Constructing Capitulation: July 2007

Looking back at July’s results (released throughout August) it’s obvious that the nation’s housing markets are continuing to show significant weakness, even during what, for most measures, is generally the seasonal peak in activity for the year.

Slowing demand and the now undeniable mortgage-credit-financial crisis are continuing to weigh heavily on housing, setting up for what seems fairly certain to be a new leg down and ultimately a severe housing recession.

The preliminary GDP report for Q2 2007 continued to show a significant drag coming from the decline in residential fixed investment as well as significant revisions to past GDP results better demonstrating the pronounced effects this drag has had for the last four quarters.

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

The housing weakness also continues to clearly show up in retail sales as consumer’s pullback on spending for some of the most discretionary of goods.


The National Association of Realtors (NAR) released their sixth consecutive downward revision to their annual home sales forecast for 2007 putting the current outlook far below the “rose colored” initial predictions from the start of the year.

NAR Chief Economist Lawrence Yun now suggests that the demand is still out there but it’s just being “delayed”.

Homebuilder confidence continues to decline to near multi-decade lows with respondents indicating that estimates of “present” and “future” conditions as well as buyer traffic continues to slump.

The Census Department’s New Residential Construction Report which continues to indicate horrendous weakness in the nation’s housing markets and for residential construction showing substantial declines on a year-over-year basis to single family permits both nationally and across every region.

The Census Department’s New Residential Home Sales Report that, despite all the traditional media’s “unexpected increase” coverage, continues to show weakness as well as significant downward revisions to April and May’s results.

As with prior months, on a year-over-year basis sales are still declining significantly at 10.2% below the sales activity seen in July 2006.

NAR’s Existing Home Sales Report showing additional confirmation that the nation’s housing markets are continuing to experience weakness with EVERY regions showing considerable declines to sales, across every product (single family, condos), as well as continued increases to inventory and monthly supply.

The June 2007 results of the S&P/Case-Shiller Indices are continued to show weakness for the nation’s housing markets with 15 of the 20 metro areas tracked reporting significant declines.

Topping the list of decliners on a year-over-year basis was Detroit at -11.01%, Tampa at -7.70%, San Diego at -7.30%, Washington DC at -6.96%, Phoenix at -6.55, Las Vegas at -5.09%, and Miami at -4.79%.

Furthermore, comparing the last major downturn in the late 80s and early 90s to the current data may indicate that the current housing downturn is in its infancy with year-over-year declines only just having materialized in the last eleven months.

The Census Department’s Construction Spending report for June again demonstrated the significant extent to which private residential construction spending is contracting.

With the weakening trend continuing, total residential construction spending fell -16.11% as compared to July 2006 while private single family construction spending declined by a grotesque -25.32%%.

Key Report Details:

• The seasonally adjusted annul rate of private residential construction spending has now dropped 23.27% from the peak set back in February 2006.
• Overall private residential construction spending dropped -16.11% as compared to July 2006.
• Single Family residential construction spending dropped 25.32% as compared to July 2006.

The following charts show changes to construction spending (click for larger version):

The Fed For The Record: May FOMC Minutes

The Federal Reserve Board yesterday released the minutes of the May Federal Open Market Committee (FOMC) meeting erasing any doubt that they had initially underestimated the significance of the current housing decline.

From yesterday’s released minutes:

“The incoming data on new home sales and inventories suggested that the ongoing adjustment in the housing market would probably persist for longer than previously anticipated. In particular, the demand for new homes appeared to have weakened further in recent months, and the stock of unsold homes relative to sales had increased sharply.

Nevertheless, most participants agreed that, although the level of inventories of unsold homes that homebuilders desired was uncertain, the correction of the housing sector was likely to continue to weigh heavily on economic activity through most of this year--somewhat longer than previously expected.

Participants remained concerned that the housing market correction could have a more pronounced impact on consumer spending than currently expected, especially if house prices were to decline significantly.

The Committee thought that the statement should reiterate the view that the adjustment in the housing market was ongoing, but that nevertheless the economy seemed likely to expand at a moderate pace over coming quarters.”

It’s important to keep in mind that as recently as the January meeting, the Fed was talking stabilization ala Bob Toll and The National Association of Realtors.

From the January FOMC minutes:

“The decline in residential construction continued to weigh on overall activity, but some indications of stabilization in the demand for homes had emerged.

Residential construction activity remained quite weak late last year, but home sales showed some tentative signs of stabilization.

Inventories of unsold homes remained considerable although they ticked down in December for the second straight month. The most timely indicators of home prices, which are not adjusted for changes in quality or the mix of homes sold, pointed to small declines.

In their discussion of the major sectors of the economy, participants noted that the housing market showed tentative signs of stabilization in most regions.”

Additionally, looking back just one year, it seems obvious now that the Fed initially choose to hold a very optimistic outlook for an obviously speculative and historically overheated housing market.

From the May 2006 FOMC minutes:

“Anecdotal information pointed to some cooling of housing markets.

That cooling was especially noticeable for high-end homes and for houses in markets that previously had experienced the steepest appreciation.

Data on home sales, permits, and starts on the whole likewise suggested that activity was gradually diminishing.

Some reports indicated that speculative building of homes had dropped off considerably, but inventories of unsold homes still seemed to be expanding.

Although fresh comprehensive data were not available, home prices on average appeared still to be rising, but at a slower pace than over the past few years.

Certain features of recently popular nontraditional mortgage products had the potential to cause financial difficulties for some households and erode mortgage loan performance for some lenders.

Nonetheless, the household sector seemed likely to remain in sound financial condition overall.

On balance, consumption spending was viewed as most likely to expand at a moderate pace in coming quarters.”

Paradoxically, the latest sentiment caused Wall Street to rally apparently on the notion that the Fed is “out of the way” in terms of interest rate hikes and soon may even lower rates in an effort to soften the blow of the housing decline.

It’s important to keep in mind that the leadership at the Fed has, on several occasions, outlined very clearly that they do not intend on stepping in to preserve specific asset prices particularly homeowner equity.

The following excerpt was taken from a speech given by Federal Reserve Governor Donald L. Kohn in March of 2006 titled “Monetary Policy and Asset Prices“.

“Conventional policy as practiced by the Federal Reserve has not insulated investors from downside risk. Whatever might have once been thought about the existence of a "Greenspan put," stock market investors could not have endured the experience of the last five years in the United States and concluded that they were hedged on the downside by asymmetric monetary policy.”

“The same considerations [as was given to dot-com stock holders] apply to homeowners: All else being equal, interest rates are higher now than they would be were real estate valuations less lofty; and if real estate prices begin to erode, homeowners should not expect to see all the gains of recent years preserved by monetary policy actions. Our actions will continue to be keyed to macroeconomic stability, not the stability of asset prices themselves.”

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.

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!

BNN - MUST SEE TV!

Today brings six great additions to the BNN lineup, most notably, a Nightly Business Report interview with Federal Reserve’s Michael Moscow in which he admits, in so many words, that the housing decline has been more significant than the Fed had anticipated last year.

“As we move through this year, I would expect to see the housing market stabilizing, but no one can say exactly when that’s going to happen. I had thought it was stabilizing toward the end of last year as well and then we had some numbers that turned out to be worse than expected.”

Watch Moscow backpedal on BNN!

Next up there is News Hour interview with Treasury Secretary Henry Paulson in which he states that the US has experienced a “major” housing correction that was inevitable after years of historic gains. “That correction has now been significant, we think it is near the bottom, it will take a while to work its way through the system.” Unfortunately, Paulson only reiterates the same guidance he offered last year prior to the housing market taking another major leg down.

Watch Paulson call the bottom again on BNN!

Then there was Bernanke’s latest take on the subprime meltdown. Although Bernanke underestimated the extent to which the mortgage market would slide, he continues to present an optimistic outlook.

“How will developments in the subprime market affect the evolution of the housing market? We know from data gathered under the Home Mortgage Disclosure Act that a significant share of new loans used to purchase homes in 2005 (the most recent year for which these data are available) were nonprime (subprime or near-prime). In addition, the share of securitized mortgages that are subprime climbed in 2005 and in the first half of 2006. The rise in subprime mortgage lending likely boosted home sales somewhat, and curbs on this lending are expected to be a source of some restraint on home purchases and residential investment in coming quarters. Moreover, we are likely to see further increases in delinquencies and foreclosures this year and next as many adjustable-rate loans face interest-rate resets. All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

Watch Bernanke talk containment on BNN!

Next, we have an excellent segment where Marc Faber, founder and managing director of Marc Faber Ltd outlines all the assets, sectors and regions in which he sees bubbles. In an era of historic liquidity, it’s not surprising that there are price bubbles in virtually every asset. Faber suggests that “everything will come down and massively so.” Additionally, Faber sees the whole global bubble scenario resulting from the inflation of the US housing bubble.

“The global liquidity was fueled largely from the American current account deficit, coming largely from the trade deficit, coming largely from US consumption, which was driven from the asset inflation in the US, most notably the housing market.”

Watch Faber talk Bubbly on BNN!

Next, Mortgage Bankers Association Chairman John Robbins discusses the subprime meltdown suggesting that the extent of the mess has been “oversold”. While pointing the finger squarely at predatory lenders for their obvious role in the current meltdown, Robbins adeptly downplays the possibility of any spillover and grater effects on the general economy.

“[the subprime meltdown] is certainly not expected to cause any great pain to the financial markets and shouldn’t bleed over to a great degree.”

Watch Robins spin on BNN!

Finally... Want to get cash out of your home without those pesky monthly payments and interest charges?

This CNBC segment features a new home equity product from Rex and Co. that allows homeowners to “borrow” against the future value of their home. That’s right! You get cash now, no payments and when you sell, you return the favor.

Watch and learn at 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

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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.

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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.

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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.

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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.

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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.”

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The Second Shoe

Something seems afoot…

While vetting clips for BNN last night it seemed that there was no end to the bad news for the housing market circulating the business media.

More importantly, the news was varied with respect to particular topic but perfectly unified in outlook.

First, there was the news of Lennar, the national home builder, reporting a 73% drop in profits in Q1 forcing them to cancel all earnings guidance for the foreseeable future.

"While we are primarily focused on fortifying our balance sheet, we are concurrently focused on rebuilding our profit margins. Given current market conditions, we are continuing to pursue cost reductions, SG&A savings, product redesign and proper land pricing in order to see margin improvement starting in the second half of 2007. Until we see prices stabilize, however, we will not be able to project the timing or the scope of margin recovery, or set earnings goals for the company." said CEO Stuart Miller.

Late day breaking news yielded more trouble for the nation’s home builders as it was reported that Beazer Homes USA was under a fraud investigation by the FBI, IRS, DOJ and HUD related to their internal subprime mortgage workings.

An FBI spokesman offered the following:

"there are potentially all sorts of fraud issues associated with Beazer to included corporate, mortgage, or investments in varying degrees."

Then, there was unquestionably the oddest occurrence I have yet to witness for the new home market when David Seiders, Chief Economist of the National Association of Home Builders was effectively positioned as the “Bear” in a classic Bear-Bull segment on CNBC.

Seiders again reaffirms his “ever revising lower” outlook for the remainder of 2007 currently calling for an 8% decline to new home sales for the year.

It’s important to note that Seiders, expressing true surprise about the effect that the subprime meltdown has had on his industry, has now revised his outlook four times since February.

“Late last year, early this year it really looked like housing demand had stabilized. Sales volume looked pretty stable, other indicators looked pretty good, the Fed concluded that the housing market was stabilizing… and then the entire subprime mess and everything that goes with it in terms of the mortgage market hit, and I’ve been not only following the homes sales numbers which clearly were rather disappointing to say the very least for both January and February, but also surveying the builders on an ongoing basis, both large and small, and I actually have been very surprised by the degree to which the builders say that the tightening of mortgage lending standards has already effected sales volume. We are really sort of in uncharted waters here, I think, in terms of the new leg of the weakening process and how far it will go.” said Seiders.

Next up was the January release of the S&P/Case-Shiller index again showing a precipitous and accelerating drop-off in home prices in most of the tracked metro markets.

Professor Robert Shiller had this to say about the results:

“[the index data] are a good indicator of the dire state of the U.S. residential real-estate market. The dismal growth in the 10-city composite is now at rates not seen since January 1994,"

Don’t forget to check out the S&P/Case-Shiller index tool for a dynamic visualization of the latest results for January.

Finally, there seems to be a dangerous head of steam building with respect to what the federal government’s response should be in cleaning up the home lending mess that has befallen the nation.

Multiple reports of proposed bailouts, new lending standards legislation as well as an FHA “modernization” initiative seem to indicate that we are now beyond the point at which the federal government can remain inactive.

More importantly, with many of the early presidential candidates, most notably Hillary Clinton, remarking on the subprime meltdown, it now seems likely we will soon see Congress attempt to put some teeth behind the latest rhetoric.

One can only hope that in a hectic attempt to help mitigate the massive wave of foreclosures now washing over the country, Congress doesn’t place the burden on the taxpayer to, in effect, bailout “shoddy” lenders and grotesquely wealthy Wall Street financial institutions in the name of unfortunate homebuyers.

Given all the above, I sense a bit of a “second shoe dropping” for housing.

It’s reminiscent of some of the days toward the end of last July and early August of last year when the general understanding that the spring market had come and gone with very poor results seemed to bring a general malaise over the market that was only lifted with Greenspan’s “Market Bottom” sentiment in early October.

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BNN - MUST SEE TV!

Today brings four great additions to the BNN lineup, most notably, a Bloomberg interview with David Seiders, Chief Economist of the National Association of Home Builders.

It seems Seiders is now presenting a significantly more Bearish outlook for the new home market suggesting that 30% of home builders surveyed are now suggesting that they are feeling a weakening of sales related to the tightening of lending standards.

“I was surprised… I got about a third of the respondents saying yes [that they were being effected by tightening lending] and of them… among them, a median hit on sales of about 10 percent.”

Watch Seiders turn Bearish on BNN!

Next up there is a great “point – sort of – counterpoint” between Economist Dean Baker and David Michonski, CEO of Coldwell Banker Hunt Kennedy.

Michonski, apparently suffering from all the bad news lately, has a hard time living in the here and now as he suggests that housing supply currently “balanced” and that he expects national median home prices to be up 4% by the end of 2007 and beyond putting an end to all the hubbub over the housing decline.

Watch Michonski delude himself some more on BNN!

Next, although the Fed’s Moskow doesn’t see the subprime slime spilling over to the general economy, CNBC’s Steve Leisman presents findings from a recent “risk conference” that seemingly draws an analogous “easy lending” relationship between the mortgage market and corporate derivatives.

Two other experts, who are both calling for significant spillover and looming recession, discuss the latest developments concerning Morgan Stanley’s recent decision to sell roughly $2.5 billion of New Century Financial mortgages.

Watch the sub-prime slime continue on BNN!

Finally, a nearly perfect example of CNBC “blathering clueless” as they try desperately attempt to understand the month by month changes in the housing market.

Diana Olick was so “Shocked” by the February’s New Home Sales report that her eyebrows were seen raised in surprise after the announcement.

Add to that UBS analyst Margret Whelan’s suggestion that for new homes, the spring selling season is already over (as Bob Toll previously discussed at length) and it’s just about all the two anchor-girls could take… “Come on! It’s not even April yet!” What’s a bull to do?

Watch CNBC Bulls Look Confused on BNN!

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Existing Home Sales Report: February 2007

Yet again, the Bulls on Wall Street and CNBC waxed wildly optimistic with the initial “top-line” numbers of a report before delving into the details thoroughly enough to realize that they had gotten ahead of themselves.

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

In an attempt to squeeze as much press out of the top-line 3.9% increase to sales nationally from January, David Lereah, Chief Economist of the National Association of Realtors (NAR), expresses some surprise but is still cautiously pointing the finger at the weather for the other weaker numbers:

“Some of the rise in home sales may be from mild weather that brought out shoppers in December, but fundamentals have improved in the housing market and buyers see a window now with historically-low mortgage interest rates and competitive pricing by sellers, … Even so, winter storms last month discouraged shopping, and buyers were chilled with the third coldest February on record. These unusual weather patterns mean home sales that close in March may decline before rebounding later this spring.”

Additionally, NAR President Pat Vredevoogd Combs offers this bit of convoluted logic mixed with consumer taunting:

“Over the last year, we’ve seen declining sales in many high-cost areas but rising activity in lower cost markets, … This change in the geographic composition of sales means we aren’t getting apples-to-apples comparisons in median home prices from a year ago.”

“What’s really happening is probably somewhere in between the different measures, but home prices are soft – a year ago we were still seeing bidding pressures and double-digit price growth, … Overall, home prices should rise slowly this year, and many buyers have an opportunity now that was only a dream during the five-year boom.”

Probably the most notable results from today’s report, beside the numerous median price declines, are the even more notable increases to inventory.

At this point, it seems fairly obvious where things are going in terms of inventory, especially in the more seasonal markets, but it will certainly be interesting to see how things shape up during March and April.

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

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