Hovnanian Enterprises - the new home builders - announced another quarter of dreadful numbers. Second quarter loses could be as high as $0.30 a share, far worse that the company's original suggestion of a $0.05-0.20 per share loss. Furthermore, the company also expects to take a $15-20 million hit on abandoning deposits on land it would not develop. Overall, their losses could be as high as $0.45 to $0.50 per share.
The company trotted out the housing sector's excuse of the moment - the subprime market, announcing that "The adverse publicity surrounding the subprime market has further damaged homebuyers' psychology, resulting in decreased demand and leading to continued use of sales incentives." However, Hovnanian were hardly catering for the subprime client. Nevertheless, the subprime crash is the housing equivalent of the black death; it kills everything it touches.
Sales performance was awful. Hovnanian delivered just 3,196 homes, down from 4,555 last year. However, the company had some limited success in reducing cancellations which fell from 36% to 32% compared to the last quarter of 2004. Looking forward, things look bad, with net contracts were down 21% to 3,116.
Hovnanian share prices are down a shocking 67 percent since their peak in the summer of 2005. Who would have known back then that housing construction shares would have been such a bad investment? Actually, anyone who had bothered to think about the bloated housing bubble. It was obvious that it couldn't go on and that Hovnanian Enterprises would be an early victim.
Here are the five housing data trends that you need to know:
1. Housing construction has slumped. - New-home construction starts dropped 14.3 percent from December to January, putting them 37.8 percent below the same time a year earlier. Building permits dropped 28.6 percent from a year ago.
2. Sales volumes are down. - Last month's sales of existing homes were down 4.3 percent from January 2006. There are about 1 million homes on the market.
3. Home builders can't shift their inventory. - Between January 2006 and January 2007, new home sales dropped 20 percent, according to the Commerce Department.
4. Risk premia (i.e. long term mortgage rates) are rising. - The National Association of Realtors predicts the cost of a 30-year fixed mortgage will jump to about 6.6% by the end of the year.
5. Mortgage resets will accelerate.- Of the $8 trillion to $9 trillion in mortgage debt outstanding in the country, a half-trillion dollars' worth is about to be converted to higher interest rates now that introductory teaser periods are expiring
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It was long speculated that California would be the epicentre of the housing crash. So far, it hasn't disappointed. California was the nation's leader in exotic, strange, and default prone mortgage products. Now, in one Californian city after another, the local press are reporting an explosion in defaults and foreclosures.
San Diego is one such city.......
In the fourth quarter of 2006, San Diego County experienced a 169 percent increase in homes receiving notices of loan default from a year ago. Default notices the first step in the foreclosure process - were up to 3,150 from 1,173 for the like quarter 2005, according to DataQuick Information Systems, which compiles home property data.
Throughout California, there were 37,273 default notices - notifying homeowners 90 days behind on payments sent from October to December 2006, marking the most foreclosure activity since the third quarter of 1998, when the number of default notices hit 38,053.
The study, released in January, states that foreclosures tend to occur a year or two after the loan is made. Most of the loans currently entering default originated between January 2005 and February 2006. After the first year or two, many home buyers who took out adjustable rate mortgages and other "inventive loans" experienced the "reset" of their payments; when a buyer's introductory interest rate shifts, and monthly payments increase.
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Check this link out from the Minneapolis Star Tribune see the extent of foreclosures in the city. It contains an extraordinary graph illustrating the housing disaster in the city. Since January 2006, over 2,500 homes have been sold in foreclosure sales.
This article reports that there "have been 1,400 foreclosure sales in North Minneapolis since January 2006. This is an area of less than 9 square miles that contains 12,810 single family residences. Meaning: 10.9% of the houses in North Minneapolis have already gone through a foreclosure sale since the real estate collapse began."
One house in ten? This has got to be a national record. Is there anywhere in the US with a higher foreclosure rate?
In the city after city, the story is the same. The story starts back in 2002, with a massive cut in interest rates prompt an undeserved rise in house prices. With increased housing demand comes a construction boom, and speculators taking a bet on house prices rising further.
It is now spring 2007 and the story is reaching a sorry conclusion; interest rates are up , speculators have long ago disappeared, the construction boom is replaced with recession, and prices are crashing. Everywhere, there is oversupply in the housing market.
However, it is dangerous to think that it is safe to return to the housing market, as this story from Tucson Arizona warns:
(Arizona Daily Star) Tempted by a generous price cut, Cynthia Saenz couldn't resist buying a new house in Vail about eight months ago. But after reaping benefits on the buyers' side of the market, Saenz is languishing on the sellers' side. She put her Southeast Side house up for sale five months ago and has reduced the 1,800-square-foot home's price from $230,000 to $200,000. Still, it hasn't sold. Saenz's house is among a record number of properties on the market in the Tucson area.
An explosion of home-building and numerous condo conversions during the boom of a few years ago have led to an unprecedented glut of homes now that the market has cooled, according to real estate executives and industry analysts. Investors who helped propel the boom are dumping properties and going elsewhere, they said. Many homes are being sold only with the help of price reductions and incentives.
Several industry observers predict the market will pick up within a year. But their hopes all hinge on whether the overabundance of homes can be reduced.
This is where it started, with phonecalls just like this....
This video clip began circulating last June. It shows a mortgage broker trying to close a three year ARM over the phone. The clip reeks of cynicism, as the broker tries to get the client to refinance their mortgage. His associate, who is out of camera shot, is heard saying " say don't worry", as if this is all that is necessary to finally close a deal. The irony, however, is is that anyone holding an ARM has quite a lot of worry about. As the fixed interest rates expire, mortgage repayments are going through the roof, and pushing many vulnerable home-owners into foreclosure.
Just how unbalanced is trade between the US and China?
Back in 1985, bilateral US-Chinese trade was in balance. The US exported to China about as much as China exported to the US. Since then, however, the US has sucked up Chinese imports. Last year, the US imported almost $290 billion of goods, but exported just $55 billion.
Last year, the US ran up a $818 billion trade deficit. Around a third of that deficit was due to trade with China. Overall, the bilateral US-China trade deficit is running at about 2 percent of GDP a year.
So how do the Chinese manage to out-trade the US? China tightly pegs its currency's value to that of the dollar at an an extremely low rate. This low rate means that Chinese goods are very price competitive and this encourages a large bilateral surplus with the United States. This policy, in effect, offers a massive subsidy to exports. However, the Chinese need to purchase huge amounts of US assets by printing local currency. In 2006 alone, the Chinese central bank purchased around $200 billion in U.S. Treasury Bills and other securities. Currently, the Chinese are sitting on $1.2 trillion of foreign exchange reserves.
However, the Chinese can't keep on subsidizing exports in this manner. It is bad for poor Chinese workers, who are effectively subsidizing rich US consumers. It is bad for the US economy, which is building up huge liabilities with China.
The solution is simple enough. China must let the Yuan appreciate. American exports with China can begin to recover, while Chinese workers can begin to see real increases in their standard of living. However, the Chinese government seem addicted to this "export-at-all-costs" development strategy.
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Living in the city can be expensive. Over the last four years, the inflation rate in America's largest cities has been significantly faster than for the US as a whole. Cumulatively, LA has experienced 3 percentage points of additional inflation relative to the rest of the country. In Chicago, the situation is even worse; the city has accumulated at least 4.5 percentage points of inflation.
Taking this unlikely scenario a stage further, suppose that you won a massive payout. What do you then do with the money? Well, putting it in a broadly based set of mutual funds wouldn't be such a bad idea. Alternatively, you could go down to an investment advisor and see the money invested in loser tech stocks. This is exactly what happened to one lottery winner from Milwaukee. Moreover, it is common for lottery winners to blow their ill-deserved winnings on poor investments. Read on....
"From $5.5 million to living on a pension
On the day he rode home in a limousine from his security-guard job 12 years ago with a winning $5.5 million lottery ticket in his hand, Andrew Cicero of Muskego figured he had it made. But he finds himself now in far different straits than he imagined when he accepted a giant Wisconsin Megabucks novelty check.
Cicero, 72, has sold his Waukesha County house and lives in a Milwaukee apartment on a pension and Social Security income while he takes an investment counselor to arbitration. This month, he sued a Milwaukee accounting firm over tax advice he claims cost him at least $170,000.
His fiscal downfall followed what has emerged as something of a pattern among lottery winners nationally: Someone with little training in dealing with vast sums of money gets a sudden windfall, only to see it tumble maddeningly into the wind.
Court and arbitration documents tell part of Cicero's story. Under the state's rules at the time, the $5.5 million prize he won in 1995 was to be paid out as 25 annual payments that would start at $98,000 and increase each year. But by 2000, he decided on a different approach: sell the future annual payments off to a private firm for an immediate lump sum - in his case, about $2 million - that he could roll into investments. He'd just live off the earnings and interest.
He alleges that within a few months, the Smith-Barney advisers had 98 percent of his money invested in individual stocks, substantially technology companies. The year was 2000, which would prove a spectacularly bad time to sink one's entire fortune into tech stocks. Cicero's lawyer has alleged the advisers were "breathtakingly irresponsible" to put a lottery winner's windfall wholly into individual stocks. The court and financial-arbitration filings tell the story in flat terms, claiming Cicero lost $600,000 or more in bad investments. And he ended up paying $240,000 more to the IRS for penalties and interest after he learned the hard way that a lump-sum lottery buyout doesn't count as capital-gains income."
The US economy is slowing down. Job growth data fell to its lowest level in two years. According to the Labor deparment, the economy added just 88,000 jobs, while the unemployment rate rose 0.1 percent to 4.5 percent.
The building sector lost 11,000 as new home construction slowed. Retailers are also having a hard time, losing 26,000 jobs. Manufacturers' payrolls shrank by 19,000 in March after declining by 18,000 a month earlier. The slowdown was also evident in the average number of hours worked, which decreased to 41.1 hours. Meanwhile, average overtime declined from 4.3 to 4.2 hours.
So the US economy is on track for an end-of-year recession. The housing market is leading the way, the US consumer is exhausted, and government debt is rising. Yet the Fed will find it hard to cut rates, inflationary pressures remain stubbornly strong. Any interest rate cuts will put further downward pressure on the dollar, which will push import prices up. Only two questions remain; how long and how deep.
Hey! You've won a ride back to the top
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