Silent Spring

Written By Brian Hicks

Posted April 12, 2007

Despite the incoherent tweets of a few remaining housing bulls, the much-anticipated spring selling season has largely come and gone without so much as a peep. The only noise left, it seems, is the chirping of the crickets.

Not even the preposterous finger and toe crossing of the desperate David Lereah has had much effect. Those "sideline buyers" that he continues to hang his hopes on have yet to materialize.

Maybe they’re hanging out with the Loch Ness monster. Or better yet, the cool, laid-back girl. (Just kidding, ladies.)

Either way, it’s been a silent spring.

That’s the continuing story, at least, from one builder after another, in a theme that has become as predictable as the sunrise. Earnings have gone south along with all of that foot traffic.

The latest builder to come up short is DR Horton (DHI:NYSE). The company reported on Tuesday that its spring selling season had gotten off to a particularly bad start. Sales orders in the second quarter fell 37% on a year-over-year basis.

The nation’s largest builder reported that for the quarter ended March 31, new orders totaled only 9,983 houses vs. the 15,771 houses sold in the same period a year ago. Moreover, the value of those orders dropped by 40%, falling to $2.6 billion dollars from $4.4 billion.

The company’s founder, Donald R. Horton, said that conditions "continue to be challenging in most of our markets," as the supply of unsold houses continues to grow and cancellation rates remain in the 32% range.

"The spring selling season has not gotten off to its usual strong start," he added.

Horton did not give any specific guidance on future sales or earnings for the second quarter either.

It was only last month, you may remember, that Horton CEO Donald Tomnitz told an analyst conference that the market for new houses "is going to suck, all 12 months of the calendar year."

Those grim words have echoed throughout the troubled industry.

Appearing on CNBC on Tuesday, Ara Hovnanian, CEO of Hovnanian Enterprise Inc. (HOV: NYSE) said that the housing market is "sluggish at best."

But that was the least of Hovnanian’s worries.

On Wednesday, Moody’s Investors Service cut its rating on Hovnanian’s debt, saying the builder is bleeding cash amid a downturn in the housing market.

Moody’s cut the corporate family rating of the Red Bank, N.J.-based builder’s debt quality to "Ba2" from "Ba1" and said it may downgrade the debt further. Both Ba2 and Ba1 are non-investment-grade designations.

The cut followed an earlier move by Fitch Ratings, which downgraded HOV’s outlook from stable to negative.

"The housing sector," Fitch said, "is in the midst of a meaningful, multi-year down trend."

Taken together, of course, all of this bad news means only one thing: the bottom in housing is nowhere in sight.

The buyers have flown the coop this spring and their silence has been deafening.

But don’t bother asking the bulls about it, because they are the only ones that continue to chirp.

The homebuilders, by the way, continue to plummet. As a group, nearly everyone of them is at or below their 52-week lows.

Needless to say, we’re hardly surprised. In fact we told you about it here, when the builders were supposedly on the rebound.

Mortgage Matters

Hi Steve,

Your newsletters are extremely insightful and very much appreciated.

My question: With the sub-prime market falling apart and foreclosures soaring, is there a prime time to get back into real-estate investing, i.e. buying real estate at the bottom?



Dear B.W.

Thanks for reading and for writing. I appreciate your kind words.

Unfortunately, I don’t hold out much hope for real estate this year or the next. The banking excesses are now just too big to be ignored. As a result, tightening credit will end up shrinking the pool of qualified buyers even further.

Also, remember that as lending guidelines become tougher, loan amounts will shrink too.

The result will be fewer buyers with less purchasing power.

Additionally, the supply of houses is huge and still growing. For instance, right now there are some 2.1 million vacant houses on the market, creating a challenging overhang even in the best environment.

The increasing number of foreclosures will only add to this. In fact, recent studies project that another 2.2 million borrowers could lose their homes to foreclosure in the coming years as the sub-prime debacle continues to unwind.

It’s just a simple matter of supply and demand. Because of this, the drop in housing is just beginning.

Now, how will we know when the market is safe?

Well, for me it will be when the price of housing becomes affordable again using the standard underwriting guidelines that banks historically used before the boom.

You know, the ones they crumpled up and threw away during the bubble days.

Remember, until recently house prices have always been tied to incomes. Those bad loans were only possible because they severed that historical link.

The mortgage morass of liar’s loans and exotic products may have put people into houses, but doesn’t automatically allow them to keep them.

Long story short, house prices probably need to fall to 2003 levels before they will again become affordable using sane mortgage guidelines.

Hope that helps.


Steve Christ, Editor

Story Update:

As we reported here in November, Kara Homes Inc., one of New Jersey’s largest builders, had landed itself a date with a bankruptcy judge and it promised not be pretty.

In fact, according to a story published yesterday by the Asbury Park Press, it has just gotten a little bit uglier. Due to a bankruptcy sale, several prospective buyers have now been kicked to the curb, losing their deposits in the process. The troubled projects were sold at auction free of any contractual obligations.

One buyer, Jerrold Fried, is now out some $135,000 as a result.

Said Fried in the article, "Unfortunately, in the end of the big bankruptcy, my wife and I are the ones that are going to suffer, and my children. Everybody else goes before me even though he (Zudhi Karagjozi, owner of Kara Homes) used my money to build the development."

The bankruptcy judge, Michael B. Kaplan, said that the terms of the sale were "fair and reasonable."

For those of you keeping score at home, that makes it crooked builder 1 and little guy 0.

It’s an outrage.

By the way: The National Association of Realtors (NAR) said Wednesday it expects house prices to fall this year for the first time since the group began tracking sales nearly 40 years ago.

In its latest monthly forecast, the group said it expects a 0.7 percent decline in the median price of an existing house sold in 2007. Just one month ago the NAR had been projecting a 1.2 percent increase.

It’s not over yet.


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


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