Archive for August, 2007

The report from Case-Shiller is a primarily based on single family homes in the top 20 markets, mostly in suburban areas. The nationwide number is down 3.2% which is the biggest decline year over year since the fund had been started! We are beginning to see a wave effect in the market. Things that professionals were talking about six months ago are becoming reality, in another six months the homeowners will begin to realize they are feeling it too. This is why there are so many houses on the market and owners are not budging with prices. The housing market does not change direction as fast as the stock market, it took 3 years to boom like this and we are not going to see a correction over a few month span.

30% increase in credit defaults

In another article, the street reports that credit card defaults have increased up from 30% compared to this time last year. With all this recent buying of homes that now have no equity and an increased credit default rate, how could we not be headed for a recession?

What this means for you, the investor? continue

“The pullback in the U.S. residential real estate market is showing no signs of slowing down,”

Robert Shiller, creator of the index and chief economist at MacroMarkets in Madison, New Jersey

The day after the market reports that housing starts are up, we see a slide in home sales. Nothing surprising since in my previous post I mentioned how the data is always a little behind the market, but who cares… What does this really mean? I don’t think anyone knows. Countless Grey haired professionals are being brought onto the news shows and questioned for their “experienced opinion”. Yet most of them seem to quote something like “follow the basics” or “fundamentals”, not really giving you a straight answer. How could they? No one has ever seen a market quite like this, and no one really knows what is going to happen. We have a credit problem which has never been this bad not to mention some of the most aloof consumers ever. Here is a great video from CNBC below.. or you can read the full story here.

The NAR talks..According to the latest home sales data from the Realtors association, median home prices fell 0.6 percent from a year ago to $228,900. Lawrence Yun (National Association of Realtors economist) stated, “In the aggregate, we don’t see the subprime market damaging the economy”. Yeah, I agree, it’s the credit crunch and tightening of lending guidelines, that’s what’s going to kill the market. Simple supply and demand…lot’s of homes for sale, very few people with good credit and 20% to put down. With the crazy loans that were in the market we made real estate a much more liquid asset than it really is, shifting back is going to be a little painful in my opinion. But remember, a lot of wealth can change hands when the market shifts, just make sure you don’t get shifted on.

So there has finally been some good news on the housing market. July housing sales are up 2.8% as reported today. The problem I have with these figures is that this information is technically old and does not really reflect the recent problems in the housing market. All these reports on TV are somewhat delayed to what is going on in the market right now. In my opinion, these recent figures are similar to what was happening in the market about 2-3 months ago.

Another thing to think about is that the “housing starts” data does not reflect canceled contracts. Example: If 100 new contracts were reported; then 2 months later 25% of those contracts were canceled or the deals fell through, the housing data would still reflect 100 new sales, a little misleading if you ask me.

Speaking of stats, if you watch CNBC you will notice that most of their foreclosure statistics are coming from Realtytrac. I find this funny since countless members of our site have said their data is far from current compared to ours. Shows you how much public relations can effect the news.

In an interview today Countrywide CEO Angelo Mozilo says that he thinks we are headed for a recession. This statement coming after the announcement of Bank of America deciding to invest 2 billion into the troubled mortgage giant. This will give Bank of America about a 16% stake in Countrywide Mortgage. Mozilo states that their sub prime exposure is in the upwards of 10% of the companies total mortgage holdings. Further explaining that he predicts that almost half of those loans will be refinanced out into fixed rates. Then why does he still think we are headed for a recession, not that he’s the only one. Not to mention that he has been dumping his stock lately which he says is totally unrelated. He claims he just wants to be doing it gradually so upon leaving in the future it is not a sudden action, but who really knows.

The problem I have with these extra efforts to bail out the mortgage industry is that it is beginning to look like the airline bailouts, but for consumers. This practice basically says its ok to go out and be reckless with credit because if enough people get in trouble, good old uncle sam will step in to bail us out. I saw an story on CNBC with a woman who was brought on for a debate saying that it is the responsibility of government to come in and help these people. This after previously admitting that when she gave her mortgage to the bank she didn’t bother to read any of the fine print herself! “It’s to confusing she argued”… are you kidding me! This is a grown woman on national television (claiming to be a professional) admitting that she doesn’t even read legal contracts she signs. It’s called being responsible, what is going on with this attitude in America?

See the CNBC interview here…

Major mortgage companies are beginning to falter and effect people on the retail level. CNBC reports that borrowers who have already moved into new homes are finding out that their loans will never close. Since these major mortgage companies are already scrambling to save whats left of their loan portfolio the loans in the “pipeline” are all getting pulled.

This is just the beginning of the correction in my opinion. Tighter lending guidelines are only going to force more buyers out of the market, further driving prices down. Not to mention these guidelines can end up being more of a problem than the interest rate itself. Even if rates are lowered, we now face a new issue with scarcity of credit. Less lenders in the business and tighter guidelines may be the nail in the coffin of this real estate market downturn…

Why does the Fed keep saving the Market? I thought they were supposed to hold off and only come in when there is a real problem. I know what your saying “there is a real problem!”, but it’s a problem created by bank and homeowners negligence. The more they lower rates, the weaker the US dollar will likely become in turn hurting the fixed-income and retirees.

I agree this is good for the market, but I think it’s just another delay for a correction that is inevitable. The sub-prime mortgage mess needs work itself out.

On another side we have Henry Paulson (74th Secretary of the Treasury) who is ready to start bailing out Fannie Mae and Freddie Mac, these two companies can already borrow money at rates lower than any other bank! They screwed up when they started buying mortgage backed securities on the secondary market. For years they had only originated loans with strict guidelines, then in the past few years they moved to the secondary market. So did a company that can already borrow money at rates lower then any other bank need to go into this business? I don’t think so… rant rant rant..

Unfortunately the real losers in this market are going to be the home-owners and small mortgage brokers, not to mention some REALTORS dropping like flies..