These are the people who got an ARM because they couldn't afford payments on a fixed interest rate loan. If their finances haven't improved significantly since they got the ARM, they might not be able to afford the higher rate after the adjustment. They could possibly refinance, but that means a larger interest rate and a large refinance cost (which in this case they cannot afford and thus this might not be a feasible option). They could sell and take the profit that they got when their house value goes up. But then they have to move somewhere. They either move to an apartment or a cheaper house; either of these means downward pressure on housing prices.

The important factor here on the housing market is: how many people truely will have to sell and move to a cheaper house/apartment when the ARM and/or interest only mortages adjust? Is it a signficant number of people? Or is it just a small minority?

Myself, I got a 5 year ARM about this time last year. I knew that interest rates would probably be much higher when it adjusts. However, by the time the adjustment starts, I'll have the house almost entirely paid for. Thus, I'm financially better off with this ARM than if I went the fixed route (even if the ARM adjusts to the highest allowed interest rate). I meticulously did the math and the 5 year ARM even in the worst case scenario was financially the best option. Most people who got the ARMs probably didn't do the math.

 

[Vic]

Originally posted by: dullard

Originally posted by: Vic
ARM's do not "reset." They "adjust." And it's good for the refi business.

It is definately good for the refi business. Hopefully, the home owners with them can afford to do the refinance instead of selling. Because if a significant number need to sell, then the housing market will have tremendous downward price pressure on it.

What would you personally say the difference is between "reset" and "adjust". It seems that everyone uses the term "reset" for the period when ARMs adjust. Even the VP of Freddie Mac calls it "getting ready to reset". I'm just curious as to what the exact terminology is because people tend to use them interchangably.

It costs less to refinance rather than to sell. Realtors typically charge fees on the total sales price that would be considered illegal if charged on a mortgage loan. Given the ready availability of high LTV financing these days, a homeowner in a tight equity position is probably going to have just as much (if not more) difficulty selling as refinancing.

I've worked in the mortgage industry for 11 years, and in an industry rife with terminology to the point of almost having its own language, I have never heard anyone say that ARMs "reset." ARM interest rates adjust according to a precise index and margin at specific times and intervals as laid out clearly in the mortgage note.
An ARM with an introductory fixed period is usually called a "hybrid" ARM. For non-prime loans, these are generally 2/28 and 3/27 6 month LIBORs, which are fixed for 2 or 3 years respectively and then convert to 6 month LIBORs. As these loans are typically offered to customers with lower qualifications, the margins tend to be high, so the interest rate tends to adjust dramatically after the initial fixed rate period, and the customer is encouraged to work hard at cleaning up their credit during the initial fixed rate period so they can re-qualify for a better loan prior to the first adjustment.
For ALT and Conforming (Fannie Mae/Freddie Mac) loans, the options are usually 3/1, 5/1, 7/1, and 10/1 ARMs, which are fixed for 3, 5, 7, or 10 years respectively and then convert to 1 year T-bill or LIBOR ARMs. As borrower qualifications are generally higher, margins are lower and (depending on market conditions), the interest rate may not even go up at all after the initial fixed rate period.
Then there are innumerable other programs like interest-only's (which can be fixed or ARM), which allow the borrower the option of making only a minimum interest only payment for the first 60 to 120 months, or even negatitve amortization "option" ARMs which allow the option of a minimum payment which doesn't even cover the interest as it accrues. Borrowers should consider their risk tolerance prior to choosing a particular loan option, and not just let some loan monkey tell them what to do. It is typical in my experience, however, that the wealthier the customer, the riskier the loan option they will choose.
It's important to remember when getting an ARM that the numbers the borrower should pay closest attention to is the index and margin, and NOT the initial fixed rate.

 

[Slew Foot]

Im not exactly sure where the realtors get their "official" stats for prices from. If you tour similar homes in Sacramento youll see price cuts of 20% since last year. The new developments are cutting prices like crazy. The flippers who bought in the last couple years are hosed, unless they short sell, there's no way they can cut prices like the developers, theyll be stuck holding on to a depreciating asset with an appreciating payment until they get foreclosed on.

 

[Moonbeam]

Should be some great buys in foreclosures.

 

[dullard]

2nd quarter price growth slows

Median price growth is now just 3.7% year over year. 59 out of 150 measured markets have prices now below their recent high prices.

So far, this just continues the trend shown in this thread. The housing price growth boom has slowed with each report. In many local areas, it slowed so much that prices have gone down. Still, the majority of areas had small price increases, and there are some places with strong price increases. With housing, it is definately more important to look at the local market, not the nationwide averages.

 

[Slew Foot]

Originally posted by: dullard
With housing, it is definately more important to look at the local market, not the nationwide averages.

Yup, certain locales in CA are down 20% from their peak already, IM sure some cities in the midwest are up significantly since this time last year.

 

[dullard]

Housing starts fall 2.5% in July 2006. June numbers downwardly revised. Permits for future housing starts fall 6.5%. Housing starts down 13.3% from July 2005, permits down 20.8% from July 2005.

It looks like the builders are really cutting back now. That further supports the decline in demand for housing. Luckilly, having fewer houses built, will help support prices of current houses.

 

[Slew Foot]

Pretty good article at the WSJ, hinting that declines are much worse than advertised.


Measuring the Cracks in the Foundation
By MARK WHITEHOUSE
August 19, 2006; Page A2

Economists looking for evidence of a hard landing in the housing market will be watching closely next week when the National Association of Realtors releases its latest data on existing-home sales and prices.

Some think there is a chance the report will show the median price of a single-family home declined in July when compared with a year earlier. If so, that would be the first time prices have fallen in more than a decade.

Economic data often defy the forecasters, and monthly housing data are notoriously volatile. But whether the data show a decline or not, many people trying to sell their homes probably already have felt one. That is because the official numbers tend to be rosier than reality, particularly at turning points like the present.

For much of the past year, economists have been engaged in a slow-motion debate over where the housing market is headed. Most still predict a soft landing, in which sales would decline and prices would stall, but only enough to take a small bite out of economic growth. Lately, though, worries have mounted amid indications that the landing could be harder.

Last week, for example, the National Association of Home Builders reported that its index of new, single-family-home sales fell to a 15-year low. The previous week, luxury-home builder Toll Brothers Inc. said orders were down 47% in the three months ending July 31 from a year earlier. Chief Executive Robert Toll said he had never seen such a sharp downturn in an otherwise healthy economy.

For the most part, economists expect next week?s housing reports, which include fresh July data from the Census Bureau on new homes, to confirm the downward trend they already see. But fresh data on median prices ? particularly for existing single-family homes, which make up most of the market ? could raise some eyebrows. So far this year, price gains have shown a sharp deceleration: In June, they were up only 1.09% from a year earlier, compared with 12.61% in January. Should prices actually fall in July, that will be a telling sign that housing could be in for the kind of sustained decline in prices that could weigh heavily on consumers? moods and finances.

Moreover, there is some reason to believe the reality is even harsher than the numbers reflect. That is because when home sales begin to slow, sellers offer incentives that the official prices don?t reflect, such as help in paying buyers? closing or moving costs. Also, as sales volumes in the worst local markets decline, a larger share of the recorded sales tend to come from markets that are still doing relatively well ? a factor that can skew official prices upward.

The difference can be significant. Thomas Lawler, an economist and former vice president at Fannie Mae who has studied prices near his home in Loudoun County, Va., estimates that the average price of similar homes in July ? accounting for concessions ? was down 10% to 15% from a year earlier. The local realtors? organization, he says, reported only a 2.5% drop.

?There are a lot of people who would love to be able to sell their homes at last year?s price,? he says. ?But they can?t.?

 

[Slew Foot]

Some big news this week, this could mark the first YOY decline in prices in over 10 years. Of course, to people who arent following the NAR's BS stats, prices are already down in CA.

On any rate, I added some more puts to TOL and LEN last friday, and Ive already made about 10K 🙂

 

[dullard]

Originally posted by: Slew Foot
Some big news this week, this could mark the first YOY decline in prices in over 10 years. Of course, to people who arent following the NAR's BS stats, prices are already down in CA.

The stats aren't BS. They list the median prices of houses sold. There is nothing false or wrong with the data that I know of. However, it isn't the entire picture. If you treat those numbers as the entire picture, you are going to be sorely mistaken. It is BS to ignore all the forms of discounts. But it is not BS to report the median selling price. The NAR just shows half of the picture, a correct half so it isn't BS, but just half.

Tomorrow we get the existing home sales and prices. The next day we get the new home sales report. Here are the five most recent Year-Over-Year median existing home price increases:
[*]Feb: 14.1%
[*]Mar: 11.8%
[*]Apr: 4.2%
[*]May: 6.0%
[*]June: 0.9%
That price increase has been dropping like a rock. Prices were still up in June (up year-over-year AND as up to an unadjusted all time high), but if the trend continues, the prices will not be up year-over-year for quite some time. And as you pointed out, this is just half of the picture because it doesn't include discounts.

 

[dullard]

Home sales fall 4.1%, and is now at the slowest pace in 2.5 years. The supply of homes on the market is at a 13 year high. In all regions, except for the south, median prices are down.

Overall, I'm surprized the median price is still up 0.9% from this time last year. However, that price doesn't include special discounts so it might actually be lower than this time last year if discounts were included. I still can't see how anyone can argue the bubble isn't gone. Whether you call it a fade, a burst, or whatever, the bubble has disappeared.

 

[LegendKiller]

Originally posted by: dullard
Home sales fall 4.1%, and is now at the slowest pace in 2.5 years. The supply of homes on the market is at a 13 year high. In all regions, except for the south, median prices are down.

Overall, I'm surprized the median price is still up 0.9% from this time last year. However, that price doesn't include special discounts so it might actually be lower than this time last year if discounts were included. I still can't see how anyone can argue the bubble isn't gone. Whether you call it a fade, a burst, or whatever, the bubble has disappeared.

I wouldn't say that it isn't gone. Personally, I see it just starting to implode. Just like a building collapsing, it is slow at first then builds a lot of steam. in the DC area we are seeing houses whacking 100k off of their offers from last month.

This is only the beginning.

 

[dmcowen674]

Originally posted by: LegendKiller

Originally posted by: Genx87
It does make you wonder if there is anything functioning in that head of his. What benefit would banks have in driving the price down if it were possible? If the price of homes contiunally went down year after year, nobody would buy a home and instead rent. Renters dont usually pay the bank a monthly payment on principal + interest.

They have no interest or power to drive down prices like Dave implies. Yet another foolish conspiracy theory propegated by those who would rather be ignorant and spread FUDD than be educated and spread reason.

They have a ton of vested interest. The money they freely shell out to Developers.

They have been driving the cost of used homes down all along.

Now with Americans broke they are being forced to drive new prices down.

Enjoy the collapse and The Great Republican Depression

 

[Slew Foot]

Up to 20K in profits on my put options since Friday 🙂

Not sure about the homebuilders stock themselves, but this is just the beginning of the implosion. You think its bad now, wait until this time next year after 1.2 trillion in ARM resets hit the fan.

 

[Vic]

Originally posted by: dmcowen674

Originally posted by: LegendKiller

Originally posted by: Genx87
It does make you wonder if there is anything functioning in that head of his. What benefit would banks have in driving the price down if it were possible? If the price of homes contiunally went down year after year, nobody would buy a home and instead rent. Renters dont usually pay the bank a monthly payment on principal + interest.

They have no interest or power to drive down prices like Dave implies. Yet another foolish conspiracy theory propegated by those who would rather be ignorant and spread FUDD than be educated and spread reason.

They have a ton of vested interest. The money they freely shell out to Developers.

They have been driving the cost of used homes down all along.

Now with Americans broke they are being forced to drive new prices down.

Enjoy the collapse and The Great Republican Depression

Dave, I think you need a new tinfoil beanie... :laugh:

 

[Zorba]

Originally posted by: dmcowen674

Originally posted by: LegendKiller

Originally posted by: Genx87
It does make you wonder if there is anything functioning in that head of his. What benefit would banks have in driving the price down if it were possible? If the price of homes contiunally went down year after year, nobody would buy a home and instead rent. Renters dont usually pay the bank a monthly payment on principal + interest.

They have no interest or power to drive down prices like Dave implies. Yet another foolish conspiracy theory propegated by those who would rather be ignorant and spread FUDD than be educated and spread reason.

They have a ton of vested interest. The money they freely shell out to Developers.

They have been driving the cost of used homes down all along.

Now with Americans broke they are being forced to drive new prices down.

Enjoy the collapse and The Great Republican Depression

Cost of new and used homes are fairly connected. If used is much cheaper than new, people will buy the used instead of the new.