D.R. Horton reports losses in fiscal fourth quarter

The second-largest homebuilder said orders dropped 39% year-over-year to the lowest level in nearly 6 years in its fiscal fourth quarter. Order cancellations were at 48%, up from 38% in the previous quarter. Chairman Donald Horton attributed the poor results to low mortgage loan availability, which hurts sales. Shares dropped 5.3%.

Market conditions are expected to remain challenging for months to come, according to industry officials. Federal Reserve Chairman Ben Bernanke said that housing will have a negative impact on the economy for the remaining part of the year and at least for some time in 2008. Builder sentiment is at its lowest level since the index was established in 1985. The index fell to 18 from a reading of 20 in September, which means that only 18% of respondents in the survey view market conditions as beneficial.

In spite of rate cut, mortgage rates edge up

After the Fed cut the Fed Funds Rate on Tuesday, one would expect mortgage interest rates to ease. What they did, however, was climb higher. One possible explanation Freddie Mac’s chief economist Frank Nothaft gave is the increased number of mortgage applications after last week’s 4-month low in interest rates. One way or another, analysts are saying Ben Bernanke’s decision missed the mark. Oil, gold, and stocks moved higher, and those were doing quite well even before the rate cut. The Canadian dollar traded at $1.0001 for a while, something that hadn’t happened in more than 30 years, and is currently priced at $0.99 and above. The U.S. dollar fell against the Euro, too, and all this against a backdrop of a weak job market and high personal debt.

Furthermore, Ben Bernanke himself said we’ll see more foreclosures soon, and borrowers will keep defaulting on their mortgages in spite of the recent moves. He added that the Fed is monitoring the situation and is ready to step in if needed, but that doesn’t really sound like a good long-term plan. President Bush said the financial indicators are good and he is confident the economy will remain strong. Tell this to all the pessimists out there.

Interest rates on 30-year fixed-rate mortgages averaged 6.34%, up from last week’s 6.31%. 15-year fixed home loans were at 5.98%, compared to 5.97% a week ago. 5-year adjustable-rate mortgages increased from 6.21% to 6.17%, and 1-year ARMs carried an interest of 5.65%, somewhat lower than last week’s 5.66%.

Bernanke comments on the mortgage crisis

On Aug. 27^th, Fed Chairman Ben Bernanke sent a letter to Senator Charles Schumer, in which he said there’s no need to lift the caps on Fannie Mae’s and Freddie Mac’s portfolios. A similar opinion was expressed by OFHEO (Office of Federal Housing Enterprise Oversight), the federal regulator of the two GSEs’, and President George Bush a couple of weeks ago when a suggestion to lift the portfolio limitations on Fannie and Freddie was rejected. Bernanke said that policy makers may encourage Fannie and Freddie to package more loans into securities and sell them to investors, as these actions are not constrained by the portfolio caps. Bernanke also said that the Fed is closely monitoring the financial markets and “is prepared to act as needed” to prevent bigger problems.

Bernanke suggested developing new mortgage products for low- and moderate-income borrowers that would not cause unexpected spikes in mortgage payments. Clearer explanation of loan terms would also be beneficial to potential borrowers. He also noted that reforming the FHA (Federal Housing Agency) might be helpful.

Analysts believe that these comments spell a high likelihood of a Fed rate cut on the next meeting Sept. 18. Another speech by Bernanke is scheduled for this Friday, and it may well shed some more light on what the Fed is about to do.

Bernanke concerned over housing

In his testimony to congress, Federal Reserve Chairman Ben Bernanke said that the subprime mortgage sector has “deteriorated significantly”, causing “increased concerns” among investors in some other types of financial instruments. It seems that top figures in the industry are finally admitting that the problems in subprime lending are a serious issue, with Freddie Mac’s CEO Richard Syron saying he doesn’t believe that housing has “hit bottom”, and that “things are going to get worse”. What we’ve seen so far may only be the beginning of a huge collapse, not the “rebound” in housing that some had hoped for.

The Fed has trimmed its forecast for growth in 2007 and 2008, but inflation forecasts remain unchanged. Unemployment is expected to rise slightly.

Amid a flood of economy-related news this week, mortgage interest rates remained mostly unchanged from last week’s readings, probably because the general outlook changed little. The 30-year fixed-rate mortgage remained close to the highs for this year at 6.73%, and the 5-year adjustable-rate mortgage averaged 6.35%, the same as a week ago. 15-year fixed-rate mortgages edged down to 6.38% from last week’s 6.39%, and one-year adjustable loans were up slightly at 5.72% from 5.71% a week ago.

Bernanke: lending standards will “restrain” housing

Ben S. Bernanke, Federal Reserve Chairman, said that tightening lending standards will impact the demand for housing for longer than expected. Let’s say the initial forecasts most authorities issued were a little too optimistic to begin with. Bernanke believes “additional measures” will be required to combat fraud and abusive lending, but the Fed should be careful “not to suppress responsible lending or eliminate financing opportunities for subprime borrowers”. Fine, now we’d like to see them actually do it. Some economists have warned against additional regulation, because the market will “correct itself” anyway. Indeed the Fed is often being blamed for causing the current situation by keeping rates low for too long, so could they exacerbate the situation by intervening now?

Although Bernanke believes trouble in the housing sector has not spilled over to the larger economy, he forecasts “moderate” growth for the coming months. Job growth, manufacturing and personal spending are doing well, but some economists fear this may not last for much longer.

Rising delinquencies and foreclosures on subprime mortgages contribute to rising inventories of unsold houses, which results in declines in home prices and new construction. According to Bernanke, “the slowdown in residential construction” will likely “remain a drag on economic growth”, but it is “difficult to quantify” the impact. Knowing that housing accounts for nearly a quarter of annual economic growth, I believe no one would like to have to “quantify” the worst-case scenario.

The word “recession” is being pronounced more and more often, and with the housing slump extending for longer than expected, it seems only a question of time before the consequences of problems in the Real Estate industry are felt in the larger economy. A recession seems unlikely, but so does significant economic growth in 2007. Perhaps the Fed will deal with the problem?