Tilted Forum Project Discussion Community - View Single Post - 1992 Redux: Will "it's the economy, stupid", Be The Big Campaign Issue?

aceventura3 · 07-26-2007, 10:13 AM

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Originally Posted by host

Can you verify whether the reported, declining existing home inventories include the residences that are on the auction block because of foreclosures, or, in inventories like the one Countrywide is trying to sell?

The data I saw was in a WSJ article. I assume existing home sales data includes all existing home for sale.

Quote:

Existing home sales continued on their dismal, downward trajectory, according to numbers from National Association of Realtors. Home sales fell a more-than-expected 3.8% in June to a seasonally adjusted annual rate of 5.75 million units, the lowest level since November 2002, Bear Stearns analysts noted. There were some numbers that didn't look quite so bleak. For instance the median home price crept up 0.3% from June 2006 to $230,100. The median home price was $222,700 in May this year. But economists didn't find much solace in the price rise, saying the median price might be skewed by strength in sales of higher-priced homes. Another apparent positive was housing inventory, which shrank 4.2% during June to 4.2 million. But, even these numbers couldn't buck up some economists. "This probably does not signify a meaningful step toward stability. Instead, it could indicate the discouragement of potential sellers who have withdrawn homes from the market in the face of price weakness and higher mortgage rates," wrote Nomura researchers. Likewise unimpressed were Morgan Stanley economists, saying in a note that "even with a significant decline in the supply of homes available for sale, the drop in the sales pace was big enough to keep the months' supply of unsold homes at a fifteen-year high."

http://online.wsj.com/article/SB118536626835477490.html

Quote:

It is my understanding that foreclosures, which are rapidly rising, are not included in MLS stats, and they are not part of home builders' unsold inventories....and the forced sales, the majority sold via foreclosure auctions, will, if not now, be sold "at any price". These are the sales, even if home builders cease all new building for the next five years....and they won't, they're still building, for example, in the area around where I live....hundreds of new units....that will weigh on the market and will negatively impact average selling prices.....count on it!

Most of the headlines focus on percentage change either year over year or month to month. Given the abnormal run up in prices and building due to speculation, I don't consider it odd to have an abnormal correction. However, at some point the percentage change will be calculated on a smaller and smaller base. When that happens the percentages will take on a totally different perspective, while the fundamentals may not change at all. This happens in reverse too, causing exaggerated reactions.

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ace....Countrywide would have a difficult time "moving" the 10,200 housing units, valued at over $2 billion, that it now finds itself "owning", if it did not make it's rising inventory, public. Since it is public information, folks analyze the data and the trend:

http://countrywide-foreclosures.blog...203-homes.html

http://www.countrywide.com/purchase/f_reo.asp

...it's a train wreck and it will feed on itself.....and it will take the entire US economy with it, as the rapid decline in cheap credit seems to indicate.

The Countrywide CEO stated that he thinks by 2009 thing will be better. He is not in a panic. Here are his words to a question during conference call after his earnings release:

Quote:

Paul Miller - Friedman, Billings, Ramsey - Analyst
Thank you very much. Angelo, you have been through a lot of these different cycles out there. This doesn't seem -- this seems to be becoming a lot stronger and a lot harder than a lot of people thought. When do you think this ends? I know you have been quoted out there you think this -- maybe it is an '09 event. But what's some of the things we have to see? We have to -- does the CDO market have to come back? Or does liquidity have to come back? Or do the inventories in the housing market have to go away? What are some of the things that we need to look for?
Angelo Mozilo - Countrywide Financial Corporation -Chairman, CEO
I think the first thing is that the inventory in the house supply has to reverse itself. Because as I view it, and I have been through a lot of these things in 54 years, although the market is a lot bigger now, so the problems are a lot bigger. But as I try to walk through what happened here, and could a lot of this have been foreseen? [These] tend to try to reflect on your own activities, and should we have known, could we have seen it? But as I do reflect on it, and I do a lot, that nobody saw this coming. S&P and Moody's didn't see it coming, but they simply just
downgrade bonds, they don't take hits. Bear Stearns certainly didn't see it coming. Merrill Lynch didn't see it coming. Nobody saw this coming. So it was the deterioration in real estate values that was the base cause of all of this. We had none of these problems as real
estate values were going up. So it is an oversimplification, admittedly, but clearly the deterioration in real estate values -- as a result of the affordability issue and an oversupply. So I think one turning point is the supply of housing. Because I think once that turns around, the psychology of the country changes. Because now the borrowers -- potential buyers simply say, look, I will just wait, because I will be able to buy the house cheaper tomorrow than I can today. That psychology has to change; and the only thing that is going to change it is supply. The other -- just so I can reflect on this as you people think of your questions. The other is that the Fed knowingly -- knowing that well over 50, 60, 70% of the loans made in 2003, '04, '05, and '06 were indexed variable-rate loans, indexed one way or another to the Fed funds rate, increased the Fed funds rate 17 times. 17 consecutive times, with most of the product out there
being variable-rate product. You know, and you never knew when they were going to stop increasing. But the fact they did that had a material impact on affordability. As people went to refinance or people went to buy. Major, major impact. So for a Fed Governor to say that the lending industry had this coming is unbelievable when the Fed, to a great extent, was a contributing -- unknowing contributing factor to this. Plus they came in with the Fed, with the joint [AC] guidelines which restricted the amount of -- the type of loans we could make, in an environment where we had limited liquidity to start with. The other was the rapid increase in real estate values that we have faced over the last few years caused people to stretch themselves and their financial resources in order to get into a home. There is a high desire for people to own a home. The mortgage product then was developed to try to help them get into the home, which was known as exotic products of various kinds. But there was a secondary market for it. There was plenty of liquidity for that. So the primary market responded to that. I say also the traditional underwriting standards, which John McMurray alluded to, were altered to use more technology and more credit scoring as a judgmental factor in whether a loan could qualify or not, versus the traditional documentation.
And you had on top of that, which again John related to, was speculation. So I just want to share those thoughts with you. Now getting back to your base question, as I say 2009 because my experience is that it just takes a long time to change, to turn a battleship around. This is a huge battleship and it is headed in the wrong direction. So first, we have to get it to slow down, then stop, and then turn. I think that that -- this is just a gut feeling, based upon what I have seen in the past and the size of this
market -- is that it's going to take 2007, the balance of this year, to get this thing to look like it is slowing down; 2008 to get it to slow down and stop; and 2009 to head in the other direction. My feeling is that by that time, you will have reduced competition, very substantial pent-up demand, because of all of the people who have been closed out of housing, probably lower interest rates. I do think that this ultimately has to have an effect on the economy. I just can't believe that this economy is totally insulated from housing. And will be 2009, 2010, 2011, I look to as sort of like 2003, 2004, 2005. Great years for the industry.

http://online.wsj.com/documents/tran...c-20070724.pdf

He says he didn't see it coming is B.S. or he was blinded by greed. He gets paid to see this stuff coming.

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This is a year old, ace....but it holds true, even more so, today...with the first time buyer unable to obtain a "liar loan" or a "time bomb" option ARM loan because of the sub-prime implosion, and the halt of the trend of rapidly rising appraised "value"....because liquidity can no longer be "injected" into the RE market by first time buyers who only qualified for loans that only "worked" if the valuations reliably went "up and up and up".....lower priced home sales diminish, with the "high end" the last to fall, because buyers of high priced homes have alternative methods of financing unavailable to first time and other assetless, former buyers.

If fewer homes priced at the "low end" sell, and "high end" sales do not decline proportionally....sure, average selling prices will remain firm, or even rise a bit, but that statistic does not support an argument that the market is better than it seems at first glance. It actually means, IMO, that it is worse than it seems, because when first time buyers are not in the market, it will not be sustained by high end buyers....hence the dramatic decline in total numbers of housing units sold.....the largest decline in 16 years:

I will look up the data later, but the overwhelming majority of loans are not in default and won't be. Even in the subprime category this is true.

What happened to the Bear Stern's hedge fund was an over reliance on leverage and taking on excessive risk. The same can be said for some homebuilders who used expensive options to control land. Now that the demand has lessened some of these options are worthless. Mortgage companies relaxed their loan underwriting standards because of the boom, and now it is coming back to hurt them. The funny thing is, that none of that has anything to due with the fundamentals of the real estate market and the intrinsic value of real estate. What we really have is a panic created by "Wall Street".