New Home Sales As Bad As Existing Homes

New home sales tumbled 26.4% last year, the largest yearly drop on record. Sales were down 4.7% in December, with median home prices dropping 10.4% year-over-year, the biggest 12-month decline in 37 years. These numbers don’t account for cancellations, so actual sales were probably even lower. Furthermore, I guess most sales featured additional incentives, so the prices are inflated, too. The median price of a new home increased a mere 0.2% to $246,900 in 2007 – if incentives were taken into consideration, new home prices would drop as well. The inventory of unsold homes is at 9.7 months’ worth, which is close to a record high, so there’s no light at the end of the tunnel for home builders. An economic stimulus package? Financial innovation, anyone?

Real Estate: Still Gloomy

Housing has been a source of concern for regulators, bankers and consumers for more than a year now, and signs of improvement are nowhere to be seen. According to the latest NAR report, existing home sales dropped 2.2% in December to a seasonally adjusted annual rate of 4.89 million units, compared to 5.00 million in November, down 22% year-over-year. Total existing home sales for 2007 came in at 5,652,000, down 12.8% when compared to 2006 results but still the fifth highest level on record. The inventory of unsold homes currently on the market is more than twice the normal supply. The December level was the highest in history for that month. The median price for a single-family home dropped 1.8% in 2007, the first decline since the NAR started tracking prices in 1968. Looks like it can only get better from now on but who knows, so many problems need to be solved first.

By the way, the latest Fed rate cut has helped bring down mortgage interest rates: on average, the 30-year fixed home loan carried an interest of 5.48% this week, the lowest level in almost 4 years. It stood at 5.69% last week. 15-year fixed-rate mortgages dropped to 4.95%, from 5.21% last week, 5-year adjustable-rate home loans averaged 5.13%, compared to 5.40% a week ago, and one-year ARMs stood at 4.99% this week, compared to 5.26% last week. Lenders are expecting a refinancing boom.

And now, KB Home

Big Wall Street banks will report 4^th quarter results in the coming weeks, and those are expected to be very, very bleak. But until then, home builders’ financial troubles will be in the spotlight. Shares of KB home lost 9% after the company reported a $773 million loss in Q4, 7 times the expected number. And they didn’t sweeten the pill either: Chief Executive Jeffrey Mezger said he expects the market to remain bad for a while, due to oversupply, low affordability and declining consumer confidence. Although revenue fell, the company increased its cash reserve, which, according to analysts, should help it survive the downturn. The surprising part was that KB Home placed a special emphasis on its “strategic partnership” with Countrywide. Amid fears that the lender might go under, it’s hard to see why this partnership is so important, but I guess they can always find another lender to work with if they have to. As for Countrywide, delinquency and foreclosure rates on its loans hit record highs in December, and loan origination dropped almost 50% year-over-year. It will report its financial results for Q4 later this month, too.

Single-Family Home Building Declines

Spending on private residential construction dropped 2.5% in November, its biggest decline in 5 years. This was the 21^st consecutive drop in home construction, which illustrates a slowing trend for private home building. Non-residential building, however, showed an increase of 2.1%, which offset the drop in residential construction. Total construction spending increased by 0.1% in November. Meanwhile, the Institute of Supply Management’s manufacturing index dropped from 50.8 to 47.7. Any number below 50 indicates contraction in manufacturing. Stalling home building and manufacturing will most likely lead to slower economic growth and affect the overall GDP. These results are closely related to the higher cost of credit and the problems in the housing sector, both of which result in lower consumer spending. What we get next is either (or maybe even both) of the following: another rate cut or recession.

Little Optimism For 2008

This is the first post for this year. 2007 was tough, and a lot has changed since last January. Many believe the housing and capital markets may never be the same again. There’s hope for improvement later this year, and yet there’s some fear that things may get worse before they get better. November housing data, released at the end of December, gives little reason for optimism. New-home sales dropped 34.4% on year-over-year basis, the largest drop since 1991. The median price was down 0.4% on a yearly basis to $239,100. This number doesn’t account for builder incentives, which means that the actual prices have dropped even more. Sales of existing homes were up 0.4% compared to the month before for the first time since February – this sounds like a piece of good news but it’s hard to classify it as a turnaround point. Fewer homes were sold in November than the previous month: 46,000 homes sold compared to 55,000 in October. The supply of unsold homes currently on the market would take 10 months to sell at the current pace.

Mortgage interest rates ended the year nearly where they started, with the 30-year fixed-rate mortgage averaging a little above 6.1%. This, however, happened after interest rates topped 6.7% in the summer and the Fed lowered its benchmark interest rate by 1% with three consecutive rate cuts. Forecasts for 2008 range from extremely bearish to modestly bullish, but most are pretty cautious and somewhat vague. Happy New Year and let’s hope it’s a good year.

Analyst Downgrades Lennar

Deutsche Bank Securities Inc. analyst Nishu Sood cut his rating on Lennar Corp. from “Buy” to “Hold”, citing concern over the home builder’s joint-venture agreements. Tighter credit and a glut of homes on the market have resulted in declining demand and a high rate of cancellations, which eat into home builders’ bottom lines. Sood cut his target price for Lennar stock from $36 to $17. The stock traded at $18.72 on Thursday.

Home builders and sellers, desperate to sell homes, are offering ever bigger incentives, ranging from trips and car leases to exotic pets. Sellers are willing to make deep discounts because they fear that home prices may fall further as forecast. However, the market is so bad right now that the chances to sell a home at all are really slim. And while most owners can afford to sit and wait for better times to sell their houses, home builders are suffering losses every day a new home sits empty.

Conforming Loan Limit Unchanged In 2008

The conforming loan limit, currently $417,000, will remain unchanged in 2008, announced OFHEO director James B. Lockhart. OFHEO is the entity that regulates Fannie Mae and Freddie Mac, the government-chartered guarantors of home mortgages. Any loans above the $417,000 limit are considered “jumbo” and cannot be guaranteed by Fannie Mae and Freddie Mac, so lenders usually charge higher interest on them. This limit only applies to one-unit properties; multiple-unit properties have higher limits. Alaska, Hawaii, Guam and the U.S. Virgin Islands have higher upper limits than other states. The maximum conforming loan limit is determined by analyzing October-to-October change in the average house price, which has declined more than 3% this year. The maximum limit hasn’t changed for the last 2 years, and it probably won’t get revised upwards anytime soon. The latest NAR report says the inventory of single-family homes on the market is at the highest level in 22 years (10.8 months’ supply), which can only drive home prices down.

Home Sales slide in September

Now that the data is in, we can say that September sales did indeed drop dramatically. Total existing home sales fell 8% to a seasonally adjusted rate of 5.04 million units, compared to 5.48 million (revised downwards from 5.5 million) in August. That is more than 19% less than a year ago, when 6.23 million units were sold. Third-quarter numbers, however, were better than expected, with an annual sales rate of 5.42 million, somewhat higher than the NAR’s forecast of 5.38 million (unless numbers get revised again).

We now have a 10-month supply of homes on the market and it seems unlikely that this surplus inventory will be sold before the end of the year. As usual, Lawrence Yun, NAR’s senior economist, provided some comment, which I will not quote, because it is more of the same “all is good talk”, as usually wrapped in shiny complicated terminology that failed to conceal the underlying emptiness. Here’s a link to the press release for anyone interested.

Beazer Homes In Trouble

Here we go again. Beazer Homes Inc., one of the top U.S. homebuilders, announced that cancellations nearly doubled in its fiscal fourth quarter to 68% from the previous quarter. Whoa, this is what I call troubled business. With prices dropping absolutely everywhere and record high inventory of unsold homes on the market, it’s only natural that buyers will cancel their orders, even if it means losing a deposit of tens of thousands of dollars. Brace yourself, this company is headed for more turmoil, if not insolvency. This is sad, and Beazer is not the only homebuilder in trouble. In fact, they’re all in trouble, and the situation is unlikely to improve in the near future.

Furthermore, an internal investigation at Beazer found violations of federal housing regulations and accounting errors, which means that the homebuilder will be restating financial results dating back to 2004, no good for its reputation and stock price. Fines and penalties from the government are highly likely as well. Fitch Ratings downgraded Beazer to BB-minus from BB, which is junk-bond area and essentially means the company’s creditworthiness is, well, somewhat shaky. Fitch also said further downgrades are possible.

And by the way, Lone Star completed the acquisition of Accredited Home Lenders Holding Co. Happy end to the soap opera.

Construction declined in May

New construction dropped 2.1% in May from a month earlier, and was 24.2% lower than last year. Permits were up 3%, but that came after a 7.1% drop in April, so the rebound is not that significant

David Seiders, chief economist for the National Association of Home Builders, predicted that new construction will decline by 22% this year. “Improvements in housing starts”, he said, will come no earlier than next year.

Housing starts dipped 3.4%, and were 26% lower than in May 2006. All regions reported year-over-year declines, but monthly data varied. In the Northeast, starts increased by 0.9% month-over month, but were down 20.6% compared to May 2006. In the West, starts were down 12.1% from April and 33.3% from a year earlier. In the Midwest, starts increased by 9.1% month-over-month, but were nevertheless down 23.2% year-over-year. In the South, single family starts declined 3.4% on a monthly basis and 24.2% from May 2006.

All this comes to say that monthly fluctuations of 1-2%, whether up of down, do not change the bigger picture. Currently demand for housing is exceptionally low, due to a number of reasons, and naturally this is dragging construction down. As long as inventories – and home prices – remain high, construction will not show any improvement.

Mortgage rates highest in 10 months

Mortgage rates rose again the week ending June 7^th, says a report by Freddie Mac. The 30-year fixed-rate mortgage is at 6.53, the highest reading for this year, and the highest since August 2006. Rising rates reflect strong job growth, but they certainly won’t be luring new buyers to the Real Estate market. Which, in turn, means that sellers will have to cut prices further and “the housing slump” will last for quite some time. Until the end of 2007 at the least, according to most forecasts.

The situation is exacerbated by record-high inventories of unsold homes, so it’s clearly going to take a while for the market to get back to normal. In fact, it seems that no one has a reliable estimation of the unsold homes on the market, but all analysts point out that there are too many homes for too few buyers. The Fed, however, is concerned about inflation, so rate cuts are unlikely. The Mortgage Bankers Association (MBA) believes mortgage rates will reach 7% by the end of the year. No wonder mortgage applications are dropping.

This is how the rest of the mortgage loans performed this week: 15-year fixed-rate mortgages averaged 6.22%, the 5-year adjustable-rate mortgage was at 6.24 and one-year ARMs carried an interest rate of 5.65. All interest rates were up 0.05% to 0.10%.