Building Permits, Construction Drops

A report by the Commerce Department says that construction of new homes dropped 5.5% in November to the lowest level in 16 years. Applications for building permits fell 1.5% to the lowest level since 1993. Meanwhile, construction of multi-family homes increased 4.4%. The builder sentiment index remained at 19 in December for a third straight month, the lowest reading in more than two decades. And now the question is, can it really get any worse? Naturally, builders are worried: after all the Real Estate speculation, those who got burned no longer have the finances or credit rating to buy a new home. As an interesting aside, a survey by Countrywide Bank showed that getting financially fit is the top New Year’s resolution this year. Physical fitness comes second - households consider sound finances more important than healthy bodies.

Al Greenspan’s version of “helicopters”

Suggesting to “drop money from helicopters” to prevent a financial crisis was what initially earned current Fed Chairman Ben Bernanke his nickname “helicopters”. However, his predecessor Alan Greenspan has just suggested and equally radical idea. He said the government should provide “direct financial assistance” to strapped homeowners, essentially depositing free money into their bank accounts. Another solution Mr. Greenspan suggested was temporarily lowering taxes. In his opinion, although this would create a “short-term fiscal problem”, it would save the economy. Hm… this sounds pretty risky, and did anyone mention moral hazard? Or have we retired the term already? And finally, the ex-Fed chairman doesn’t even know “if it would work”, but he firmly believes it will be good for the people. So much for common sense.

Job Cuts At LendingTree

Mortgage lender LendingTree couldn’t think of a better holiday gift for its employees: job cuts. Unlike Freddie Mac, which took its employees to a party at Ritz-Carlton, LendingTree will be eliminating 220 jobs, which leaves it with some 1,000 employees. This is the third time this year that the company conducts mass layoffs. According to a spokeswoman for the lender, the layoffs were prompted by pessimistic forecasts for the industry. LendingTree posted a third-quarter loss of $5.6 million, compared to profits of $15.2 million a year earlier. The company saw its loan sales plunge due to lower demand by the secondary market, lower revenue per loan and the closing of fewer loans. Since the beginning of the credit crunch in the summer, profits have plunged for mortgage lenders as they tightened their lending standards to prevent future delinquencies and foreclosures. A report by the Labor Department showed that the Consumer Price Index rose 0.8% in October, the biggest jump since September 2005, which will negatively affect the consumers’ ability to make timely mortgage payments, meaning more trouble for lenders. I guess Christmas won’t be very jolly for some companies.

Countrywide’s Loan Production Plunges

Countrywide’s home loan production dropped 40% year-over-year in November, the lender announced Thursday. Loan fundigs were up 5% compared to October’s results, quite a feat amid all the trouble the mortgage lending sector is experiencing currently. Countrywide almost eliminated origination of subprime home loans and significantly reduced adjustable-rate mortgages. Delinquencies rose from 4.57% in November 2006 to 6.34% last month. In October, 5.89% of Countrywide loans were delinquent.

Mortgage interest rates climbed up from record lows after the Fed’s rate cut, and this week 30-year mortgage rates averaged 6.11% - still some of the lowest rates for this year, but above 6% nevertheless. The rate dropped below 6% briefly last week. 15-year fixed-rate loans were at 5.78%, up from 5.65% a week ago. 5-year ARMs averaged 5.78%, compared to 5.75% last week. Interest on one-year adjustable home loans increased from 5.46% last week to 5.50%. Which way rates go from here will depend on a number of factors, including the market for Treasuries and the job market.

Fannie, Freddie: More Gloom Ahead

The CEOs of Fannie Mae and Freddie Mac, the two government-chartered financiers of mortgage loans, recently voiced concerns about the housing market’s future. Freddie Mac’s Richard Syron said his company will likely suffer another quarterly loss of about $2 billion, with credit losses totaling $10-12 billion. The worst is not over yet, however: he expects home prices to drop further before the market stabilizes. The company is in “hiring freeze” in order to control costs while it struggles with losses. Fannie Mae’s CEO Daniel Mudd expects 2008 to be “very tough”, with a gradual recovery in late 2009. He expects home prices to fall 12% by next year and hopes Fannie’s recent efforts to raise capital will be enough to help the company deal with the situation. As the housing slump unfolds, it turns out even the two GSEs are not immune to trouble. Both have slashed their dividends in recent weeks and issued stock to raise capital.

Another Fed Rate Cut

The Fed cut its benchmark interest rate again, by 0.25% to 4.25%. The discount rate was lowered accordingly to 4.75%. Economists who had expected a half-point cut in the Fed Funds Rate were disappointed, as recent bad news was expected to prompt more aggressive action by the Federal Open Market Committee (FOMC). The Dow Industrials dropped nearly 300 points after the cut. Stocks of mortgage lenders and large banks suffered, including those of Countrywide Financial, Wells Fargo, Fannie Mae, Freddie Mac, Morgan Stanley, Merrill Lynch, Goldman Sachs and others. Shares of home builders Pulte Homes, Toll Brothers, Lennar and Beazer took a hit as well. The Fed’s statement suggested that they’re worried about the economic slowdown and lower consumer spending, while “some inflation risks remain” too. Meanwhile, holiday shopping has slowed down, and the holiday season’s start wasn’t that impressive after all. Analysts believe the Fed may cut again in January if holiday shopping data is weak and the financial markets remain in freeze mode.

As The Year Ends

2007 is drawing to its end, and between holiday shopping and baking cookies, some are trying to analyze the housing market trends and forecast its future behavior. While predictions range from mildly gloomy to disastrous, the NAR produced an amusingly optimistic home sales forecast for 2008. After reducing their home sales forecasts for 9 straight months, they now revised their 2007 forecast upwards, to 5.67 million from 5.66 million. Chief economist Lawrence Yun said an optimistic job market report and the government’s help for troubled homeowners influenced the improved outlook. The group believes home sales will rise to 5.7 million in 2008. A Global Insight economist forecasts 4.7 million home sales in 2008.

Merrill Lynch predicts a gloomy 2008 for the U.S. economy with high energy prices, weak employment, tight credit and falling home prices. And by the way, Fannie Mae and Freddie Mac are introducing tougher requirements for mortgages they securitize.