Frailty in Housing Market

Written By Brian Hicks

Posted March 29, 2007

The rickety house of cards that Alan Greenspan and his mortgage buddies built–one bad loan at a time–took another hit this week. New home sales plummeted 4% in February to their slowest pace in more than six years.

The news not only rocked the markets, but also cast a long shadow of doubt over earlier and much rosier numbers on existing home sales released by the National Association of Realtors. New homes, after all, are widely seen as a leading indicator, since they are booked at the initial sales contract, rather than as a closed loan like with previously owned homes.

According a Census Bureau report, new homes sold at an annual pace of 848,000 in February, down from the 882,000 January figure, which itself had already been revised lower. All four regions of the country showed sharp declines, and sales tumbled 18.3% vs. sales data from February 2006.

But it wasn’t just falling demand that moved the markets, because inventory also skyrocketed. The new home glut grew to an 8.1-month supply, up from a 7.3-month-supply in January. That marked the biggest surplus in over 16 years.

Those figures, of course, came against the backdrop of continued sub-prime jitters and Congressional hearings on the mortgage morass.

“I really do think the mortgage mess has pretty seriously shocked these markets,” said David Seiders, the chief economist for the National Association of Homebuilders. “The uncertainties out there right now feel so profound.”

Echoing those sentiments exactly, Stuart Miller, Lennar Corp. president and CEO, said on Tuesday in the wake of his company’s disastrous first-quarter results, “Given the state of the market, we do not expect to achieve our previously stated 2007 earnings goal, and we are not comfortable providing a new earnings goal at this time.”

That marked a complete reversal of sentiment for Miller, who laid out a yearly earnings goal of $3.69 per share in January in hopes that the new-home market would demonstrate “traditional, seasonal improvement.” But instead, Lennar’s earnings plunged a whopping 73% in the first quarter.

“The typically stronger spring selling season,” Miller said, “has not yet materialized.”

New home orders fell 27% year-over-year and housing starts were down 38%, while Lennar admitted that its cancellation rate was still around 29%.

 

But in the gloomy parade of builders on the brink, Lennar’s troublesome release barely turned a head. Since the start of February, homebuilders such as KB Homes, Hovnanian Enterprises Inc. and Toll Brothers Inc., just to name a few, have all reported falling profits.

And to top it all off, in what has been a very bad week for the nation’s housing bulls, home prices fell into full retreat also, turning negative for the first time in eleven years according to Standard & Poor’s and MacroMarkets LLC’s Case-Shiller price index.

The 20-city index was down 0.7% in January, creating the first year-over-year negative reading since 1996. Annualized, those numbers may portend a nearly 8.7% price decline for 2007. By comparison, it was only a year ago that prices were continuing their uptrend, rising 15%.

“The annual declines in the composites are a good indicator of the dire state of the U.S. residential real-estate market,” said Robert J. Shiller, chief economist at MacroMarkets.

Home prices fell from December to January in 17 of the 20 cities; only Miami showed any price gains. Prices were flat in Charlotte, N.C., and Seattle, while prices in January were falling fastest in San Diego, down 1.7%, for a 22.4% annual rate. Prices also dropped 1.1% in Los Angeles, a 14% annual rate.

Those deflationary numbers only spurred fears of an even greater meltdown in housing, since falling home prices not only create upside-down home owners, but make it practically impossible for troubled borrowers to refinance their loans, leaving all of them completely trapped.

Remember the mantra: Equity was just so old-school, they said, like money under the mattress–nothing more than foolishness in the face of opportunity, since real-estate never declines.

But what all of these numbers continue to show is that what they created was nothing but a house of cards.

It was built on lies and it’s going to collapse.

By the Way . . . According to a poll released by Bankrate.com on Monday, more than three in ten U.S. homeowners have no idea what type of loan they have, suggesting once again that confusion reigns in the mortgage world.

“Clearly, many homeowners are uninformed about their mortgages,” said Greg McBride, senior financial analyst at Bankrate.com, a consumer financial data firm.

Another troubling finding in the Bankrate.com survey was that 34% of homeowners who hold adjustable-rate mortgages (ARMs) do not know what they will do when their loan resets to higher interest rates.

“Given that homeowners could be looking at an increase of several hundred dollars each month, this is a staggering statistic,” McBride said in a statement.

By some estimates, nearly $1 trillion worth of adjustable rate loans are set to readjust this year. The banking debacle continues.

Also, according to 2006 4Q GDP figures released today, investment in home building has been slashed by 19.8% on an annualized basis. That led directly to a 1.21% decline in overall GDP. That means that the next release should be even worse.

The bottom in housing is nowhere in sight.

Mortgage Matters will return next week.

 

Wishing you happiness, health, and wealth,

 

Steve Christ, Editor

 

The housing bubble has popped, but the banking debacle has just begun. Email me your mortgage questions at steve.christ@angelpub.com.

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