So CR what do you make of this news. Surprised? I guess I'm not... not anymore.
Until 'moral hazard' is re-established & lending standards more in line with buyers real ability to cover a loan over the long term... I don't see these record months stopping anytime soon.
I'm not justifying it or saying it makes sense or advocating people sign up for more than they can afford... but they are and will continue to do so until the credit markets say 'enough'. And with BK laws the way they are the markets don't even understand their own risks... fail to recognize they can't squeeze blood from stones no matter what a judge orders.
But there may be signs that the credit markets are getting a little bit spooked... the appetite for these questionable loans in the secondary market appears to be ebbing a bit. Ben has a discussion here about how CFC is seeing the cost of loan origination increasing because they can't just pour them out and watch them disappear anymore... now they have to actually 'sell' these loans to the secondary market.
If so this might actually be the sign the system is starting to hit saturation. I doubt the public will cut themselves off due to their own good judgement... that appears to be lacking.
Also if Toll and Centes and others see their sales pinched by the credit markets... do you think they will form their own 'acceptance corporations' like the automobile mfg'ers did? Like GMAC?
If they are to do this then the builders will need to consolidate & merge - get BIG like GM & Ford... They are large now but will have to get ENORMOUS to be able to manage a credit engine this large... GE Capital-like scale.
If I were a Michael Milken like person I'd be exploring this right now... I bet people are. They have to be.
If so the resulting M&A activity & new venture money flowing in could make this bubble stretch out for years yet...
God I hate to even think about the excess this could produce and the mess it would leave behind.
dry fly, I'm not surprised by anything with housing. A blow-off top? Maybe. I expect to be talking about the bubble "bust" at this time next year, but we may still be waiting (OK, that would definitely surprise me).
Good point on CFC. I don't think the builders are strong enough to form their own 'acceptance corporations'. Most of their assets are in land (inventory), followed by Receivables.
Shouldn't the headline be that the year-over-year median price increase is close to zero? That's what it looks like to me, from the chart.
Hard to say... houses vary so much by design, materials, etc. I have a friend who is finishing building a home now... his is the least expensive in the development BY DESIGN... smaller, few bells-n-whistles. There are other homes around him that cost 25% more than his.
A better measure is to watch the builders margins (like Toll, Centex) in their financial reporting... if they are seeing price drops across a number of product platforms as opposed to building cheaper platforms but at standard pricing... it will show up in gross margin erosion and maybe even net profits too.
But they can manipulate these numbers in the short run... so we probably won't know until it is obvious in the market anyway.
There has been plenty of talk about a housing bubble, but very little about a mortgage bubble.
Now investors are starting to see worrisome signs in some banks' latest quarterly earnings reports. In others, such signs are absent. Good news? Nope, because disclosure is so poor at so many banks
[...]
Option ARMs are wonderful not just for borrowers who can't afford their houses, but also for investors who look only superficially at a bank's earnings report. A bank books the entire amount that a customer owes as income each month, not the minimum payment that's actually paid. Voila, noncash earnings.
It gets better: The unpaid interest gets tacked on to the bank's outstanding loan total, allowing the bank to display loan growth, which investors love. "You get earnings and growth. What more can you ask for?" says Keefe, Bruyette & Woods analyst Fred Cannon.
Wow questionable noncash earnings... where have we heard that before?
Waiting for a bear market in real estate may be a longer wait than thought. Notice that the real estate market is holding, while there is a very broad international bull market in stocks. Almost every significant stock market in the world is approaching the 3rd year of the bull market, with no signs of weakness in those markets where real estate has slowed.
Also, the Vanguard REIT Index is up 12% for the year to date. What impresses me is that Britain, Australia and the Netherlands have differently faltering housing markets but are faring moderately well and experiencing a continuation of bull stock markets.
I basically agree with you, but keep looking for a way out of the problem that will not be wrenching. Please do not mind the comments, for I appreciate all you do and find it all too convincing.
Jennifer, I'd like to find a soft landing too, but the current administration believes everything is wonderful and isn't even paying attention. That is disturbing.
So CR what do you make of this news. Surprised? I guess I'm not... not anymore.
Until 'moral hazard' is re-established & lending standards more in line with buyers real ability to cover a loan over the long term... I don't see these record months stopping anytime soon.
I'm not justifying it or saying it makes sense or advocating people sign up for more than they can afford... but they are and will continue to do so until the credit markets say 'enough'. And with BK laws the way they are the markets don't even understand their own risks... fail to recognize they can't squeeze blood from stones no matter what a judge orders.
But there may be signs that the credit markets are getting a little bit spooked... the appetite for these questionable loans in the secondary market appears to be ebbing a bit. Ben has a discussion here about how CFC is seeing the cost of loan origination increasing because they can't just pour them out and watch them disappear anymore... now they have to actually 'sell' these loans to the secondary market.
If so this might actually be the sign the system is starting to hit saturation. I doubt the public will cut themselves off due to their own good judgement... that appears to be lacking.
Also if Toll and Centes and others see their sales pinched by the credit markets... do you think they will form their own 'acceptance corporations' like the automobile mfg'ers did? Like GMAC?
If they are to do this then the builders will need to consolidate & merge - get BIG like GM & Ford... They are large now but will have to get ENORMOUS to be able to manage a credit engine this large... GE Capital-like scale.
If I were a Michael Milken like person I'd be exploring this right now... I bet people are. They have to be.
If so the resulting M&A activity & new venture money flowing in could make this bubble stretch out for years yet...
God I hate to even think about the excess this could produce and the mess it would leave behind.
dry fly, I'm not surprised by anything with housing. A blow-off top? Maybe. I expect to be talking about the bubble "bust" at this time next year, but we may still be waiting (OK, that would definitely surprise me).
Good point on CFC. I don't think the builders are strong enough to form their own 'acceptance corporations'. Most of their assets are in land (inventory), followed by Receivables.
Best Regards.
Shouldn't the headline be that the year-over-year median price increase is close to zero? That's what it looks like to me, from the chart.
Shouldn't the headline be that the year-over-year median price increase is close to zero? That's what it looks like to me, from the chart.
Hard to say... houses vary so much by design, materials, etc. I have a friend who is finishing building a home now... his is the least expensive in the development BY DESIGN... smaller, few bells-n-whistles. There are other homes around him that cost 25% more than his.
A better measure is to watch the builders margins (like Toll, Centex) in their financial reporting... if they are seeing price drops across a number of product platforms as opposed to building cheaper platforms but at standard pricing... it will show up in gross margin erosion and maybe even net profits too.
But they can manipulate these numbers in the short run... so we probably won't know until it is obvious in the market anyway.
More on the mortgage side from Ben... he posted this today too:
Investors fret mortgage balloons will burst
There has been plenty of talk about a housing bubble, but very little about a mortgage bubble.
Now investors are starting to see worrisome signs in some banks' latest quarterly earnings reports. In others, such signs are absent. Good news? Nope, because disclosure is so poor at so many banks
[...]
Option ARMs are wonderful not just for borrowers who can't afford their houses, but also for investors who look only superficially at a bank's earnings report. A bank books the entire amount that a customer owes as income each month, not the minimum payment that's actually paid. Voila, noncash earnings.
It gets better: The unpaid interest gets tacked on to the bank's outstanding loan total, allowing the bank to display loan growth, which investors love. "You get earnings and growth. What more can you ask for?" says Keefe, Bruyette & Woods analyst Fred Cannon.
Wow questionable noncash earnings... where have we heard that before?
Waiting for a bear market in real estate may be a longer wait than thought. Notice that the real estate market is holding, while there is a very broad international bull market in stocks. Almost every significant stock market in the world is approaching the 3rd year of the bull market, with no signs of weakness in those markets where real estate has slowed.
Also, the Vanguard REIT Index is up 12% for the year to date. What impresses me is that Britain, Australia and the Netherlands have differently faltering housing markets but are faring moderately well and experiencing a continuation of bull stock markets.
Dry Fly
Aren't ARMs used almost exclusively abroad? If so, where do we look for adversity in the international mortgage market in past years?
CR
I basically agree with you, but keep looking for a way out of the problem that will not be wrenching. Please do not mind the comments, for I appreciate all you do and find it all too convincing.
Jennifer, I'd like to find a soft landing too, but the current administration believes everything is wonderful and isn't even paying attention. That is disturbing.
Best Regards.
I've been waiting for 5 years for the RE bubble to pop and it has just gotten bigger.
As to acceptance corps. It seems tht the GM and GE corps get a lot of their proftit not from making things but financing the things they make.
Soooo you could see loss leader houses to entice folks to take out a mortgage.
Soooo you could see loss leader houses to entice folks to take out a mortgage.
GMAC is just a big bank that gives away 'free cars' like they were toasters if you take out a $30,000 loan from them...