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.

Countrywide Bankruptcy Rumors Float Again

Countrywide managed to produce a bunch of bad news in a day – again. Its stock plunged more than 20%, its biggest decline since October 1987, on bankruptcy rumors and speculation. In a fresh hit to Countrywide’s reputation, it was revealed that the lender has fabricated documents related to a bankruptcy case. The papers were presented to the court as evidence of Countrywide’s actions, but they had apparently never been sent to the borrower. Although it tried to explain that this was not fabrication per se, Countrywide has finally ruined its reputation. Rumors about credit rating agencies considering downgrading Countrywide and a possible bankruptcy were dismissed by the lender. At this point, if you think you’re having a déjà vu, relax: this has indeed happened before. In fact, rumors about Countrywide considering filing for bankruptcy protection sent the company’s stock falling several times in 2007, most recently a couple of months ago. The lender will report its 2007 fourth quarter and year-end earnings, and host a live webcast on January 29. Currently, Countrywide shares trade at a little below $6.

Borrowers Desperate For Help

Thousands of homeowners facing foreclosure are turning to the Bush Administration’s foreclosure relief plan for help. HOPE NOW Alliance, a coalition of lenders and nonprofits which plays a central role in the plan, has noticed a significant increase in calls since the campaign was officially announced in the media. In each of the past two quarters, the number of calls has doubled and these days staffers have to deal with up to 3,000 calls a day, up from 100 calls per day in June 2006. The demand is so high that the foundation has tripled its staff, but hiring more counselors is hard, because HOPE NOW cannot offer competitive remuneration. Despite all the blasting the plan received in the media, desperate borrowers are calling by the thousands, and why shouldn’t they: if they get some mortgage relief – perfect, if not – they have nothing to lose by asking for help.

Fannie Mae said that it will reimburse mortgage servicing companies which refer delinquent borrowers to the HOPE counseling hotline, adding to demand for the service. The HOPE NOW toll-free number is 1-888-995-HOPE. It is available 24 hours a day and provides counseling in multiple languages. Now we’ll all sit and watch how all this unwinds, because it’s the best most of us can do – apart from, probably, writing angry comments about irresponsible borrowers/lenders and about using taxpayers’ money to bail out speculators. Oh, in fact Paulson repeatedly denied the possibility of the latter. However, he did say something about the economy and the housing market, but he wasn’t really optimistic: “there is no single or simple solution that will undo the excesses of the last few years”. Sad but true.

Unemployment Rises

Unemployment rose to 5% in December, according to the Bureau of Labor Statistics, up from 4.7% a month earlier. Unemployment was expected to grow a modest 0.1% to 4.8%. A significant jump in unemployment like this one may indicate that a recession is coming. A year earlier, the jobless rate was 4.4%. The losses were mainly in construction, retail trade, financial activities and manufacturing, while health care, mining, management and technical consulting services added jobs. It is widely believed that actual unemployment is significantly higher than official statistics would suggest, because the data may be distorted by various adjustments. Unemployment rates for some months in 2007 were revised upwards.

It is believed that weak employment data may pressure the Fed to cut rates at its next meeting on January 30. According to analysts, a half-point rate cut could help the economy avoid a recession, but concerns about the high price of oil and surging inflation remain.

Mortgage Rates In The First Week of 2008

Mortgage interest rates began the year at a 4-week low, according to Freddie Mac’s weekly survey of mortgage lenders. 30-year fixed-rate home loans averaged 6.07%, down from 6.17% last week. 15-year fixed-rate mortgages carried an interest rate of 5.68%, compared to 5.79% a week ago. 5-year adjustable mortgages dropped from 5.90% to 5.78%, and one-year ARMs were at 5.47%.

Analysts attribute the drop in interest rates to a series of bad news about the economy and pessimistic expectations about the new year. However, the consumer confidence report picked up in December for the first time in 5 months. I wonder if it’s all holiday cheer or a long-term trend. Either way, mortgage interest rates got even better, for those who can qualify for a loan.

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.