Friday, September 28, 2007

Unsold Homes Increase 2,000 per Month

The National Association of Home Builders reported on Thursday the 27 of September, that the level of newly constructed unoccupied homes in the United States now stand at 200,000. They also reported that about 2,000 new homes are added to inventory every month. Based on current inventory levels there is about 8.5 month of sales on hand.

Let us look at one city and see what is happening in the residential real estate market. During 2005 and 2006, one-half of all home and condominium sales in Las Vegas were to speculators. In the third quarter of 2004, priced rose 44% not annualized, but 44% in a 90-day period.

As of this week there were 24,241 single family homes and 6,221 condominium’s for sale. Why is this important? While real estate is a local market, more and more markets prices are coming under pressure. California the most real estate sensitive and expensive markets in the country, we have seen prices fall from the top of the market by 15% in some areas of the state.The average price of a single family home in California is $500,000 dollars. A 15% decline equates to a loss of market value of $75,000 and in some cases 100% of the equity a buyer put down to buy the property.

I was speaking with a client yesterday and she asked, “Why do you write so much about real estate?” For many American their home is their largest asset. Our homes unlike stocks or bonds are not for sale every day. If the value of our home declines, we get concerned about our future. Because the home is the largest investment, decline in the value of their home may have an impact on the quality of life in retirement for boomers.

The decline in the stock markets at the turn of the century saw many retirement accounts decline in value by 40% or more. While the Dow and the S&P 500 have set new highs, many millions of Americans have yet to get even, much less make a gain in their retirement accounts. Now add to that a decline in the value of their home and retirement may not look as good as it did just a few years ago.

The problem in real estate is not just the decline in the value of the home, it is that plus the impact on all the other related industries that go along with real estate. As I said in an earlier blog, I think we have not yet seen the bottom. In my hometown five new houses were built at the same time on the same street, all empty, one has been on the market for over a year and the other are getting long in the tooth. The market will hit bottom when all five are sold. Look at the new homes for sale in your neighbor hood and see how long it takes to sell. The one setting empty is counted in the 200,000 of unsold homes the big question is will we continue to see the number rise above 200,000? My guess we have a lot more to go.

Dan Perkins

Thursday, September 27, 2007

More Bad News on Housing

Sept. 27 (Bloomberg) -- Sales of new homes in the U.S. dropped more than forecast in August and prices plunged by the most since 1970, underscoring the Federal Reserve's concern about the broader economy.

Purchases declined 8.3 percent to an annual pace of 795,000, the lowest level in more than seven years, the Commerce Department said today in Washington. The median price dropped 7.5 percent from a year ago.

The figures suggest home construction will extend its deepest slump since 1991, and consumers will have less home equity to tap for spending. Fannie Mae Chief Executive Officer Daniel Mudd said in an interview today that the industry won't hit a bottom until the end of next year, echoing comments by KB Home, the builder that hours earlier reported a third-quarter loss.

To me the most significant item in the above release is the statement that on a national basis, the median price for a new home, on a year over year basis, was down 7.5%. I indicated in a previous Blog that I thought that next spring is when we would see the break in the seller’s asking price, perhaps it may come sooner than I thought.

The sale price of existing homes, not yet reported for August, had a decline through July of about 3.8% on a year over year basis. With the price of new homes, falling by 7.5% would could see downward pressure on the prices of existing homes. I believe there will be even more price pressure on the asking prices of existing homes, because of the decline in the offering price on new construction. Builders and developers are despertately trying to move inventory off their books. If we were to see the year over year decline for existing home values to fall in line with new home prices declines we could see a death spiral in prices, one lowers and the someone lowers and so on.

We some times forget that the American consumer spending their money accounts for two-thirds of the GDP of the United States. A lower home value has the ability to shrink the wallets of a great many Americans. If Americans sit on their collective wallets, it cannot be good for the economy.

Dan Perkins

Tuesday, September 25, 2007

“One and Done?” Right!

When the Federal Reserve Open Market Committee reduced interest rates by 50 basis points last week, it took the markets by surprise. Almost immediately after the rate cut people began to say about the move was it “One and done?” Over three years ago, the same question was raised when the Fed started on its 25 basis points every meeting death march. I wondered, “Has the Fed ever increased or decreased interest rates in a cycle only once?

I went back to the 1950’s and I could not find one example in either direction that the Fed was “One and done”. The real question is how much more will the Fed have to reduce interest rates? The market currently has the 90-day T-Bill at an interest rate of 3.78%, the Fed Funds target rate is almost one full percent higher (4.75%). This difference would seem to imply that the Fed is behind about one full percent as to were the markets thinks the interest rates should be now.

The news this morning on both retail sales and housing were very bad and now the focus on September 25, is with all the things that are happening, the big concern is how will holiday shopping season turn out? It is three months until Christmas and being concerned about retail activity that far show the level of concern in the markets about the reliability of the consumer. If this news was not bad enough the level of consumer, confidence fell from 105.6 to 99.8 the lowest level since November 2005.

One annalist that I heard this morning indicated that the last significant correction in the housing market took 5 years to bottom out and we are in about two years from the top in the market, still a long way to go. She suggested that prices have not backed off much except for the builders trying to get out from under their debt by dramatically lowering prices to clear inventory.

As I indicated on and earlier Blog posting I though that people will hold out for the Spring selling season of 2008 and if they don’t see any activity we may well see a crack in the price of housing. The consumer sat on their wallets in the month of September as sales at Target, Wal-Mart, and Kohls and others were below expectations. Lowes the big home improvement center said that they would probably miss the low end of their earning forecast for the year.

All of this information has to weigh on the Feds minds as they think about their next meeting on interest rates. If the jobs number due out a week from tomorrow is as bad as the September number I would expect the Fed to lower interest rates at the next meeting and concern for the economy will overshadow the concern about inflation the policy statement.

Dan Perkins

Tuesday, September 18, 2007

Did you hear that fat lady sing?

The FOMC surprised almost everybody today when they cut both the discount and the Fed Funds interest rates by 50 basis points (one-half of one percent). I was looking for, like the majority of economist, a 25 basis points cut and then delaying till sometime later, an additional cut in the Fed Funds and Discounts rates.

My concern about a 50 basis points cut at this stage was that the Fed would be using a great deal of fire power all at one time. By using so much firepower at one time I was concerned that the Fed would spook the markets that they knew bad news that the rest of the market does not know. With the Fed taking such a drastic move the underlying message is the economy is in real trouble.

In the “statement” the Fed said that they were clearly concerned about the faltering economy and in particular the housing market. The markets, at least for this afternoon, like the cut in interest rates as shown by the 335 point gain in the Dow Jones index. Tomorrow will being questions as to why such an aggressive move in the first rate cut? How low will the Fed take interest rates before it is over?

The first cut will have its impact in about 45 days with the reduction in credit card interest rates for those cards tied to the prime rate. In fact all loans indexed to the prime rate will see a decline in their cost of borrowing. However, all those mortgages that will be resetting in the next 4 months may not see any relief at all. Many of the adjustable rate mortgages at tied to the rate of interest on Treasury bills, notes and bonds and the rates of interest on these did not move today and depending on how the market views the move today they may not go lower. A concern may develop that the Fed may have been over aggressive and Treasury interest rates many in fact increase.

We will get more information, data, as its called by the Fed, over the next few days and the markets will react to the data. I don’t believe that its up, up and away from hear. The Fed Chairman beings his testimony before Congress later this week and he is sure to be asked, more than once, why he was so aggressive in cutting rates, is he concerned about the economy (code for recession) and what do they think is going to happen to the housing problem? His comments will move the markets, so as for now, enjoy the song because many people and intuitions needed the rally we got today.

Dan Perkins

Saturday, September 15, 2007

Another Mortgage Story

I got the following response from one of my client’s after he read the article, I posted on the Blog, about declining real estate prices.

“Dan, interesting news in my county in Virginia, one of the fastest growing and having high household income in US---the news was that the number of home foreclosures in the county in 2005 was 14—the number of foreclosures in 2006 was 139---the number of foreclosures through June of 2007 has already tripled all of 2006. Very concerning”

Let us say that the Fed does cut interest rates on the 18 by 25 basis points or even 50 basis points. What can we expect in the housing market as a result of these interest rate cuts? Not Much. Many of the problems in the housing market have been widely discussed, but I do not think you have heard about this one.

A young couple takes advantage of the special mortgages in 2006. They buy a condominium with virtually no money down. They can afford the mortgage payment, their income an excellent. Therefore, when the Fed drops interest’s rate by 25 basis points and as a result adjustable rate mortgages rates fall-- they think that at some point it will make sense to refi their existing mortgage thus saving them money with a lower interest rate.

With the concept of no money down and by the way an interest only mortgage, they will find that they have negative equity in their home. The bank will not lend them money on the property for a mortgage because the value of the condominium is less then the outstanding amount of the mortgage remember interest only mortgages do not reduce loan principal.

In order for them to refi the existing mortgage they will have to come to the closing with cash to payoff the difference between the current appraised value and the outstanding mortgage amount. I suspect that there are a great number of homeowners that are trapped like the young couple in my example.

Why are they trapped?

If they do not have the cash to make up the difference they are stuck unless they can get the cash or the price goes up to an amount greater than the mortgage including closing costs. If I am right and the worst is, yet to come in the price decline of real estate, they could be stuck for a long time. If the real estate market does not bottom until the end of next year, I do not expect that prices will start rising off the bottom. The young couple in my example may be in the condominium for many years.As people with excellent income see that a decline in interest rates may not help them, they will have to begin to save not for the down payment for the next house, but in addition they money to get out of the existing mortgage.

Dan Perkins

Friday, September 7, 2007

Who Taught The Government To Count?

There are not many people today happy with how the government counts. One might ask. “How did 100,000 people lose their job and nobody knew for 2 months?” I do not know of nobody who was expecting a decline in jobs for August. By the same token I could not find anybody who guessed that we would have had the downward revisions that were made today for June and July.

One client called this morning asking me about the HPB I mentioned in my most recent Blog. The value of the opportunity in HPB changed dramatically today. Most of the talking heads we saying before today "as long as employment holds up we will be fine”. The housing market got into a lot more trouble today. Lenders will be even stricter about making loans to buyers and those who want to refinance.

Think about this, if the capital markets can’t figure out the price of a bond how in the heck can a mortgage lender figure out the price of a house and in turn how much they can lend on that house today?

The feeling going around Wall Street today was we will get through this in the next few months--don’t worry this could well be a significant buying opportunity. What else do you think they are going to say about today? There are two concerns that people will be thinking and worrying about over the weekend. First, HOW MUCH WILL THE FED CUT INTEREST RATES AT THE SEPTEMBER 18 MEETING? Second, WILL THE PREVIOUS LOW IN THE MARKET HOLD?

Some people are saying the Fed is behind the curve and a 25 or 50 basis points cut won’t make change. I don’t think the Fed will cut rates any more than 50 basis points because they will fear that anything more will spook the markets. Keep in mind it takes 12 to 18 month for changes in interest rates to work their way through the economy. Any changes in interest rates by the Fed will be more emotional than anything else.

As to the second question from my standpoint I already on the record at an early Blog that I don’t think the 12,845 on the Dow will hold. We are, as of today, just about 250 points from that level we could very well test the level on Monday. I think we may make several runs at testing the previous low but we are going down.


Don’t sell in a panic, look for rallies to sell by reducing your positions slowly. Take a real hard look at the quality of your stocks and bonds. Cash is king and cash in T-Bills is the Emperor. This will work itself out, but it will take longer than most of the pundits are saying. In yesterdays Blog I spoke about HPB and I got a call today asking what else would I recommend? I know who I send e-mail notices to but I don’t have any real way to monitor all the people who see or hear about a recommendation on this Blog. Any issue mentioned on this Blog must be reviewed with an investment professional for suitability to you needs, goal and risk factors.

I said earlier that you should look at the quality of you investments. I have and have had for a significant period of time a large position in Annaly Capital Management, Inc. (NLY). This company is listed on the New York exchange and invests and manages US Government, agencies and instrumentality's bonds on a leveraged basis. The stock is volatile but it manages for its shareholders the highest quality fixed income investments available. The volatility is not for everybody, but call your advisor and ask him what he or she thinks about NLY for you.

Hang on to your hats and your wallets till the 18.

Dan Perkins

Thursday, September 6, 2007

Just When You Thought It Couldn't Get Any Worse.

The Mortgage Bankers Association reported Thursday that mortgage-holders starting the foreclosure process in the April-June quarter reached 0.65 percent, marking the third consecutive quarter that this figure has set an all-time high. The delinquency rate, which tracks the number of people who are behind in their payments but have not yet entered the foreclosure process, was also up sharply during the spring, rising to 5.12 percent of all loans, up nearly three-fourths of a percentage point from the same period a year ago.
Doug Duncan, the MBA's chief economist, said the worsening performance was driven by two factors - heavy job losses in the Midwest states of Ohio, Michigan and Indiana and the collapse of previously booming housing markets in California, Florida, Nevada and Arizona. . Another big problem is that an estimated 2 million adjustable rate mortgages are scheduled to reset this year at sharply higher interest rates, which will cause monthly payments in some cases to double or even triple, a problem that is especially severe in the market for subprime mortgages, loans offered to borrowers with weak credit histories. The delinquency rate for subprime loans increased sharply to 14.82 percent - up from 13.77 percent - in the first quarter.
Now for the rest of the story.
Standards and Poor’s reported that in the second quarter of 2007 the average home price was down just under 4% on a year over year basis. People have tried to hold to their asking price for there home for as long as they can the result in many market the asking prices are to high. The problems in the housing market are far from over and as I indicated in another Blog that I felt that it might well take into 2008 before we see the bottom in the real estate market. When the homeowner finally gives up and starts to reduce the price of their homes next Spring, to get out from under, you will see a significant drop in the price of housing perhaps as much as double digits.
Is their opportunity in adversity? I think so. Just over a year ago, I bought HPB. This is a managed closed end fund that is short the Philadelphia housing stock index. In other words this investment believes that housing will continue to fall and the more it falls the more HPB will appreciate.

Is HPB for everybody? No. Check with your financial advisor and see if together you think it is good for your portfolio.

Dan Perkins

Wednesday, September 5, 2007

Has Anybody Seen The Fat Lady

The National Association of Realtors' index of signed purchase agreements dropped 12.2 percent after gaining 5 percent in June, the group said today in Washington. The decline was more than five times the median forecast of economists surveyed by Bloomberg News. The number of Americans entering into contracts to buy previously owned homes plunged in July by the most since records began in 2001, worsening the two-year housing recession. The median forecast was for a decrease of 2.2 percent, according to a survey of 26 analysts. Estimates ranged from a drop of 4 percent to an increase of 1.5 percent.

That is the Good News!!!

How is that so many people missed the number by such a wide margin? One might say that “Hope Springs Eternal”. Many people felt that the worst of the housing problem was behind us. I have been talking for over a year that the problem in the real estate market was just beginning and had a long way to go before it was over. In some respects, the same is true about the stock market correction.

The two weeks in August were scary, but as soon as we got an up day after about a 10%, correction--it was up and away. I have been in this business for almost 35 years and I have never seen a correction that was over so quickly as people wanted to believe this correction was over. In an earlier comment on this Blog, I said that I did expect a relief rally, but we must go back and test the low to see if it will hold. The critical time will be around the Fed decision on the 18 of September.

The market has already built in “Baked In” a reduction in Fed interest rates. The risk is that if the Fed does not move at all or does not move rates down far enough the stock market could sell off through the most recent lows. The current estimate is that over 1.5 million adjustable rate mortgages will reset over the next 12 to 18 months. A decline in short-term interest rates by the Fed will not help many of those homeowners to afford their mortgage and keep their homes.

One additional thought about housing and the “Bean Counters”. The housing activity has been in a decline for over two years and counting. This economic recovery created over 500,000 jobs in the housing sector. With the decrease in demand, fewer homes are being built. Lower demand for housing should show up in layoffs of people employed to build homes. Economists have been asking the question, “Why haven’t these layoffs shown up in the employment data?”

One thing the economists may be missing is the magnitude of the extent of the employment of illegal aliens in the construction of homes. These jobs were with the home builders and the subcontractors to the home builders have not been counted. As the housing market continues to contact, we will start seeing the layoffs of legal workers.

ADP Employer Services projects companies in the U.S. added the fewest jobs in August since 2003. The 38,000 increase reported was less than forecast and followed a revised gain of 41,000 for the prior month. Fridays employment data is a two edged sword. One side wants the Fed to cut interest rates so, a bad number (decline in new jobs and an increase in unemployment) would be good for them. On the other hand those who believe that the economy is still good will want a low number so that inflation will not be a problem and the Fed will not have to raise interest rates to slow the economy. I think both sides might be very disappointed at 8:30 AM on Friday morning.

Dan Perkins