This one takes some explaining. The big homebuilders borrowed money and bought up a lot of land. Now they are in trouble, running out of cash to run their businesses and pay down the debt – and the only way they can hope to surive is to build MORE houses to sell at a steep discount, because this brings in at least SOME cash.
Of course, the effect on the rest of the economy will be terrible: MORE houses dumped on an already-saturated market, at even lower prices. This will force prices to drop further, and more people to be in trouble. Calculated Risk: Homebuilders Struggle to Survive,
We could make fun of the analysts that claimed the homebuilders would have strong cash flow during a downturn (due to less investment in land and improvements) and that the homebuilders were “land banks”. Those investment ideas were Dumb and Dumber!
But the more important point is that the homebuilders struggle to survive shows why the builders are still overbuilding. Building homes, and selling at a deep discount, is the only way they can liquidate land to raise cash and pay down their debts in the current environment. This is why housing starts are still too high and will likely fall further over the next few quarters.
Home-builder stocks rose Monday after a Citigroup analyst raised his stock ratings on several of the sector’s largest companies on signs the worst may be behind the embattled industry.
Worst may be OVER?
Let’s see, highest housing inventory ever, difficult to get credit, mortgage rates rising in response to Fed bailout attempt, prices far, far, far above what an average person can afford, a huge wave of ARM resets coming next year… and some probably-23-year-old analyst sees a price bottom?
Oh yes, go buy stocks based on a bottom – suckers.
Median sales price down 7.5% in past year, biggest drop in 37 years
Sales of new homes dropped 8.3% in August to a seasonally adjusted annual rate of 795,000, the slowest sales pace since June 2000, the Commerce Department estimated Thursday.
Sales are now down 21.2% in the past year, with no sign of a bottom in the crippled housing market.
… The median sales price fell 7.5% to $225,700 compared with a year earlier, the largest year-over-year decline in 37 years.
The worst is yet to come. Maybe a year from now is the time to start thinking about loking for a bottom.
U.S. Homes Post Steepest Price Drop in 16 Years
The decline in U.S. home prices accelerated nationwide in July, posting the steepest drop in 16 years, according to the S&P/Case-Shiller home price index released Tuesday.
So the situation: a huge wave of “ARM resets” – steep rises in monthly payments for holders of adjustable mortgages – is only beginning. Then it takes several months before they get into enough trouble to be forced into foreclosure. At the same time, it is hard to get a mortgage now, the largest number of homes for sale in history, and everyone aware that prices are falling and it is just stupid to buy a house now. So prices are going to be dropping, maybe a lot, for some time. There is no way around it.
(Feel free to add other “doom and gloom” factors in the comments.)
The number of foreclosure filings reported in the U.S. last month more than doubled versus August 2006 and jumped 36 percent from July, a trend that signals many homeowners are increasingly unable to make timely payments on their mortgages or sell their homes amid a national housing slump.
… The national foreclosure rate last month was one filing for every 510 households, the company said.
The BIG ARM Reset jump – increasing numbers of people with adjustable mortgages that adjust to much higher monthly payments – hasn’t happened yet. And then it takes several months for them to fall behind on payments and eventually face foreclosure. So this is just the start of a wave – a tsunami.
This is filed under Housing Bubble, because this is more fallout from the bubble’s bursting. Here’s the deal: financial institutions loan out money to people (and companies and countries, etc.) who, because of the “credit crunch,” might not be able to pay it back. That means that the financial institutions might not be able to pay back the money THEY owe, including to depositors.
It’s housing bubble burst time – do you know where YOUR money is? Calculated Risk: Northern Rock Bank Run, with photos:
From Bloomberg: Northern Rock Customers Crowd London Branches, Withdraw Money
Hundreds of Northern Rock Plc customers crowded into branches in London today to pull out their savings after the mortgage-loan provider sought emergency funding from the Bank of England …
A bank run happens when people feel that a bank might be having trouble, and realize they might not be able to get THEIR money out of the bank if they don’t hurry. Everyone knows that a bank (money market, stockbroker, etc.) only keeps so much cash on hand. So they show up to withdraw their money before it is too late. It is a “run” because you have to run down to the bank to get your cash before other people get their cash. Only the first people in line are going to get their money.
In the US bank deposits up to $100,000 are insured by the government, so if the worst happens you will eventually get your money (up to $100,000) — after all the paperwork gets done. So if you feel like running down to the bank, you don’t really need to take out more than you will need to pay you bills for a few months.
Here is one more problem from the housing bubble – all those big houses they built cost much more to heat and cool than regular houses. As utility costs rise this will compound the monthly-payment problem. Then, on top of that there’s the maintenance costs like eventually re-roofing them, watering the lawns, etc.
And then there is the terrible environmental impact. Very few were built withing walking distance of stores and public transportation so cars are required. How many of the world’s trees were cut down to build them?
And, if the public somehow manages to regain their senses, these house monstrosities – like the huge, pre-oil-embargo land-barge cars of the 1970s – will become even harder to sell. AlterNet: Environment: Big Houses Are Not Green: America’s McMansion Problem,
The just-popped housing bubble has left behind a couple of million families in danger of losing their homes to foreclosure. It has also spawned a new generation of big, deluxe, under-occupied houses bulked up on low-interest steroids.
The National Association of Home Builders (NAHB) estimates that 42 percent of newly built houses now have more than 2,400 square feet of floorspace, compared with only 10 percent in 1970. In 1970 there were so few three-bathroom houses that they didn’t even to show up in NAHB statistics. By 2005, one out of every four new houses had at least three bathrooms.
…the manufacture and transportation of concrete to build a typical 2,500-square-foot house generates the equivalent of 36 metric tons of carbon dioxide.
The number of homeowners receiving foreclosure notices hit a record high in the spring, driven up by problems with subprime mortgages.
The Mortgage Bankers Association reported Thursday that mortgage-holders starting the foreclosure process in the April-June quarter reached 0.65 percent, marking the third consecutive quarter that this figure has set an all-time high.
The delinquency rate, which tracks the number of people who are behind in their payments but have not yet entered the foreclosure process, was also up sharply during the spring, rising to 5.12 percent of all loans, up nearly three-fourths of a percentage point from the same period a year ago.
And don’t forget, NEXT year is when MOST adjustable mortgages reset upwards, greatly increasing monthly payments. This is just the very tip of what is coming.
An “ARM Reset” occurs when an adjustable loan (ARM) changes (resets) from its initial “qualifying” rate, and goes up to its real interest rate. This reset can cause the monthly payments on the mortgage to as much as double.
Much of the trouble we are seeing now in the mortgage markets now is coming from people not being able to meet their payments. But the problem of this rise in payments has only just barely started! Many, many more mortgages reset through the rest of this year — and then the number really takes off next year.
How many more mortgages reset next year than this year? Go look at the chart of upcoming ARM resets: Calculated Risk: ARM Reset Charts. This is huge. We have only seen the smallest beginning of the problem. This is going to be really, really big next year. A really bad problem.
And the reason there was a “qualifying” rate? The buyer couldn’t afford to buy the house and needed something to get around this limit. So they used a “qualifying rate” to accomplish this – to make it look like the buyer could afford the payments. In other words, after an ARM reset, people can’t afford to make their monthly payments. Se can talk about the reasons loans were given to people who can’t afford to make the payment in another post. Update – Bonddad shows the same graph with some explanation, in this post.
U.S. home prices fell 3.2% in the second quarter compared with a year earlier, Standard & Poor’s reported Tuesday.
It’s the largest decline ever in the 20-year history of the Case-Shiller home price index.
A year ago, home prices were rising at a 7.5% pace nationally.
… Meanwhile, prices fell 3.5% in the past year in 20 major cities and 4.1% in 10 major cities.
It’s only the beginning. The psychology hasn’t set in yet. What happens next is sellers hear this news and start to realize that the game is up. So they’ll start to accept that they have to lower prices if they are going to sell. And this doesn’t even take into account that foreclosures are going to start serious price drops soon.
I’mnot trying to be doom and gloom here, I’m just describing what has to happen when we have seen the kind of price bubble we have seen. Prices have to revert to the mean.
US consumers are defaulting on credit-card payments at a significantly higher rate than last year, raising the prospect of problems in the stricken US subprime mortgage market spreading to other types of consumer debt.
Credit-card companies were forced to write off 4.58 per cent of payments as uncollectable in the first half of 2007, almost 30 per cent higher year-on-year. Late payments also rose, and the quarterly payment rate – a measure of cardholders’ willingness and ability to repay their debt – fell for the first time in more than four years.
The effect of the “credit crunch” are starting to ripple out.
You’ve probably been reading the houses “at the top” are still selling. Expensive houses require big mortgages – called “Jumbo” loans. And getting a jumbo loan has gotten much harder, which means there will be fewer buyers for the houses at the top, which means they are going to sell fewer of them, which means prices there will also have to start dropping. Growing mortgage crisis spreads to jumbo loans,
The evening before their home purchase was to close, Gary Becker and his wife, Amy Dacus, learned their mortgage to buy a Woodinville home had evaporated.
Unlike subprime borrowers defaulting on loans, the couple had a stellar credit score, a 20 percent down payment, strong employment history and had effortlessly purchased three prior homes.
But their new home’s $670,000 sales price was large enough to require a “jumbo” loan, so named because it was for more than $417,000, the limit the nation’s largest mortgage backers will fund.
Why is this happening?
The credit crunch isn’t universal.
Borrowers with good credit scores, good jobs and a down payment still have ready access to 30-year “conforming” loans — those funded through banks and mortgage brokerages by Fannie Mae and Freddie Mac, the giant federally chartered companies that fund the bulk of the nation’s mortgages.
But Fannie and Freddie cap their loans at $417,000, which means that banks and mortgage companies must tap other sources, such as mortgage-backed securities, for jumbo funds.
In recent weeks a skittish Wall Street has loudly signaled its unwillingness to invest in these securities.
Update – I just have to add this. Maybe we need a version of the Darwin Awards for people who just refuse to keep up with the news and try to buy a house in this market. The people who are not getting the jumbo loans are dodging a huge bullet. What kind of idiot is trying to buy an expensive house in a market where every single news story talks about how no one can sell a house, no one can make their payments, and prices are going to drop dramatically in the next few years?