This commentary from LA found its way into the UK Times today. Yup, there's a few more nervous brits walking around today, wondering if they can unload their overpriced flats ASAP... Outright panic articles like these are just adding fuel to the fire. Meltdown underway.
IF YOU’RE wondering why I’m sweating so much, the answer is simple: I’m waiting for The End. It’s been a long time coming, there’s no doubt about it. But I still feel unprepared. During my 31 years, I’ve lived through a few traumatic events: the dot-com crash, September 11, anthrax, the Iraq war, Simon Cowell’s America’s Got Talent.
And yet this new Armageddon fills me with equal dread. Yes, the explosive charge in the foundations of America’s housing boom has been detonated. The wrecking ball has swung. After 17 consecutive interest-rate rises by the Federal Reserve, sales of existing homes in California have suffered their biggest fall in nearly 25 years, while the median home price across the entire country has recorded its first decline in a decade.
It’s all over. Let the demolition begin.
The worst affected are the “flippers”: people who bought multiple properties in the hope of reselling them quickly. Now they’re left with more homes than Bono and no money for groceries.
As you might have guessed, I’m not objective here: I bought an overpriced house in an overpriced area at perhaps the most overpriced point in the entire decade-long trend of overpricing. Not only that, but I also made the purchase with the kind of dodgy mortgage that allows you to pay less than the actual rate of interest (which adjusts every month).
The only consolation to us homeowners is this: America’s tax system favours mortgage-holders, and Southern California’s last bubble took six awful years of 5 per cent price declines to burst fully. That’s a long time to live in a rented home, especially a town as obsessed with status as LA. I hope the Bubble Sitters loathe every second of it.
October 04, 2006
The End is here. "The explosive charge in the foundations of America's housing boom has been detonated. Let the demolition begin"
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28 comments:
Who is a bubble sitter?
jack mehoff......that gives me an idea!
Jack,
Don't believe the hype. Elections are coming, and things are not what they seem. Corporate earnings have been bought through mergers and aquisitions for quite some time now, layoffs exceeded 100,000 in the month of September, Oil prices always come down this time of year, only to be jacked up again in the winter, barring any supply disruptions which are always lurking in the shadows. Construction costs are still up, not to mention healthcare, stagnant wages....let's not forget about the census report of the homeowner spending well over 30% of their income on housing costs...
Should we get into the macroeconomic situation? Deficit, China holding 1 trillion dollars in reserve and counting? GSE's holding billions in shitty mortgages, and not disclosing their portfolio, Impotent Congress...the situation is grim.
But the fact that the DOW finally recovered after 7 fucking years is a reason to celebrate?
I wonder how long it will take to recover from the impending housing crash....probably a lot longer.
God help us.
That’s a long time to live in a rented home, especially a town as obsessed with status as LA. I hope the Bubble Sitters loathe every second of it.
Loathe? Let's see we rent a SFH is one of the best neighborhoods in the city. The landlord pays for the gardener and takes care of all the repairs promptly. My wifes spends all her time with the baby and we have a fulltime cook/housekeeper. The neighbor bought his house last year and he recently started doing his own gardening( Hmmm, wonder if that ARM reset?). When I compare our daily lives to other two earner familys I think we have a pretty good standard of living. I just loathe it and can't wait to trade my >$100k cash into a $600k debt. :)
I am very happy renting. I hope I'm still renting in 5 years time and don't have to worry about what it'll cost me if the furnace gives out or if termites set in or if property taxes rise. I can pick up and move to my next apartment with no transaction costs and I'll sleep very well knowing that my landlord is subsidizing my rent because his mortgage readjusted again and the payment is that much more than my rent payment.
As my property law professor used to say 'property is a bundle of rights, privileges and immunities'. Ownership and renting entail different rights, privileges and immunities, that's all. And let me tell you, if you have a mortgage, then the bank has it's own bundle of rights, privileges and immunities over that house that you think is 'yours' because you 'own' it.
Yeah, let me tell you how much I hate renting in LA. I live in a barely middle class neighborhood where 1200sq costs you about $600k.
I'm really hating living in the same square footage, paying $1200 a month versus a $4,000 to $5,000 mortgage. Plus having a pool, beautiful landscaping and a full time maintenance dude to take care of any problems I have is a real drag.
My biggest problem is trying to figure out where to invest the saving since, although the Dow is barely up 8% on the year and the Nasdaq is flat. Best to be about 50% invested outside of the US as the dollar starts its long slide.
And my other problem. Hmmm Figi or Costa Rica this year? Wouldn't be thinking that if I had a house that owned me :)
How about this one?
The backhoe of financial justice is ripping through the cheaply veneered walls of inflated housing prices.
I hope the Bubble Sitters loathe every second of it.
------------
LOL! While our savings accounts grow and homes de-value! Gotta love the sour grapes!
here's mine: http://whatbubble.blogspot.com/
Housing Hangover?
By Jacqueline Doherty
October 3, 2006
http://yahoo.smartmoney.com/barrons/index.cfm?story=20061003&afl=yahoo&pgnum=2
HOME BUILDERS have thrived in the past five years as easy money fueled enormous demand for houses — as well as abundant supply. The role of low interest rates and novel loan structures in helping buyers enter the market — or trade up to McMansions — has been well-documented. Less understood is the potentially problematic financing that has enabled developers to increase their supply of land to meet, and perhaps exceed, this unprecedented demand.
Unlike in past housing cycles, when they borrowed heavily from banks, home builders today also use options and off-balance-sheet joint ventures to buy land. When times were flush, these financing vehicles enabled the industry to expand without bulking up its debt. But now that the housing market has weakened, land options and joint ventures could come back to haunt some companies, their financial partners and the broader economy — not to mention stockholders.
The pain could be twofold: If orders dry up and home builders are forced to write off their option deposits or joint-venture investments, which are considered assets, some could face substantial hits to book value. Alternately, builders' earnings could be nicked if joint-venture gains turn to losses.
Housing bulls argue that concerns about the deteriorating health of the residential real-estate market largely are reflected in building-company shares. After all, the Standard & Poor's Supercomposite Homebuilding Index is down 41% from its high of July 2005. If the housing recession proves mild and short-lived, the stocks could rally, much as Barron's argued in a cover story in late August ("Big Ripple," Aug. 28, 2006). So far, that's been a savvy call: Most are up almost 20% from their lows this past July.
If the downturn is severe and protracted, however, as it may be in locales where home prices and speculative development have soared, the industry's use of options and joint ventures is likely to prolong the pain. "The home builders are going to abandon a significant amount of their options and attempt to dissolve the joint ventures that no longer meet their return requirements," Ivy Zelman, an analyst at Credit Suisse, predicts.
Most housing companies today trade at slight premiums to book value, which is considered a more reliable indicator of their worth than price-earnings multiples. And any impairment to book (roughly defined as assets minus liabilities) could result in similar markdowns in the companies' shares.
FOR SOME COMPANIES, the problems of Technical Olympic USA (TOA1) may be a sober warning. Last week the U.S. unit of the Greek construction company announced that, because of softness in the Florida real-estate market, the revised sales and delivery projections of one of its residential joint ventures won't be adequate to support the JV's capital structure. The company is requesting waivers from its lenders regarding potential defaults, among other things.
The JV was created in August 2005 to buy the assets of Transeastern Properties of Coral Springs, Fla., and was financed aggressively, with equity equal to only 20% of the purchase price, versus the 40% common in most JV deals. News of its problems sent Technical Olympic's shares down about 15% on the week, to 9.83, though it had been trading below book value before the disclosures.
The company's senior and junior debt fell to levels implying its equity in the JV and loans and advances to the JV, which total $141 million, could be wiped out. The company, which has said it does not intend to contribute additional capital to the venture, declined to comment. But Technical Olympic's parent acknowledged in a press release that in a "worst-case scenario," its sub would take an after-tax charge of $89 million, or $1.50 a share. It estimates book value will decline 4% from the June quarter.
"This won't be the only company that will affected," says Alex Barron, a senior housing analyst at JMP Securities in San Francisco. "All the other home builders will have writedowns of joint ventures, option deposits and land on their balance sheets."
BULLISH INDUSTRY ANALYSTS BELIEVE concerns about option-deposit and joint-venture writedowns are overblown.
But that might not be true for some companies with large exposure. At NVR (NVR2), a Reston, Va., builder, $642 million of option deposits account for as much as 64% of book value. With the shares trading at 553 apiece, or 3.2 times book, investors appear to have given little consideration to the possibility of writedowns. The company declined to comment.
Hovnanian Enterprises (HOV3) and Beazer Homes USA (BZH4) also could be vulnerable; their options deposits each equal at least 20% of book. Other companies, such as MDC Holdings (MDC5) and D.R. Horton (DHI6) have little exposure.
"We've used land options for decades. We think they are a very efficient use of capital," says J. Larry Sorsby, CFO of Hovnanian, in Red Bank, N.J.
Beazer, based in Atlanta, didn't return Barron's calls.
Some home builders already have walked away from land deals and taken modest losses. Miami-based Lennar (LEN) last week reported it wrote off $15.8 million in option deposits and related costs and made a "$16.5 million valuation adjustment" to the company's joint ventures, which contributed to a $5.9 million joint-venture loss in the third quarter, versus a gain of $16.8 million a year ago. Total profits in the latest quarter, ended August, fell to $206.7 million from $337.3 million a year earlier.
By using land options and development joint ventures, Lennar doesn't have to take on 100% of the risk of a project, explains Bruce Gross, the company's CFO. It also can team up with strategic partners to enter new markets or to buy large parcels of land. Many JVs were created years ago and have significant pent-up value, he adds.
Among the country's major home builders, Lennar has the largest exposure to joint ventures; $1.45 billion of equity in these ventures represents about 25% of the company's book value. That's in addition to $1.3 billion of option deposits and lines of credit outstanding, equal to an additional 23% of book.
At Standard Pacific (SPF), an Irvine, Calif.-based builder, equity in joint ventures amounts to 18% of book value. At KB Home (KBH), in Los Angeles, it represents 13% of book, and at Hovnanian, 11%.
Other companies, including MDC Holdings and D.R. Horton, have no joint-venture exposure. Standard Pacific and D.R. Horton didn't return calls. MDC and KB Home declined to comment.
While all option deals are structured differently, their intent is the same: A home builder that wants to buy land for future use but doesn't want to put the property — or the debt needed to purchase it — on the balance sheet, buys an option to purchase the land from its owner at a set price over an agreed-upon period.
When the land is owned by a farmer, industry experts say, the option might cost 5% of its full, agreed-upon value. When an investor group, known in the industry as a land bank, owns the property, terms typically have been much steeper, with deposits ranging from 10% to 20%. In addition, a builder subsequently might make monthly payments of 15% to 20% of the value of the land, minus the deposit — well above the 6.5% to 9% it would cost to borrow funds in the capital markets.
Some of the largest land bankers include IHP Capital Partners, Acacia Capital and Hearthstone. Hedge funds such as Stark Investments and Farallon Capital Management reportedly have jumped into the business, as well; both declined to comment. "I've seen a lot more hedge-fund involvement over the last five years," says Dale Goldsmith, a lawyer with Armbruster & Goldsmith, a Los Angeles firm specializing in land use and entitlements.
In turning to land bankers, are home builders really using "financing that's hidden?" asks Joseph Snider, a senior credit officer at Moody's Investors Service. Moody's now rates the home builders based on numbers adjusted for option and joint-venture liabilities. While it has yet to change any debt ratings, Snider warned in a recent report that companies with significant use of options and joint ventures should increase disclosure of their terms and related liabilities or face the risk that these deals will put downward pressure on their ratings relative to companies with less complex structures.
In recent years, land options have worked wonderfully. Most have a duration of three to five years, and those acquired before 2003 are money good if exercised this year, given the enormous appreciation in land values. Writeoffs have been small to date; Zelman of Credit Suisse estimates that the home builders have written off nearly $300 million in option deposits through this year's second quarter, a small fraction of industry earnings.
The numbers could grow, however, if the price of land tanks, along with housing prices. Home builders don't disclose when their options were struck. Nor do they reveal the economics of options and joint ventures, Moody's notwithstanding. At most, companies say they review their option and joint-venture investments each quarter, writing down deals as necessary.
IF HOME BUILDERS WALK AWAY FROM LAND OPTIONS, the impact is likely to be widespread. The land owner presumably would shop the property anew, and at a reduced price, particularly if it has associated debt.
Jeff Barcy, CEO of Hearthstone, a San Francisco-based land banker with access to $4 billion of equity capital, cites a deal in which a publicly traded home builder recently walked away from an option to buy land in Florida for $60 million. The parcel recently was resold for $32 million.
The Florida deal "definitely put pressure on the broader market, and affects all the deals" in that market, Barcy says. "Everything is connected in a local market. We're seeing more weakness across the U.S. on a daily basis."
A number of home builders have said they're working to renegotiate the terms of some of their land options, in the hope of reducing purchase prices or extending the time periods in which they agreed to exercise them. If they don't reach acceptable terms, some indicate they'll walk.
Hovnanian Enterprises, which has $454 million of option deposits and letters of credit outstanding, wrote off $11.4 million of deposits in its fiscal third quarter, ended July, and expects to walk away from additional options, says CFO Sorsby.
Management told analysts it couldn't quantify the exact impact of option renegotiations until such talks conclude. Therefore, its earnings guidance for its fiscal fourth quarter ranges widely, from $1.05 a share to $1.80. Hovnanian's stock has been among the industry's strongest performers of late, up about 20%, to 30, since Aug. 14. Still, it's down more than 50% from its highs in 2005.
If home builders forfeit their option deposits, they could face additional costs. Among other things, they might have to spread the sunk costs of developing a community — which range from architectural plans to the construction of model homes and swimming pools — over fewer homes, one land banker explains.
There's also reputation risk. "Companies with 50 homes built don't want to walk away from [unfinished] communities. It would kill their reputations," says John Burns, president of John Burns Real Estate Consulting in Irvine, Calif.
Joint ventures, too, have allowed home builders to buy land, and even other builders, while keeping both the land and leverage off their balance sheets.
For example, a developer seeking to purchase a $100 million piece of land with 40% equity might put up $19.6 million, or 49% of that equity stake, with a partner contributing $20.4 million, or 51%. The JV would fund the remaining $60 million with debt, which, because the builder's equity stake is less than 50%, would not appear on the company's books. Private-equity funds have been active participants in such deals.
Lennar used a joint venture to purchase the 3,718-acre El Toro Marine base in Irvine last year, with equity partners including MSD Capital, the investment vehicle for Michael Dell; Rockpoint Group; and Blackacre Institutional Capital, the real-estate arm of Cerberus Capital Management, a hedge fund.
Hovnanian likewise used a joint venture in 2005 to acquire the assets of Town & Country Homes, a Lombard, Ill., home builder. Its equity partner: Blackstone Real Estate Advisors. Hovnanian's total investment in unconsolidated joint ventures was $217 million at the end of the July quarter, about 11% of its book value.
So far, none of the nation's top 13 home builders, save Lennar, appears to have written off equity in joint ventures. On the other hand, earnings from joint ventures have declined at some companies. Beazer's share of income from joint ventures declined to $127,000 in the June quarter, from $2.95 million a year earlier.
The Bottom Line
At NVR, Lennar, Hovnanian and Beazer, land-option deposits represent a hefty chunk of book value. At Standard Pacific and KB Home, joint ventures account for much of book value.
Some home builders guarantee the debt of their joint ventures, which could come back to bite them if market conditions worsen. Lennar, for example, guarantees $1.2 billion of debt for its JVs and enters into option contracts to buy land from them. When the builder is also the guarantor, industry insiders say, a joint venture tends to get more favorable terms from lenders. But if things unravel, the company could wind up with a lot more debt than it discloses on its balance sheet.
In a worst case, or one close to it, the home builder might opt to prop up a joint venture with additional equity financing. If its interest exceeds 50%, under accounting rules it would have to consolidate the JV, with all its liabilities, into its own operations.
Every real-estate cycle is different, and it's too soon to tell whether this one will end with a whimper or a bang — one that rivals, and maybe exceeds, the Nasdaq's collapse in 2000. Land options and off-balance-sheet joint ventures are designed to mitigate corporate risk in the event of calamity. If market conditions worsen, however, they might provoke it.
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Anonymous said...
Who is a bubble sitter?
Wednesday, October 04, 2006 12:59:09 AM
The Smart People
Oil prices always come down this time of year, only to be jacked up again in the winter,
Not if you vote Republican! YOU BETTER VOTE REPUBLICAN YOU BEER SWILLING, HILLBILLY, er... ah... Go Bush!
The fact is most of the posters to HP are sucking on limes of their own.
Me and thousands of other cannot afford to buy a home now. Who will YOU sell to? Your running out of lawyer and doctors.
The fact is most of the posters to HP are sucking on limes (Wrong - lemons) of their own. Today the Dow closed at it's highest level EVER (U.S dollar went sideways), oil prices plunged, gold prices plunged (hedge funds are going bankrupt and dumping into blue chips as they liquidate), inflation is tame (by which measure?) and earnings reports are good (true). The US economy is the best in the world (Wrong - its Sweden actually) despite what you all say here and at other doom and gloom blogs.
My biggest problem is moving every six months as I keep find nicer and bigger places to rent for the same price. LOL
There is a transaction cost in moving every six months but then again Mexicans work for cheap and its not the 6% the real estate crooks take from you. LOL
Joey-
You are right on with your forecast. I also like renting here. The busting of this bubble will have some causualties! Millions of them, and not just in the U.S.
why does the realtor troll confuse the dow hitting a record high with anything to do with home prices?
Great blog!
Get the latest news on the real estate & housing bubble:
http://www.expertresearch.net/realestate/news.html
The Fernstien rental ratio, used for years before this bubble, predicts leverage factors above the %40 resale ceiling thus creating a great buying opportunity this winter!
"DOW at all time high".
Well Duh!! for one thing the stocks in the DOW arent the same as they were 6 years ago, and once you place inflation into the equasion even using government data of 4% over 6 years it compounds to a loss of over 30%.
The DOW would have to be in the region of 14000 just to break even!!!!
OK Jack, doom and gloom? How about a dose of what Volcker has to say?.. Or is he just another deranged idiot?
Since 2005 to even last week, Volcker has been warning the market with the following comments:
"There are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot."
"I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change."
"We are skating on increasingly thin ice".
www.jsmineset.com
jack mehoff said...
"...inflation is tame "
Of course inflation is tame when someone like you are living in your parents basement....
Evidently, you're not living in the real world... Get a clue.
I’m predicting that this bubble will unravel more quickly than previous real estate bubbles because of the widespread use of exotic mortgage products that either did not exist in previous bubble periods or were limited use products doled out wisely and sparingly to doctors, lawyers, and Indian Chiefs. Today, you can be an aspiring actor or pizza delivery boy and get approved for an outrageous mortgage for far more money than you can ever hope to repay. Again, this is a credit bubble chasing real estate folks because of our present tax environment – not a pure real estate bubble. If you really want someone to blame this run up on, blame it the companies and banks that co-opted out their loan decision making to salesmen and saleswomen and used cookie cutter standards as means for approval and then lowered all the standards. No slight intended to girls, slow people or effeminate males out there, but the military has been for years lowering their entry standards to “make their numbers work” and that’s what the mortgage industry has been doing to chase down sales.
The market is saturated and it is not going to make a dime’s worth of difference what “good intentions” our guv’ment boys have up their sleeves. About the only hope I can see in preventing the unraveling of this bubble accelerate downhill is if there is a widespread importation of all manner of foreigners who come crashing in and want to buy into this “American Dream”. I could see the average John Q. “Boomer” Public going for it if some politician tries appealing to his craven side by saying “Look, we’re going to level with you for a change. Without letting in all the young Maria’s and Jose’s and their multiple children, your housing value is going to crash and there will not be enough full time workers in the country to support your Social Security benefit. We kind of aborted all the future we had during the 70’s, 80’s and 90’s. So, it’s either watch your house ‘value’ go to hell in a hand basket and figure on working till you drop and get used to Little Friskies for dinner or, learn Spanish – what’s it going to be?”
now there's an irony - jack mehoff is learning a "romance language" - ha! I kill me!
i know you are but what am i?
signed
Pee Wee
"Today the Dow closed at it's highest level EVER, oil prices plunged, gold prices plunged, inflation is tame and earnings reports are good. The US economy is the best in the world despite what you all say here and at other doom and gloom blogs."
"One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It is simply too painful to acknowledge -- even to ourselves -- that we’ve been so credulous"
-Carl Sagan
"Our high-quality sleeping pad with brass valve construction is built to last for easy, reliable inflation season after season. Imported."
- REI
"Gold prices are dropping because it appears the rate of inflation is moderating. That is a fact."
Bank of France blamed for gold sell off
Central banks may have dumped far more gold on the markets over the last three weeks than officially reported, accounting for the sudden plunge in prices that has stunned investors. Barclays Capital said Europe's banks had sold an extra 100 tonnes from reserves in a rush to meet a quota deadline on September 26, but had done so by selling through forward contracts that disguised the effect.
Treasuries Fall After Fed's Kohn Says Inflation Is a Concern
Oct. 5 (Bloomberg) -- Treasuries declined, pushing two-year yields up from the lowest since February, after Federal Reserve Vice Chairman Donald Kohn said he was worried about inflation.
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