OFHEO Home Price Index: Q1 2007

Last Friday, the Office of Federal Housing Enterprise Oversight (OFHEO) published their Home Price Index (HPI) data for Q1 2007 showing continued deceleration of home price appreciation in most regions as well as outright declines in many states and metropolitan areas.

The current installment shows declines to the East North Central and New England census regions as well as to 25 states (using “purchase only” data) including Michigan, Massachusetts, Californian, and Florida and a whole host of Metropolitan Statistical Areas (MSA).

I have updated my OFHEO HPI Charting Tool by both updating the data as well as adding some additional features that make the tool more powerful but first, I should mention some background on the OFHEO HPI.

The OFHEO HPI series is formulated from home purchase and refinance information collected from Fannie Mae and Freddie Mac and as such suffers slightly from some basic limitations of the data.

First, Fannie and Freddie mortgages are subject to conforming loan limits which eliminates huge portions of data that are particularly relevant given the current bloated state of home prices.

A great percentage of home purchases made in the last decade, especially in the bubbliest areas, were made with Jumbo loans that, by their definition, exceed the Fannie-Freddie conforming loan limits and as such are not included in the OFHEO data.

Also, data from mortgages made for the purpose of refinance are also included which may have a tendency to skew the HPI series.

Fortunately, OFHEO now produces “Purchase Only” indices (i.e. HPI indices derived only from home purchase mortgage data only) for all census and states statistical areas.

In general, because the “Purchase Only” indices are based on home price changes from only home purchase transactions, they tend to show a greater degree of deceleration and/or decline than the complete data indices and may be a better indicator of the overall state of each particular housing market.

Although it’s generally recognized that the S&P/Case-Shiller (CSI) home price indices are more accurate than the OFHEO indices, OFHEO offers data for over 400 different census, state and metropolitan statistical areas compared to only 20 major metro areas for the CSI.

The OFHEO HPI Charting Tool allows you to visualize the HPI data as well as compare data from different areas.

Additionally, the tool now fully supports the “Purchase Only” data as well as allowing you to “normalize” the data in order to make a true comparison from one area to another.

To illustrate how to use the tool, I will build up a simple chart that compares the data from the New England census division, Massachusetts, and the Boston-Quincy and Cambridge-Newton-Framingham Metropolitan Statistical Areas (MSA).

For the following chart (click to jump to the tool itself), I added the New England census division to the chart by going to the “U.S. Census Regional Division” section and “checking” New England and also “un-checking” the United States.

Then, in the section of checkboxes just under the “Update Chart” button, I checked the “Show Complete Index”, “Show Purchase-Only, Seasonally Adjusted Index (if available)” and “Normalize using base of 100” checkboxes.

Finally, I constringed the date range a bit by going to the “Date Range” section at the bottom and selecting “1991” in the first dropdown and then clicked the “Update Chart” button.

Other than the over 150% increase in New England home values seen since 1993, this chart shows that the “purchase only” index has seen a more significant increase that the “complete” index and appears to have declined more since the peak.

To get a better sense of what has gone on since the peak, let’s constrain the date range even more, by setting the starting year to “2000” in the first drop down found in the “Date Range” section at the bottom and then clicking the “Update Chart” button.

Now you can clearly see that there is a significant difference between the “purchase only” data and the “complete” data as the “complete” data series has decelerated but has not yet registered an actual decline compared to the “purchase only” data which peaked in Q1 of 2006 and has declined steadily ever since.

Since the “complete” data seems less then perfect, lets “un-check” the “Show Complete Index” checkbox found at the top and “check” the Massachusetts checkbox found in the “States and District of Columbia” section and then click the “Update Chart” button.

We can see from this chart that Massachusetts actually peaked in Q2 2005 and has been trending down ever since as well as the fact that the extent of the decline seen in Massachusetts far surpasses that seen by the New England region as a whole.

But something about this chart seem to run counter to the basic expectation that Massachusetts has the “hottest” real estate markets in New England, namely the fact that the New England data seems to peak at a higher value than the Massachusetts data.

This is because the chart is showing the two data series in “normalized” mode which, for simple comparison purposes, adjusts all the data on the chart to start with a base value of 100.

With the normalization feature you can compare two totally different data series and get a sense as to the relative changes they have made over the same time period.

In order to get the “real” view of the data, simply un-check the “Normalize using base of 100” checkbox and click the “Update Chart” button.

Now you can see that Massachusetts home prices have appreciated to a greater degree than the New England region as a whole.

But since we really do want to make a relative comparison across different data series, let’s continue with the “normalize” checkbox checked.

Now, lets add the Boston-Quincy and Cambridge-Newton-Framingham Metropolitan Statistical Areas by selecting “Boston-Quincy,MA” and “Cambridge-Newton-Framingham,MA” in the first and second drop downs found under the “Metropolitan Statistical Areas and Divisions” section then click the “Update Chart” button.

Now you can see that Boston peaked in Q1 2006, and Cambridge peaked in Q3 of 2005 while all data series declined steadily throughout 2006 and continue to decline today.

You can follow these general steps with any state and set of areas and do particularly interesting comparisons by “mixing and matching” completely unrelated areas.

S&P/Case-Shiller: March 2007

Today’s release of the S&P/Case-Shiller home price indices for March continued to show weakness for the nation’s housing markets with thirteen of the twenty metro areas tracked reporting significant declines.

Topping the list of decliners on a year-over-year basis was Detroit at -8.38%, San Diego at -5.97%, Boston at -4.86%, and Washington DC at -4.78%.

Additionally, both of the broad composite indices showed accelerated declines slumping -1.88% for the 10 city national index and -1.36% for the 20 city national index resulting in the first negative appreciation on an annual basis since the 1990-1991.

To better visualize the results use the PaperMoney S&P/Case-Shiller/Futures Charting Tool and be sure to read the Tutorial in order to best understand how best to utilize the tool.

Gettin’ Down with Toll

Toll Brothers (NYSE:TOL) reported Q2 earnings results last week confirming a $119.7 million of pretax write-downs that served to depress their net income by an astounding 79% as compared to Q2 2006.

Additionally, Toll yet again reduced its expectation for the maximum number of homes delivered for 2007 from 7300 homes last December to 7000 in Q1 now to 6900.

During the conference call, CEO Bob Toll uncharacteristically offered very little optimistic sentiment even offering some skepticism regarding recent Treasury Secretary Paulson’s “market bottom” outlook and the recent up-tick in the Census Department’s New Home Sales.

“I think what that indicates is that most new homebuilders that are large, the public homebuilders, their average product goes anywhere from about $250K up to us which is about $700,000 so obviously the increase [in sales] is taking place below our space. Which means that we’re not out of the woods yet. I took with surprise yesterday and it’s now confirmed today by this analysis when the secretary of the treasury said that we’ve got the hard times pretty much behind us I wondered how many communities he had and where he got that information but I now understand that the information he got hadn’t been pealed away, I guess, to show that it was $150,000 housing. So I would say that we have not got the bad times behind us yet though it could be… you never know.”

When asked about the April year-over-year comparisons getting less negative Toll suggested that favorably comparing against a year that “stinks” is not what he’s looking for.

“As you get further in to a down market, in terms of length of time, the comparisons are going to get better. So that, ultimately, if we stay here for a long period of time, you will see that April sales equaled April sales last year. That’s not what we’re looking for of course. So, I think the statements are a little misleading. The comparisons are good but what you’re comparing to stinks so that’s why your getting unhappiness expressed by the public home builders.”

Ivy Zelman, analyst with Credit Suisse First Boston tweaked Bob Toll in a minor skirmish over Toll’s interest in buying additional land.

Toll: “I would hope that we would increase the land portfolio somewhat from where we are now, we are actively looking and trying to buy… We have raised thresholds because we can and I think we should operate more prudently, more carefully than we did when the market was going up.”

Ivy: “You don’t feel that having almost a 10 year supply of land is enough?”

Toll: “Well, we hope that it’s not 10 years Ivy.”

The complete conference call can be listened to here.

Here are some of the interesting data points from the Q2 release:

Second Quarter Results

• Net income was $36.7 million down 79.0% compared to Q2 2006.
• Pre-tax land write-downs totaled $119.7 million up 897.5% compared to Q2 2006.
• Earnings per share declined 66.7% as compared to Q2 2006.
• Total revenues were $1.17 billion down 18.75% compared to Q2 2006.
• Net signed contracts were $1.17 billion down 25% compared to Q2 2006.
• Quarter end backlog was $4.15 billion down 31.6% compared to Q2 2006.
• Signed contracts was 2031 down 14% compared to Q2 2006.

Current 2007 Projections

• Deliver 6100 – 6900 homes (prior estimate 6000 – 7000).

Existing Home Sales Report: April 2007

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for March showing continued and uniform weakness of the nations housing markets.

Without missing a beat, the new “fill-in” Senior Economist Lawrence Yun continues to suggest that the weakness is indicating stabilization.

“We’ve been anticipating slower home sales because many subprime loan products are no longer available … In addition, increased scrutiny by lenders is stopping risky mortgage origination, which is good for both consumers and the lending community. Fortunately, a wide availability of conventional mortgage products and the 4.5 million jobs created over the past 24 months will help to stabilize the market going forward.”

Additionally, NAR President Pat Vredevoogd Combs continues to attempt to scare buyers into action with the threat of increased interest rates.

“Long-term financing remains favorable, but interest rates are rising … Although some buyers have a wait-and-see attitude regarding home prices, they should consider that rising interest rates later this year could offset a lower sales price when you get down to the monthly payments.”

Looking at March’s Existing Home Sales report should only result in additional confirmation that the nation’s housing markets are continuing to experience weakness with virtually all regions showing considerable declines to median price and sales as well as significant increases to inventory and monthly supply.

Sales are, in fact, down in EVERY region with the majority of declines in the double digits.

Keep in mind that we are now seeing existing home sales declines on the back of last years fairly dramatic declines further indicating that the housing markets are not bottoming as many had suggested last fall.

Below is a chart consolidating all the year-over-year changes reported by NAR in their April 2007 report.

Particularly notable are the following:

• Majority of median prices are down.
• ALL sales are down.
• ALL Inventory and Months Supply show HIGH double digit increases on a year-over-year basis.

A Closer Look at New Home Sales

Let’s take another crack at making some sense of the numbers released in yesterday’s New Home Sales Report.

The most notable figures released in the report were the 10.9% decline in median selling price and simultaneous 16.2% jump in the number of sales.

Revisions notwithstanding, these figures seemed to indicate that declining prices are now driving greater number of sales.

Although it’s likely true that lower prices are, in fact, spurring on sales, it’s important to look at the distribution of sales activity in order to gain a truly accurate sense of how the housing markets are changing.

It’s also important to understand that the “headline” new home sales number is essentially an estimated count of the number of homes sold during a given month regardless of price.

As we all know very well, home prices have increased dramatically in recent years, and new homes, especially in the bubbliest markets, are very expensive.

In order to really understand what’s happening in the market, as well as make the sentiment and results provided by luxury homebuilders like Toll Brothers (NYSE:TOL) and Hovnanian (NYSE:HOV) “jive”, we need to examine the home sales results by particular price ranges.

Luckily, the Census Department also publishes the price range breakdown and sales counts of the home sales that are used to formulate the overall “headline” total home sales number.

First, let’s examine the following chart that shows home sales counts for four separate price ranges since January 2000 (click ALL charts for larger versions).

Note, the data has been smoothed using a six month moving average so as to make the trends a bit more obvious.

Notice that in 2000, the majority of new homes sold were priced at or less than $150,000 and the minority of new homes sold were priced at or above $300,000.

Notice also, that some time in 2005, this relationship reversed.

That is, in 2005, the distribution of home sales exactly flipped, the lowest priced homes showed the lowest number of sales while the highest priced homes showed the highest number of sales.

Although, this change can obviously be explained by a number of factors including increasing prices, changes in buying patterns and builder products, it represents an important shift in the market that may, or may not be fundamental and long lived.

Now, look at the following chart which shows the same four price ranges, unadjusted and un-smoothed, since January of 2006.

Notice that during the course of the housing slowdown, the numbers of homes sold in each price range appears to be beginning to converge.

That is, the number of homes sold in the top two price ranges are trending down while the number of homes sold in the bottom two prices ranges are flat to recently trending up.

This may indicate that the distribution flip that occurred in 2005 and still exists today, is likely in the process of reverting.

Notice also, that April 2007’s data showed the largest simultaneous decline in the top two ranges and “incline” to the bottom two.

This explains why there was such a dramatic increase in sales and simultaneous decline in median price.

There was a surge in the number of new homes sold below $199,999 and a slump in homes sold at or above $200,000.

Another way to look at this data is to visualize the “market share” of homes sold per each of the four price ranges.

The following chart shows the share of each price range out of a total of 100% of all unadjusted new home sales.

Notice again how the market share has changed since 1999 when the lowest priced homes showed the largest percentage of home sales and the highest priced showed the smallest.

Also note that in April 2007 (all the way to the right), the bottom three ranges are increasing in market share while the share of homes sold at or above $300,000 is decreasing.

Aside from all this, let’s remember that, in general, new homes, particularly the “McMansions” commonly seen in the luxury developments of the nations bubbliest areas, are very expensive.

In order to really make the new home sales numbers “jive” with the outlook and results reported by home builders like Toll Brothers (NYSE:TOL), Hovnanian (NYSE:HOV), and KB Home (NYSE:KBH) we are going to need look ONLY at the top price range of homes priced at or above $300,000.

As you can see, there was a considerable expansion of homes sold in the top price range which peaked in August of 2005 and has been heading down precipitously ever since.

New Home Sales: April 2007

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for April showing an unexpected “surge” in new home sales.

Probably the most notable figure in today’s report was the 10.9% decline to the median home price, the largest decline since December 1970, further reflecting the weakness brought on by the inventory oversupply and continued reduced demand.

It’s important to note, however, that with this report the Census Department revised every month back to January 2005 as formally imputed permit data, a factor in the new home sales estimate, was replaced with actual data.

This, as well as other factors, effected both sales and price data, including a 22% downward revision to the March 2007 reported median home price providing further evidence that some caution should be used when interpreting this report.

The following charts illustrate the revisions to sales and median price published in today's report (click for larger versions).

As with prior months, on a year-over-year basis sales are still declining in the double digits at 10.6% below the sales activity seen in April 2006.

It’s important to keep in mind that these declines are coming on the back of the significant declines seen in 2006.

This should not be understated as it is clearly showing continued and even accelerating weakness to new home sales.

The following charts show the extent of sales declines seen since 2006 as well as illustrating the further declines 2007 is showing on top of the 2006 results (click for larger versions)

Note that the last chart essentially combines the year-over-year changes seen in 2005 and 2006 and shows sales trending down precipitously as compared to the peak period.

Look at the following summary of today’s report:

National

• The median price for a new home was down 10.9% as compared to April 2006.
• New home sales were down 10.6% as compared to April 2006.
• The inventory of new homes for sale declined 4.8% as compared to April 2006.
• The number of months’ supply of the new homes has increased 4.8% as compared to April 2006.

Regional

• In the Northeast, new home sales were up 43.1% as compared to April 2006.
• In the West, new home sales were down 25.4% as compared to April 2006.
• In the South, new home sales were down 3.4% as compared to April 2006.
• In the Midwest, new home sales were down 28.1% as compared to April 2006.

Mad As Hell

In an impassioned yet somewhat contrived and disingenuous “finger pointing” appeal to the National Press Club, the Mortgage Bankers Association’s Chairman John Robbins yesterday placed the blame of the subprime meltdown squarely at the feet of “unethical” predatory lenders while simultaneously insisting that the extent of the damage has been overblown.

“I know the good my company, my employees and thousands of my fellow mortgage bankers have done for families, for communities, and for this country. Frankly, Id imagine my brief tenure as Chairman of the Mortgage Bankers Association would be celebratory. One part victory lap, one part implementation of initiatives with a lasting impact on the industry I so cherish. Yet I stand before you mad as hell. I have to be angry. It would be too depressing to accept that a very few, unethical people, can give my profession, and me, a black eye.”

Robbins goes on to use passionate words for everything from the role of Mortgage Bankers in promoting home ownership to immigrants utilizing subprime loans to get their share of the American Dream.

“Many of the people in this category are not mere victims of unscrupulous lenders. They’re smart people who took a calculated risk to get into a home, all along planning to refinance before the big jump in their ARM. We can’t leave these people twisting in the wind. They were practicing financial planning and attempting to take advantage of the opportunities they saw in the future. They were betting on themselves. To keep their financing options open, we must avoid a credit crunch.”

Yet when addressing real estate speculators, his tone quickly changed.

“It’s clear that our first steps are to help those that are in trouble. We mean homeowners living in their own homes. We’re not for rescuing real estate speculators. Blanket forbearances that bails out investors could actually drive up delinquency. Some might view it as a way to get out of their obligations… Even the talk of blanket forbearances could spur a surge in delinquencies.”

When addressing the question of who was responsible for the current state of the subprime market, Robbins risks an association “battle royal” with the National Association of Mortgage Brokers by pointing the points the finger squarely at “the short term folks” who care only about “their commission”.

“We need to identify the problem… unethical people. They’re responsible for this mess. The short term folks. People who get a commission when the deal happens. For them it’s the number of loans that count. Good loan, bad loan... who cares. For them, it’s all about their commission. … For the people who caused this problem, there’s no such thing as a lifetime customer. The closest they get is someone you refi every six months until they sink. They, not people with marginal credit, are the ones that need to be stopped. Frankly, it’s too easy to hang a shingle out and call yourself an expert in mortgages. We need licensing of brokers with a threshold that will weed out those unwilling to be responsible.”

In a particularly emotional and sappy portion of his address, Robbins recounts what it means to him to be a mortgage banker.

“Their stories take me back to one of my very first originations. The Realtor had left the keys to the house with me and asked if I could drop them off to the buyers once all the paperwork was done. Well, I went to their apartment, and we were sitting around a little Formica table… bright red. And I handed them both the keys at which point they both started crying. They said they never imagined they would own their own home. That was 37 years ago and you know it just never leaves you. There isn’t a day that goes by that I don’t stop and think about that scene going on thousands of times across this country. And that’s why, despite my temporary black eye, I’m proud to be a mortgage banker. Thank you.”

Later in the Q&A portion of the appearance, Robins is asked how immigrants in the past received financing to buy homes prior to the boom in subprime lending.

“Those that could afford to do so, and not all could, accumulated a traditional 20% down, waited years, and years, and years to obtain home ownership when they had the possibility to do that. But then home ownership was for the wealthy and the powerful not for the masses.”

Here Robins continently forgets that until recently the national home ownership rate had traditionally hovered at about 65%, hardly limited to the wealthy and powerful.

Furthermore, it has only been during last ten years, with lending running footloose and fancy free, that an extra 5% of Americans have been draw into home ownership many without down payments and with volatile and exotic affordability loan products.

Watch the entire National Press Club address on BNN!

Boo Hoo?

Oh.. Boo Hoo.. That mean Lesley Stahl hurt the wittle twade organization’s wittle feewings…

Or so went the National Association of Realtors (NAR) sad, feeble smokescreen of a response to last Sunday’s 60 Minutes segment.

Well before you get all teary, let me remind you that the National Association of Realtors is not only Americas largest trade organization but also the most wealthy and influential Political Action Committee (PAC).

As such, they are routinely called to Capitol Hill to provide “important” testimony as well as certainly calling upon on our representatives (at least the ones they supported with campaign donations) to apply the best influence that money can buy.

Stated plainly, the NAR is far more powerful than any individual American using their campaign contributions and ongoing lobbying to virtually ensure that their interests are represented well in excess of the average consumers.

What happens if there is conflict between what would be in the best interest of the American consumer and what would be in the best interest of the NAR?

Ill let you decide.

The 60 Minutes segment merely stated the obvious, questioning the sense of the traditional 6% broker commission as well as pointing out that in the age of the Internet, the traditional real estate broker services are going the way of the buggy whip.

There were no new revelations in the segment as these are the very same issues many average consumers have asked themselves in recent years after seeing the obvious disconnect between the standard 6% commission Realtors have established and the actual work performed.

Yes, it’s true that, as NAR states, commissions are always negotiable and in fact average more like 5.1% nationally but one should use caution before jumping to the conclusion that Realtor commissions represent a free and efficient market.

The reality is that NAR has worked to prevent competition from limited service brokers who would otherwise charge minimal flat fees or commissions at or below 4% in exchange for services that generally assist sellers in listing their home with the MLS as well as providing a range of other Internet based marketing efforts.

Keep in mind that this attempt to stifle competition is really an attempt to prevent technology from doing what it does best, that is, bringing new and innovative services to the market that dramatically increase the efficiency of existing processes.

As we know very well, this efficiency is often translated to savings in the cost involved of a particular process which can be passed on to the consumer through free and unfettered competition.

Therein lies the real issue for the NAR.

The Mother of all “disruptive” technologies, namely the Internet, is bearing down on the NAR and instead of embracing the change and innovating, they are fighting it tooth and nail in an effort to maintain the status of the traditional full service broker model.

This is certainly NOT in the best interest of the consumer but is this really in the best interest of the association members?

You brokers out there ought to ask yourselves what services you have found to be most impressive recently.

The schlocky listing sites hosted by many full service agencies or the innovative services such as Zillow.com, ZipRealty.com, and Redfin.com.

Remember, it’s your future that is in flux here.

You can either choose to join the trend that will inevitably yield a host of new services and models for transacting the business of real estate, or fight it and likely be left behind in an ever dwindling cohort of “old timers” attempting to provide defunct services.

The complete 60 Minutes segment as well as Lesley Stahl’s post-segment Q&A can be viewed now on BNN!

housing+bubble realtor national+association+of+realtors housing bubble decline existing+home home+sales sales median median+home+price David+Lereah NAR mortgage interest+rate economy recession

Copyright © 2007
PaperMoney Blog - www.paperdinero.com
All Rights Reserved

Disclaimer

Toll’s Dirty Dance

Ouch!

Things have not gone well for Toll Brothers (NYSE:TOL), certainly not nearly as well as CEO Bob “Dancing on the Bottom” Toll had anticipated as 2006 drew to a close.

Back then, an optimistic Toll had suggested that the housing downturn may likely have bottomed.

“Fifteen months into the current slowdown, we may be seeing a floor in some markets where deposits and traffic, although erratic from week to week, seem to be dancing on the bottom or slightly above.”

Furthermore, at that time Toll Brothers announced that they budgeted an additional $60 million to account for all pretax write-downs for the entire year of 2007, an allotment easily surpassed by the $96.9 million actually required for only the first quarter of 2007.

Now, Toll has announced an additional $90 million to $130 million in pretax write-downs for just Q2 2007!

That brings the total of pretax write downs to somewhere between $186.9 million to $226.9 million for just the first half of 2007, a truly astounding number compared to the $152 million in write-downs taken in all of 2006.

As for the dancing, Toll now suggests that things have taken a turn for the worse.

“Virginia came back… remember when I had said, either last quarter or the quarter before that that we were dancing off the bottom.. or something opaque like that, in the northern Virginia, Maryland, Washington DC market. The market continued to improve, not much but a little bit, and [now] it’s back down a little bit.”

As for additional impairment write-downs soon to come from obviously poorly purchased property such as a very large parcel Toll purchased on the outskirts of Las Vegas in January 2006, Tool responded:

“The real answer is, you haven’t reached the point where can prove to your auditors that the value isn’t there and therefore has to be written down in order to show a profit. I mean, you could argue all day that Vegas is slow and this property is going to come on the market in 09 and if things are in 09 as they are today, when we open it, we’ll be hard pressed show a profit and they’ll want to get vary exact and say ‘hard pressed quite do it’. You’ve got to show that you’re below the line.”

When asked about his outlook for the housing market in Florida, Toll replied:

“Nice place to play golf in the winter, but not a great place to sell homes right now. There are probably great opportunistic land deals in Florida, the problem is, sometimes half-price ends up to be twice-price.”

When asked if he thought there would likely be additional future reductions of “head-count” (layoffs) Toll responded:

“I prefer to call it overhead, and the answer is yes. We haven’t stopped, but we will be looking even more seriously at reducing overheads where sales paces are reduced.”

When asked to “grade” the different markets across the nation, Toll responded:

“In our northern territories, Massachusetts and Rhode Island are ‘F’. Connecticut is a ‘B+’. New York exurbs are ‘B+’, New York urban which for us is Queens, Brooklyn and Manhattan are a ‘B+’ if not an ‘A’. Jersey City and Hoboken are a ‘B+’. New Jersey suburbs, oddly enough when you juxtapose them against the New York suburbs ... you got an ‘F’, it may be due to the tax situation in New Jersey, Michigan is an ‘F’. Chicago is surprisingly still and ‘F’ market. Minnesota is a ‘C-‘ market which is a whole lot better than it was. The Philadelphia suburbs is a ‘B’ market for us. The Poconos is an ‘F’ market. The state of Delaware is a ‘C+’ market. The mid-Maryland shore, as I said earlier, is an ‘F’ market. Washington DC, northern Virginia is probably a ‘D+’ market. Raleigh is a ‘B’ market. Charlotte is a ‘B’ market. South Carolina is a ‘D’ market as in dog. Florida, central market, Orlando, we sell a lot of homes, we get the same homes back, we sell the same homes, we get the same homes back, it’s a very hard market to figure. People, I guess are renting them without ever moving in. That’s and ‘F’ market. Florida east coast is an ‘F+’ market. Florida north, Jacksonville, pretty much an ‘F+’ market. Tampa is an ‘F’. Florida on the west coast is an ‘F’. Texas is good, Austin is a ‘B’ market, Dallas and San Antonio, we’ve got a ‘C’ market because we haven’t got our product up and running as we should yet so it’s only a ‘C’ market. I suspect it’s really a ‘B’. Northern California averages to be a ‘C’ market for us, there are some pockets that are ‘B’ and some that are ‘D’. California southern market is a ‘C’ market for us. California Palm Springs is a ‘C’ market for us. Arizona … I would rate as a ‘D-‘. Vegas is definitely an ‘F’. Reno is an ‘F’. Colorado is a ‘C’.”

During the conference call, there is extensive discussion on Toll Brothers outlook for impairments as well as their methodology and criteria used to determine and take them which can be listened to in its entirety here.

Here are some of the interesting data points from today’s preliminary release:

• Total revenue totaled $1.17 billion, down 19% as compared to Q2 2006
• Quarter end backlog totaled $4.15 billion, down 32% as compared to Q2 2006
• Net signed contracts totaled $1.17 billion, down 25% as compared to Q2 2006
• Pre-tax land write-downs totaled between $90 million and $130 million
• Q2 cancellations totaled 384 compared to 436 in Q1 2007

Remember, these results are preliminary and Ill post a more complete summary of Tolls Q2 results when they become available on May 24.

housing+bubble housing bubble realtor sub-prime subprime home+builder homebuilder bob+toll toll+brothers economy recession interst+rates mortgage

Copyright © 2007
PaperMoney Blog - www.paperdinero.com
All Rights Reserved

Disclaimer

Inventory Tool Take 2

Today, I updated the Inventory Tracking Tool to better allow you to visualize the changes to an areas inventory.

I added the ability to visualize the average monthly inventory as well as the daily inventory over the full period that the tool has been operating.

The tool now includes the following charts:

• Today’s Inventory - Today’s current inventory broken down to over 40 separate price ranges.
• Monthly Inventory – The average inventory for each month beginning with the month that the tool started collecting to now.
• Daily Inventory – The total daily inventory for each day beginning with the month that the tool started collection to now.

It’s important to note that data is collected as users request it so your town may or may not have a well populated data-set depending on how frequently you or others use the tool to check the data.

Most if not all of the most popular towns and metro areas are checked virtually every day so their data is mostly complete.

You can check out the tool here.

housing+bubble housing bubble realtor national+association+of+realtors NAR lereah economy recession interest+rates mortgage loan ARM lenders bernenke greenspan

Copyright © 2007
PaperMoney Blog - www.paperdinero.com
All Rights Reserved

Disclaimer

Adding a Little Color to Countrywide

On Thursday, the executives at Countrywide Financial (NYSE:CFC) held their conference call to discuss the results for the first quarter of 2007 showing net earnings dropping 37% as a result of swelling delinquencies and growing impairment charges.

To combat the slide, Countrywide is taking measures to tighten credit standards as well as increasing its pricing to account for additional future risks.

David Sambol, President and COO stated:

“In terms of the adjustments that Countrywide has made in response to market conditions, I mentioned that industry guidelines had been tightened. Well we have also significantly tightened our own credit guidelines and programs. For example, ‘materially restricting’ 100% loan-to-value financing. Carving back, materially, reduced documentation programs… particularly on the high LTVs. Eliminating subprime second mortgages which have particularly been impacted by liquidity and loss of value in the market.”

It’s interesting to note that although Countrywide is not completely eliminating the 100% LTV subprime loans, they are restricting activity to a very small percentage as well as limiting other similarly risky products.

The following lists the changes to subprime lending standards implemented recently at Countrywide:

• 100% LTV will be limited to a just 3% of the subprime production compared to 24% in 2006.
• ARM 100% LTV will be limited to less than 2% of the subprime production compared to 90% in 2006.
• Subprime Second Liens will be eliminated entirely.
• No-Low Documentation loans will be limited to less than 2% of the subprime production compared to 35% in 2006.
• Average LTV for the subprime production will be brought to less than 80% from 85% in 2006.
• Subprime loans to first time homebuyers will be reduced to 5% from 22% in 2006.
• Subprime loans, as a percentage of total purchase, will be brought to less than 20% compared to 60% in 2006.

A particularly interesting outcome of these changes lies in the elimination of the Subprime second liens as these were typically used for the 20% “piggyback” of the 80/20 100% LTV products.

As Sambol puts it:

“As I mentioned, we are no longer doing subprime seconds, in part because of the lesser investor demand for that product. And most of those seconds represented the 20% piece of a 100% financing loan, the 80/20 that you might be familiar with that were very popular in the subprime market. And again, if you recall, we have materially curtailed our program such that we expect to do very few subprime 100% financing going forward.”

As for pricing, Sambol adds that the latest rate sheets more accurately value risk as well as simply reflect the less competitive market environment that exists now after many industry players have gone bankrupt.

“And then pricing of new loans that we are originating have also been adjusted to provide for a more conservative loss assumptions, higher yields on our retained interest from future originations and greater origination margins as well.”
“We’ve seen credit occurring in the industry and we have tightened our guidelines somewhat as well on the Alt-A side. And I would point out that our rate sheets and our pricing fully reflects all the widening seen in the markets.”

“We are now pricing our rate sheets to provide for profitability in each of our channels. Where I will tell you that in 2006, for much of 06 and 2005, competitive conditions were such that in certain of our segments we were pricing to break even, it was that tight. But with the exit of the market of so many players, we and the rest of the industry have materially increased rates and starting as early as the first quarter we expect to see each of our production divisions, our retail subprime operations, wholesale and the little bit we still do on the correspondents side generating positive margins.”

In fact, the pricing for subprime loans seems to have increased substantially as seen by comparing this Countrywide rate sheet for Massachusetts dated March 12 to the following one dated April 16.

When discussing the impairment charges accounted for in Q1, Sambol states:

“The impact both of write downs to our subprime investment and to our production profitability in the first quarter stemming from the turmoil in the subprime market. We have quantified that the quarter-over-quarter impact was approximately $400 million.”

On page 7 of the supplemental presentation associated to the conference call there is an interesting footnote on the “Impairment of retained interests” item that reads “Change in impairment of retained interests includes $53 million from other 1st lien residuals with loan features that are similar to subprime” seemingly indicating that a significant percentage of the impairment charges came from prime loans.

Diging into the Q1 results it appears that the actual impairment numbers were a little heavier than in Sambol’s presentation, particularly the prime loan charges.

“Loan Servicing sector pre-tax earnings were adversely impacted by $429 million in impairment charges against retained interests. Impairment charges of $231 million were related to subprime and similar retained interests, while $135 million was related to retained interests on home equity lines of credit extended to prime borrowers. These impairment charges were driven by increased estimates for future losses on loans underlying the related securities as well as increased market yield requirements. In addition, the Company incurred $63 million in impairment on other retained interests where Countrywide does not retain credit risk. This impairment related to increased market yield requirements.”

All in all, the $429 million impairment charge has swelled 256% as compared to Q1 2006 $120 million charge.

Later in the Q&A portion of the conference call, CEO Angelo Mozilo was asked to elaborate on Countrywide’s recent switch over to an OTS regulated thrift which was a change that Mozilo to strongly denied had anything to do with sidestepping new Federal Reserve regulations.

“That decision was made because of, I think, two primary reasons. One is that the OTS has a historical housing mission and that matched up with our mission much better than the OCC and the Fed. We had no particular complaints about the Fed at all, nor the OCC. We believe we enjoyed a solid relationship with them but the practical matter was that when we began to examine where this company was going over the next decade and beyond, we did not see ourselves in any business that would require an OCC charter and Fed supervision. We are not going to be a lender in commercial loans in Japan or any of those kinds of things so the businesses that we planned to be in matched up perfectly with the authorities of the OTS. The second reason which was tied to that is that it is much more difficult for, at least for us, to manage and deal with two regulatory bodies that from time to time went in two different directions, than it was to deal with a single regulator that examined the bank and supervised the parent.”

When asked about his outlook for the market and home prices as it relates to Countrywides business, Mozilo replied:

“I think, bottom line, it’s very difficult to determine where [home] prices are going. It would certainly, based upon our view of where the world is today, increased foreclosures, as that comes on to the market we’ve got to work through that. During that period of time, in certain areas of the country values will go down. Certain unique areas of the country, values will stabilize and others, although few, where values will continue to climb but not at the rate they did before so it’s sort of a mixed bag.”

The entire conference call can be listened to here.

housing+bubble housing bubble countrywide+financial lender mortgage ARM loan bernanke greenspan economy recession realtor interest+rates

Copyright © 2007
PaperMoney Blog - www.paperdinero.com
All Rights Reserved

Disclaimer

New Home Sales: March 2007

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for March showing both significant downward revisions to the results for every month since November 2006 as well as continued weakness for the March results.

Hopes for a bottom to the new home market are now surely dashed as March showed that sales were down across virtually every region, most notably the West, as well as a 27.9% increase to the months supply as compared to March of 2006.

Easily the most notable aspect of the report was the enormous downward revisions to November and December of 2006 and January and February 2007 helping to push their respective year-over-year declines further into the double-digits.

It’s important to keep in mind that these declines are coming on the back of the significant declines seen in 2006.

This should not be understated as it is clearly showing continued and even accelerating weakness to new home sales.

The following charts show the extent of sales declines seen since 2006 as well as illustrating the further declines 2007 is showing on top of the 2006 results (click for larger versions)

Note that the last chart essentially combines the year-over-year changes seen in 2005 and 2006 and shows sales trending down precipitously as compared to the peak period.

Look at the following summary of today’s report:

National

• The median price for a new home was up 6.36% as compared to March 2006.
• New home sales were down 23.5% as compared to March 2006.
• The inventory of new homes for sale declined 1.4% as compared to March 2006.
• The number of months’ supply of the new homes has increased 27.9% as compared to March 2006.

Regional

• In the Northeast, new home sales were up 18.0% as compared to March 2006.
• In the West, new home sales were down 29.6% as compared to March 2006.
• In the South, new home sales were down 25.7% as compared to March 2006.
• In the Midwest, new home sales were down 19.3% as compared to March 2006.

housing+bubble housing bubble realtor real+estate NAR home+sales economy recession interest+rates bernanke greenspan

Copyright © 2007
PaperMoney Blog - www.paperdinero.com
All Rights Reserved

Disclaimer

Existing Home Sales Report: March 2007

Not so fast Real Estate-Wall Street Bulls.

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for March showing the LARGEST MONTHLY DROP IN HOME SALES SINCE JANUARY 1989.

Of course, NAR Chief Economist David Lereah continues to attempt to blame winter weather conditions as well as fallout from the subprime meltdown for the current drop in sales.

“For the last couple months we’ve been expecting a weather ‘hit’ on home sales finalized in March, … We also may be seeing some losses as a result of the subprime fallout. … It’s too early to measure a significant impact from tighter lending standards, which should moderately dampen activity, but we’re still looking for existing-home sales to gradually improve during the last half of 2007”

Additionally, NAR President Pat Vredevoogd Combs continues to attempt to goad unknowing home buyers into making their purchase at the top of a dramatically deflating market.

“It’s a good time to buy, in part, because home buyers are not pressured to make quick decisions,” Combs said. “We’re in a window of low interest rates with a plentiful supply homes on the market and flat prices in most areas. First-time buyers now have more power to negotiate with sellers for help on downpayment or closing costs.”

Looking at March’s Existing Home Sales report should only result in additional confirmation that the nation’s housing markets are continuing to experience weakness with virtually all regions showing considerable declines to median price and sales as well as significant increases to inventory and monthly supply.

Keep in mind that we are now seeing existing home sales declines on the back of last years fairly dramatic declines further indicating that the housing markets are not bottoming as many had suggested last fall.

Below is a chart consolidating all the year-over-year changes reported by NAR in their March 2007 report.

Particularly notable are the following:

• Majority of median prices are down.
• Majority of sales are down.
• Inventory and Months Supply show double digit increases on a year-over-year basis.

housing+bubble realtor national+association+of+realtors housing bubble decline existing+home home+sales sales median median+home+price David+Lereah NAR mortgage interest+rate economy recession

Copyright © 2007
PaperMoney Blog - www.paperdinero.com
All Rights Reserved

Disclaimer

New Residential Construction Report: March 2007

Popularly reported as an “unexpected rise” in housing starts, today’s New Residential Construction Report continues to indicate significant weakness in the nations housing markets and for residential construction.

In particular, housing permits, the report most leading of indicators, again indicates substantial weakness in future construction activity both nationally and across every reported region.

As predicted, housing completions are now declining significantly on a year-over-year basis indicating that the contraction in construction activity may soon be reflected by a substantial drop-off in construction related jobs as older projects reach completion and newer projects start at a far slower pace.

Now, we are well within the period in which permits and starts began to show significant weakness last year so the current double-digit year-over-year declines to those measures unequivocally indicate that the housing market has not yet stabilized.

Here are the statistics outlined in today’s report:

Housing Permits

Nationally

• Single family housing permits up 1.4% from February, down 28.4% as compared to March 2006

Regionally

• For the Northeast, single family housing up 1.3% from February, down 35.7% as compared to March 2006.
• For the West, single family housing permits up 2.1% from February, down 22.7% as compared to March 2006.
• For the Midwest, single family housing permits up 19.5% from February, down 29.1% as compared to March 2006.
• For the South, single family housing permits down 3.6% from February, down 29.6% compared to March 2006.

Housing Starts

Nationally

• Single family housing starts up 2.0% from February, down 24.6% as compared to March 2006.

Regionally

• For the Northeast, single family housing starts down 7.8% from February, down 35.2% as compared to March 2006.
• For the West, single family housing starts down 5.9% from February, down 26.7% as compared to March 2006.
• For the Midwest, single family housing starts up 35.9% from February, down 17.2% as compared to March 2006.
• For the South, single family housing starts down 0.5% from February, down 24.1% as compared to March 2006.

Housing Completions

Nationally

• Single family housing completions up 1.5% from February, down 28.9% as compared to March 2006.

Regionally

• For the Northeast, single family housing completions down 16.2% from February, down 35.8% as compared to March 2006.
• For the West, single family housing completions up 17.8% from February, down 28.3% as compared to March 2006.
• For the Midwest, single family housing completions up 7.6% from February, down 36.0% as compared to March 2006.
• For the South, single family housing completions down 3.8% from February, down 25.9% as compared to March 2006.

Keep in mind that this particular report does NOT factor in the cancellations that have been widely reported to be occurring in new construction.

housing+bubble real+estate new+construction housing+starts housing realtor permits home+sales cancellations residential decline MarketWatch

Copyright © 2007
PaperMoney Blog - www.paperdinero.com
All Rights Reserved

Disclaimer

S&P/Case-Shiller/Futures Tool Tutorial

I’ve been watching the use of the S&P/Case-Shiller/Futures Tool for about a week now and I thought that putting together a short tutorial might help others in getting the most use out of it.

First, I’m no expert on housing futures or any futures for that matter.

If you want to know more about how to trade housing derivatives or just want to follow the goings on of housing derivatives market, check out the Housing Derivatives Blog.

It’s important to keep in mind that the tool displays BOTH the "actual" reported values of the S&P/Case-Shiller Indices (CSI) as well as the "expected" future values given by the daily trading of housing futures at the Chicago Mercantile Exchange (CME).

The CME housing futures are based on the CSI so the futures contracts essentially predict where the indices will be at set points off in the future.

Since the CSI is derived from actual home sales information, the indices are an analogue of changes to actual home prices.

If the future expectations, given by the futures contracts, are for a decline of 5% to a particular CSI, then the prediction is essentially that home prices will decline 5% in the associated housing market.

Keep in mind that the CSI are now regarded by economists, traders and financial institutions as the most accurate home price indices available.

Tool Overview

By default, the tool displays the complete Composite CSI series which ranges from 1987 to the present day (see the view directly below .. click for actual chart).

Additionally, it shows the year-over-year changes to the series on a monthly basis, i.e. the percent change to index values when comparing a given months result against the same month the prior year.

The left y-axis is labeled with the year-over-year percentage change value and the right y-axis is labeled with the index value.

That is the reason for the “empty” columns for the first year of each series as there is not a prior year of data to compare against.

As it stands, this “default” view is useful for seeing how the overall index has changed throughout its existence and for gauging how abnormal the latest run-up of home prices have been given a fairly lengthy historical context but for viewing the future predictions we need to narrow the view down to just the last year or so and add the futures contracts we wish to see.

The following instructions will provide a step-by-step guide for manipulating the “default” view of the chart into the view you see below (click for the actual chart).

To narrow the view, simply scroll down to the section titled “Date Range” and select a starting year of 2006.

Now click the “Update Chart” button (found just under the chart) and you will see that the chart now only includes monthly results from 2006 and 2007.

If you don’t like the columns of year-over-year data (they may seem a bit noisy), you can simply turn them off by un-checking the “Compare year-over-year” checkbox under the “Comparison” section and then click the “Update Chart” button again.

Personally, I like the year-over-year data so I leave that feature turned on.

Now, to add the futures predictions to this chart, scroll down to the “Futures Contracts” section and check the checkboxes next to the contract expirations you wish to see and then click the “Update Chart” button again.

What you now see is a long line running vertically through the chart separating the portion of “actual” reported CSI values on the left and “expected” future values on the right.

Keep in mind that each tradable futures contract has a specific expiration date for which the future predictions are essentially being made.

So, if you check the 02/25/2008 checkbox, you are essentially asking the question “What do the futures traders expect this index’s value to be on 02/25/2008.”

Since the index reflects actual home price data, this prediction should match actual changes to home prices in that particular market.

Now, if you select multiple contract expirations, you can see both the long term and short term predictions simultaneously.

Additionally, if you have selected the year-over-year option you are actually going to see percentage change columns that reflect the “expected” future results against the “actual” results of 2006.

Note, to connect the points between the last “actual” CSI value as well as each “expected” future contract value, I simply extrapolated the linear function for each given set of points so the chart values “in between” each set of points are merely functional estimates and should not be interpreted too literally.

You can also display multiple metro indices on the same chart view but keep in mind that only Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, Washington DC, and the Composite indices have associated futures trading so if you are looking at futures, the other indices will not display results.

That’s it!

Ill be updating the tool periodically to add more functionality and to fix bugs but as usual, please feel free to ask questions or report bugs by either commenting on this post or emailing me directly.

housing+bubble housing bubble realtor national+association+of+realtors NAR lereah economy recession interest+rates mortgage loan ARM lenders bernenke greenspan

Copyright © 2007
PaperMoney Blog - www.paperdinero.com
All Rights Reserved

Disclaimer

Mozilo’s Island

Given the relative strength shown by Countrywide Financial (NYSY:CFC) throughout some of the worst initial tumult of the subprime meltdown, one wonders whether CEO Angelo Mozilo can continue to maintain his island paradise or whether it will buckle under the strain leaving him looking more like Herve Villechaize stamping angrily from the shores of Lilliput.

This month may mark a bit of a turning point for Countrywide as it faces two significant challenges to its buoyancy.

First, on Thursday afternoon, it was reported that a lawyer representing The Louisiana Municipal Police Employees Retirement System, a Countrywide Financial shareholder, successfully argued for the right to move forward on an options backdating probe that will see an additional trial for the Countrywide “books and records” on April 18.

To be fair, it appears that the The Louisiana Municipal Police Employees Retirement System is a fairly active shareholder, suing a whole host of other public companies for various indiscretions including options backdating.

Furthermore, on April 26, Countrywide will release its first quarter 2007 earnings and host a conference call to review the results.

The results are particularly important as it will shed some additional light on the extent to which Countrywide has been impacted by the subprime meltdown as well as the even more important spillover effects on their “pseudo-prime” business.

As a possible harbinger of things to come for Countrywide, competitor American Home Mortgage reduced their expectations for first quarter results in a pre-announcement last Friday citing significant pressure coming from their Alt-A loans.

“A disproportionate share of the Company's non-performing loans are repurchased Alternate "A" loans. The Company has ceased offering those types of Alternate "A" loans that have resulted in a high proportion of its repurchases, and consequently believes the portion of delinquency related charge resulting from repurchases will diminish toward year-end.”

housing+bubble housing bubble countrywide+financial lender mortgage ARM loan bernanke greenspan economy recession realtor interest+rates

Copyright © 2007
PaperMoney Blog - www.paperdinero.com
All Rights Reserved

Disclaimer

Charting the Future!

Today, I updated the S&P/Case-Shiller (CSI) Index Tool to fix a bunch of bugs as well as adding some interesting new functionality.

First, I added a year-over-year comparison option that displays the percentage change on a year-over-year basis for each reported month.

This allows you to see all the really impressive appreciation that was racked up during the run-up years as well as the more recent and equally as impressive depreciation occurring in many markets.

Las Vegas and Phoenix, for example, are truly bizarre! … 50% rates of appreciation out of thin air.

But the coolest new feature is the “futures view”.

As you many already know, the Chicago Mercantile Exchange (CME) now hosts housing futures trading (for an excellent source of housing futures information read the HousingDerivatives blog who’s blogger kindly helped me conceive of and implement this new feature) based on the S&P/Case-Shiller index.

Every day the CME releases a settlement statement with the current values (ask, bid, settle, etc) for the futures contracts that trade for the Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, and Washington DC as well as the Composite index series.

The tool now captures those daily values and incorporates them into the chart view as additional months of data “beyond” the last actual reported month (currently January 2007) of the CSI.

This way, you can see what traders are predicting will happen to home prices as far out as a year in the future.

Ideally, if the market is accurate, it should prove to be a good analogue of what will actually occur.

Remember, the futures data is updated daily so the accuracy will should become better as we get closer to the contract dates.

As always, let me know if you notice any bugs or if you have any additional questions.

housing+bubble housing bubble realtor national+association+of+realtors NAR lereah economy recession interest+rates mortgage loan ARM lenders bernenke greenspan

Copyright © 2007
PaperMoney Blog - www.paperdinero.com
All Rights Reserved

Disclaimer