Countrywide Didn’t Keep Its Promise

Countrywide Financial, the nation’s biggest mortgage lender reported its 4^th quarter financial results yesterday. After a $1.2 billion loss in Q3, the company said it expected a profit in Q4, but failed to achieve that, as expected. Countrywide posted a loss of $422 million, much better than the previous quarter, but well, still a loss. However, Bank of America affirmed investors that it is still eager to acquire the mortgage lender, so shares of both businesses went up. Overall, the 4^th quarter results were pretty bad in every sense: loan fundings were almost cut in half compared to a year earlier, and loan-loss provisions increased more than 12 times from $73 million to $924 million for the same period. The delinquency rate on subprime mortgages was 33% in Q4, up from 29.6% the previous quarter. And finally, it currently holds $395 million in foreclosed real estate – now that one’s gonna be hard to get rid of.

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.

Bush Administration Proposes Fiscal Stimulus

On Friday, Bernanke and the Bush administration proposed a “fiscal stimulus package” of $150 billion to help prop up the economy by encouraging consumer spending. No details were available, because the Congress has yet to approve it, but the administration is considering one-time tax rebates of approx. $800 for all consumers. An agreement will probably be reached in 30 to 45 days, just in time for tax-filing season. The plan is costly, and there’s some doubt that it won’t help the economy in the long term. Although it actually provides consumers with free cash, no one knows how they may react: in the current crisis, people are unlikely to start spending more. They may have to pay down credit card debt, buy insurance, or choose to invest the money. It may offer some relief, but it will not solve all the problems in the U.S. economy. Stock markets were closed on Monday, but Dow Jones and S&P 500 futures prices dropped more than 4% in a day. Markets all over Europe, South America, and Asia plunged on worries over bank losses, the U.S. Real Estate market and an imminent recession. Now this is getting scary.

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.

Consumer Spending Slowed In October

Growth in consumer spending slowed to the lowest level in 4 months in October, the Commerce Department reported Friday. Spending increased a mere 0.2%, the smallest increase since June. This is slightly below the expected increase of 0.3%. Individual incomes grew by 0.2% as well, which is the slowest pace in 6 months and slower than expected. Gross domestic product increased by 3.9% in Q3, but economists believe the current quarter will not be as robust, with growth possibly slowing to 1% annual rate.

Construction dropped 0.8%, in the 20^th consecutive month of declines for the industry and the biggest decline since July. The slowdown in the housing industry may lead to more layoffs, and even weaker consumer spending. Rising inflation is scaring off consumers and, despite a relatively strong beginning, retailers are bracing for a tough holiday season this year.

Mortgage Interest Rates At 6-month Low

Freddie Mac’s weekly survey of interest rates shows the 30-year mortgage dropped from 6.24% to 6.20% for this week, the lowest since mid-May. The low for this year was 6.14% in early March, and rates kept climbing pretty steadily for a while, reaching 6.73% back in July. This made many analysts think that interest on 30-year fixed home loans is about to go through the roof topping 7% by the end of the year. Turns out they didn’t foresee the August credit crunch and well, no one counted in the Fed rate cuts. I assume now it’s safe to say interest rates won’t be nearing 7% until the end of the year in any case. With all the mess in the housing market and the two GSEs in trouble as well, the Fed may yet cut again at its meeting on December 11^th – they’ve thrown the dollar stability out the window anyway, so why not prop up the Real Estate sector for a while. Furthermore, oil will most likely hit $100/barrel by the end of 2007, rate cut or not (it’s at $97-$98 right now and forecasters say it will keep growing) due mostly to the dollar’s weakness: China plans to “diversify” its reserves, and OPEC is considering pricing oil in another currency. It may all look like doom & gloom but this is reality. Financial innovation, anyone?

Home Sales Dropped in 3Q

Sales of existing homes declined in 46 states in the third quarter of 2007, according to an NAR [National Association of Realtors] report issued Wednesday. Sales dropped 13.7% on average year-over-year, while Nevada, Florida, Arizona and California were hit hardest, with declines of 35%, 32%, 30.9% and 27.8% respectively. Sales increased in Vermont and North Dakota – the only two states to report positive data. Sales were up 0.8% in Vermont and 2.9% in North Dakota, and no sales figures were available for Idaho and New Hampshire.

As for metropolitan areas, 93 out of 150 surveyed saw price increases. However, median prices in Florida and California dropped more than 10% compared to last year. In his statement, NAR’s chief economist Lawrence Yun emphasized the positive news: “Some metro areas are hot while others are experiencing localized problems”. So all Real Estate is local, and the problems are “localized”. And there’s more of the “all is well” rhetoric: “Home prices … are affordable and, perhaps, even undervalued” – I guess foreclosure properties are indeed undervalued.

S&P Cuts Bear Stearns Rating

S&P cut Bear Stearns’ credit rating after the company announced plans to write down $1.2 billion in subprime assets, which will likely result in its first quarterly loss since 1985 when the company went public. After the rating was revised from A+ to A, the stock price actually rose because the writedown was smaller than other securities firms’. Citigroup got its ratings lowered after writedowns of $9 billion and Merrill Lynch & Co was downgraded on writedowns of $8 billion.

Meanwhile, Wells Fargo’s CEO John Stumpf, speaking at an investment conference, predicted that the worst is yet to come for the housing market. He said that this is the worst Real Estate market he’s seen in his 30-year career, and 2008 will probably be even worse. Wow he actually said that.

Home Depot Feels The Heat

Home Depot, the home improvement store chain, had to cut its full-year outlook for 2007 after financial results came in somewhat weaker than expected in Q3. The company posted a 27% drop in quarterly profit, citing “tough environment” as the main reason. Net earnings dropped to $0.60 per diluted share, compared to $0.73 a year ago. Sales dropped 3.5% compared to the third quarter of 2006, “reflecting negative comparable store sales of 6.2%, offset in part by sales from new stores”, according to the retailer’s press release. Earnings per share are expected to decline by 11% in fiscal 2007, adjusted downwards from September’s forecast for a 9% decline.

“We started the year with a more pessimistic view of the housing and home improvement markets than many. It turns out we were not pessimistic enough”, said Chairman and CEO Frank Blake. Well, Home Depot is not the only company that wasn’t “pessimistic enough”.

Dollar In Freefall

The dollar hit yet another record low against the Canadian dollar, which traded at $1.1040. This is the lowest rate since 1950. The Greenback fell against other currencies as well, and quite significantly. It hit a 26-year low against the pound at $2.1052, and a 23-year low against the Australian dollar, which was priced at nearly $0.94. The Euro traded at $1.47 yesterday, the highest since the inception of the 13-nation currency.

China announced that it will diversify its foreign exchange reserves, which may further weaken the dollar. Chinese officials no longer regard the dollar a “world currency”, according to Xu Jian, a central bank director. Analysts believe that further weakening of the dollar is likely, although some indices would suggest a bottoming out of the dollar’s freefall.

The dollar’s weakness pushed crude oil prices higher to a new record of $98/barrel, while gold reached a 27-year high. Good news for anyone trading in those commodities and for export companies. Add to this the facts that the economy isn’t exactly booming and troubles in the Real Estate market are far from over. And one of these days someone may officially call a recession. The world is changing…

Interest Rates Fall Sharply

Interest on 30-year fixed mortgages averaged 6.26% this week, down from 6.33% a week ago, according to Freddie Mac. This is the lowest reading in five months and fairly close to the lows for this year. A year ago, 30-year fixed home loans stood at 6.31%. 15-year adjustable-rate loans carried an interest of 5.91%, down from 5.99% last week. Last year this time, 15-year ARMs were at 6.02%. 5-year ARMs averaged 5.98%, compared to 6.03% last week and 6.05% a year ago. 1-year adjustable home loans fell to 5.57% from 5.66% last week.

A RealtyTrac report showed that foreclosures have almost doubled in the third quarter, compared to Q3 2006. Although RealtyTrac numbers tend to be somewhat higher than other agencies’, you get the idea. Foreclosures were up 30% from the previous 3 months and according to RealtyTrac’s CEO James Saccacio, foreclosure activity is likely to “increase over the next year in many markets”. He also mentioned that August and September “were the two highest monthly foreclosure filing totals” since January 2005 when RealtyTrac began issuing the report.

Greenspan “didn’t really get” how dangerous the housing boom was

Former Fed Chairman Alan Greenspan’s statement sounds totally out of place, given his role in the Real Estate bubble we saw in recent years. This irresponsible attitude has received a lot of criticism already, but I think there should be more to come. We don’t usually expect words like that from someone who’s supposed to understand the economy and make sure that it’s doing well. Oh, in fact all was good indeed – for a while. This raises a number of questions, ranging from “What was he thinking when he said this in an interview?” – because he should have predicted the reaction – to “Is he lying?” – because it’s hard to believe he really didn’t understand what was going on. But I don’t have the answers.

As eyes turn toward Greenspan’s successor, current Chairman Ben Bernanke and the Fed, which will be making its decision on interest rates this week, there’s little doubt that a rate cut will be announced. Analysts are instead speculating on whether it will be a half-point or a quarter of a point cut. Whatever the Fed chooses to do will have a serious impact on the economy, even leaving the rate as it is will send important signals to the financial markets. I can feel the tension…

“Days on the market” stats removed from Southern California listings

The Southern California Multiple Listing Service has announced a decision to remove the number of days a home stays on the market from listings. Real Estate agents will still have access to the data, but it will not be publicly available. Good for agents, not so good for buyers who might be able to get a better deal if they know the seller is desperate to offload a property. Brokers get a percentage of the home price as fees, so they will have an incentive to make buyers pay more.

On the other hand, this decision may help end “re-listing” schemes, where brokers remove a home from the market for a while and then list it again, thus distorting the stats. Re-listing practices are not prohibited by law, but they certainly do not benefit buyers. However, this doesn’t sound like a very good justification to me – after all, everyone is aware of the “slump” in the housing market, I don’t really believe re-listing is that much of a problem. Attracting any buyers at all is hard enough, let alone getting a higher price. Hiding the “days on the market” number will help mask the slowdown in home sales and generally benefits realtors, but it will not help improve the market. Hm…

Mortgage applications fall

After last week’s sharp increase in interest rates, mortgage applications fell by 3.4% this week. This sounds logical to me, but industry officials seem to be surprised that activity hasn’t increased now that interest rates have stopped rising. And all the talk about “near-historic lows” in interest rates sounds all too familiar and unrealistic, given recent activity. Economists keep repeating that all is good like a broken record, in the face of all evidence to the contrary.

Now that the spring season obviously failed to bring around the “rebound” everyone had been expecting, there’s talk about a coming improvement in the remaining summer months, as owners and builders keep cutting prices, etc., etc. Face it: the Real Estate market will not all of a sudden “rise and shine” because someone says it will be so. It will be several months before any improvement takes place.

Mortgage rates slide again

30-year fixed-rate mortgage rates dropped to 6.22% this week, from 6.30% last week. This is the lowest level since mid-January, when it averaged 6.21%. According to analysts, the drop reflected a relative weakness in the real estate industry, illustrated by reports of slowing new home construction. Housing starts fell 14.3% in January to the lowest reading since 1997, sparking concerns that the declining housing market may have a serious impact on economic growth. The drop was in part due to large numbers of unsold inventories currently on the market.

15-year fixed rates also dropped this week, reaching 5.97%, compared to 6.03% last week. 5-year adjustable rates fell to 5.96% from 6.01 a week earlier. One-year ARMs dropped from 5.52% to 5.49%.

Lower mortgage rates will make new homes more affordable, so there’s hope this will help absorb the oversupply of unsold houses. But will low rates be around for long enough to really influence the market? This week’s drop is definitely caused by changing circumstances, and yet home prices have to drop further before balance is restored. When and how this is going to happen is not entirely clear, as increasing sales volumes tend to push home prices up as well, so if houses begin to sell faster again, sellers won’t be willing to cut prices.