US mortgage carnage

Kimosabi · 25 April 2007

Subprime Bondholders May Lose $75 Billion From Slump

Bond investors who financed the U.S. housing boom are starting to pay the price for slumping home values and record delinquencies in subprime loans.

They will lose as much as $75 billion on securities made up of millions of mortgages to people with poor credit, says Pacific Investment Management Co., manager of the world's biggest bond fund. Some of the $450 billion in subprime mortgage-backed debt sold last year has lost 37 percent, according to Merrill Lynch & Co.

BlackRock Inc., AllianceBernstein Holding LP and Franklin Templeton Investments are vulnerable because investors have replaced banks and thrifts as the primary source of money for U.S. mortgages. More than $6 trillion of mortgage bonds are outstanding, dwarfing the amount of U.S. government debt by about 50 percent.

``Bond investors will be the ones who will take the losses,'' not the banks, said Scott Simon, who oversees $250 billion in asset-backed securities at Newport Beach, California- based Pimco, a unit of insurer Allianz SE in Munich.

Investors are losing money because of places like Riverside County, California, where foreclosures almost tripled last quarter to 6,103 from a year earlier, the biggest increase in the U.S., according to Foreclosures.com.

Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, used Riverside loans as collateral for $1.5 billion of bonds sold in January 2006. Some of the lowest-rated portions of the securities trade at 63 cents on the dollar, down from more than 100 cents in October, according to data compiled by Merrill Lynch.

BlackRock, Franklin Templeton Investors in the Lehman bonds include New York-based BlackRock, which oversees $1 trillion of assets and AllianceBernstein, which manages $726 billion, according to filings with the Securities and Exchange Commission. Franklin Templeton, a San Mateo, California-based firm that oversees $565 billion, also bought the bonds, data compiled by Bloomberg show.

Bond investors paid for the decade-long real estate expansion that led to a record 69 percent of Americans owning their own houses.

Home buyers were able to get loans from banks, thrifts and mortgage companies who would then typically sell them to underwriters, freeing up cash for more lending. New York-based Lehman; Bear Stearns Cos., the biggest underwriter of mortgage bonds; Morgan Stanley, Wall Street's biggest real estate investor, and other securities firms packaged loans into bonds and then sold them.

`More Lenient'

About two-thirds of mortgages get turned into bonds, up from 40 percent in 1990, when the market was $1.08 trillion and the country suffered its last real estate slump, according to data from the Federal Reserve and Fannie Mae in Washington.

Mortgage companies increased the amount of loans they provided when the economy was accelerating by accepting home buyers who previously couldn't obtain credit. These subprime mortgages totaled almost 20 percent of all new home loans last year, according to the Mortgage Bankers Association, a Washington-based trade group.

When U.S. growth slowed and home prices stopped rising last year, delinquencies mounted. About 13 percent of subprime mortgages made in 2006 were delinquent after 12 months, with 6.65 percent considered ``seriously delinquent,'' or more than 90 days late, Standard & Poor's estimates.

``Underwriter standards have gotten progressively more lenient,'' said Mark Tecotzky, chief investment officer at Greenwich, Connecticut-based Ellington Management Group LLC, a $4 billion hedge fund that invests in mortgage bonds.

`Feet to the Fire'

Bondholders are as much to blame as lenders, Federal Deposit Insurance Corp. Chairwoman Sheila Bair in Washington says.

``We should hold the servicers' and the investors' feet to the fire on this,'' Bair said in testimony to the House Financial Services Committee last week. ``We did not have good market discipline with investors buying all these mortgages.''

Barney Frank, a Democrat from Massachusetts and chairman of the House Financial Services Committee, and Spencer Bachus of Alabama, the top Republican on the committee, said earlier this month that they favor legislation making bond investors liable for loans that end up in default.

`Attractive Yield'

Investors say more regulation may dry up financing for homes, causing more delinquencies and damaging the economy. The National Association of Realtors in Washington said today that sales of previously owned U.S. homes declined 8.4 percent in March to an annual rate of 6.12 million, the lowest level in almost four years.

The bond market has reduced ``the cost of mortgage credit by linking investors and home-buying families through mortgage securitization,'' said George Miller, executive director for American Securitization Forum, an industry trade group for investors and underwriters in New York. Miller made the comments last week in testimony to the House Financial Services Committee.

Contained

AllianceBernstein spokeswoman Stephanie Giaramita didn't return calls seeking comment. Pimco's Simon said his firm is also only buying the highest-rated parts of mortgage bonds.

The losses in mortgage bonds haven't spread to other markets, even though more than 50 lenders have halted operations, gone bankrupt or sought buyers since the start of 2006, according to Bloomberg data. Defaults on subprime mortgages tracked by the Mortgage Bankers Association surged to a four-year high in the fourth quarter.

``The economic risk, the macro risk -- I don't see it posing a serious problem,'' U.S. Treasury Secretary Henry Paulson said after a speech in New York on April 20 in response to questions on the collapse of the subprime mortgage market.

Brown Grass

Driving around Riverside County's Lake Elsinore, realtor Abdul Syed counts about 40 lots with brown grass in the 1,200- home Tuscany Hills subdivision. Owners stop watering their lawns when they are about to lose their homes, he said.

``All of these people are probably in default and probably going to face foreclosure really soon,'' said Syed, who in 2002 moved to the town of 38,000 about 60 miles from San Diego.

The owner of 16 Ponte Russo paid $650,000 for the Mission- style house in November 2005 and got financing for 100 percent of the price from BNC Mortgage Inc. in Irvine, California, according to country records. BNC is a subprime lender owned by Lehman.

The owner never made mortgage payments. Now, the house is on sale for $496,000 following a foreclosure. Attempts to reach the owner weren't successful.

That house is ``a real nice one because it backs up into a canyon and you have endless views of hills,'' Syed said. ``That's a great deal. The banks must be getting kind of desperate.''

More than 43 percent of the bonds sold by Lehman, called SAIL 2006-1, are based on property in California. Foreclosures in the state have quadrupled since September to $2 billion, according to Foreclosure Radar in Sacramento. SAIL stands for Structured Asset Investment Loan Trust.

Rates Reset

The SAIL bonds were backed by 7,600 mortgages when they were issued. Almost $50 million of the loans are in foreclosure, some $25 million are 90 days delinquent and banks have seized property backing $30 million more, according to data compiled by Bloomberg. The bonds are one of only six to ever be downgraded before their first anniversary, and the biggest of that group, S&P said.

Rates on almost half of the loans in the Lehman bonds are scheduled to increase to an average 10.3 percent in December from about 7 percent now, according to the prospectus for the securities.

David Sherr, the managing director in charge of global securitized products at Lehman, and Steven Skolnik, chief executive officer of BNC, declined to comment.

Packaging mortgages into bonds has been the fastest-growing part of the debt market since 1995, providing investors with securities and a default rate below 1 percent.

Fees

Fees from securitizing assets like mortgages and student loans almost tripled in the past five years to $5.6 billion, Bank of America Corp. analyst Michael Hecht in New York estimated. Like Lehman, underwriters including Bear Stearns, Merrill Lynch and Morgan Stanley bought lenders to gain access to a steady supply of loans.

Much of the demand for the mortgage bonds came from Europe and Asia, where investors borrowed in their currencies and used the proceeds to buy higher-yielding assets in America. The Fed holds $675 billion of mortgage bonds and debt sold by Fannie Mae and Freddie Mac -- the two biggest financiers of home loans --on behalf of foreign central banks and international accounts, an eightfold increase this decade.

Subprime mortgage-backed securities from 2006 may be the worst ever, with delinquencies on the underlying debt ``consistently higher'' than in the prior five years, according to S&P. Losses on loans backing bonds will be between 5.25 percent and 7.75 percent, S&P said.

Losing Homes

As many as 2.4 million Americans may lose their homes, the Center for Responsible Lending in Durham, North Carolina said in testimony to Congress last month. The National Association of Realtors this month said the median price for an existing home likely will fall 0.7 percent to $220,300 this year, the first annual drop since the trade group began keeping records in 1968 and probably the first decline since the Great Depression.

Foreclosures in California will rise to 70,000 in 2008 from 3,000 in 2005, said Bruce Norris, a resident of Riverside, California, who buys houses in foreclosure.

``There is no way this is going to play out without pain,'' Norris said. ``It's already not OK. It just hasn't hit the courthouse steps.''

http://www.bloomberg.com/apps/news?pid=20601087&sid=a5UjfT0OCIrQ&refer=home

CanOz · 25 April 2007

From Bloomberg today:

Subprime `Liar Loans' Fuel Housing Bust With $1 Billion Fraud

By Bob Ivry

April 25 (Bloomberg) -- Cheating on mortgage applications is so widespread and so seldom punished that it's fueling an increase in foreclosures that will prolong the housing slump, said Robert W. Russell, counsel to the director of the Office of Thrift Supervision, which oversees savings and loans.

Borrowers and brokers commit fraud when they exaggerate the applicant's income, qualifying the borrower for a home he otherwise couldn't afford. Such fraud robbed lenders of an estimated $1 billion last year, according to data collected by the Washington-based Mortgage Bankers Association and the Federal Bureau of Investigation.

``Misstatements about employment and income are being made every day,'' Russell said. ``The brokers are just putting down on paper what the underwriters would require. There are borrowers providing false information as well.''

Loans that require little or no documentation of income soared to $276 billion, or 46 percent, of all subprime mortgages last year from $30 billion in 2001, according to estimates from New York-based analysts at Credit Suisse Group. Homebuyers with those loans defaulted at a 12.6 percent rate in February, compared with 1.5 percent of fully documented prime mortgages, said San Francisco-based First American LoanPerformance, a mortgage consulting group.

A 2006 study cited by the Mortgage Asset Research Institute showed that almost 60 percent of stated income loans were exaggerated by at least 50 percent.

`Liar Loans'

``Everyone calls these loans `liar loans' because we know these people were lying,'' said Jim Croft, a spokesman at the Reston, Virginia-based Mortgage Asset Research Institute.

Nancy Olland's application for a mortgage said she made $6,900 a month. She needed that much income to qualify for her loan. The 48-year-old mental health therapist from Cleveland Heights, Ohio, actually makes $3,286, based on her pay stub.

She said she wasn't asked to document her income. She signed the application without reviewing it and discovered the discrepancy months later.

``I don't know where the information came from,'' Olland said. ``I didn't give it to my mortgage broker. Was it literally fabricated out of thin air?''

New Century Financial Corp., the second-largest U.S. subprime lender last year, was Olland's lender.

Laura Oberhelman, a spokeswoman at Irvine, California-based New Century, said in an e-mail that the company only approves loan applications ``that evidence a borrower's ability to repay the loan.'' To stem fraud, she said New Century used electronic and manual systems ``designed to detect red flags like inflated appraisal values, unusual multiple borrower activity or rapid loan turnover.''

New Century filed for bankruptcy on April 2.

Red Flags

As part of a pending class-action lawsuit in State of Minnesota District Court alleging Ameriquest Mortgage Corp. charged borrowers extra fees, former account executive Mark Bomchill, who worked in the Plymouth, Minnesota, branch office, said it was ``a common and open practice at Ameriquest for account executives to forge or alter borrower information or loan documents.''

``I saw account executives openly engage in conduct such as altering borrowers' W-2 forms or pay stubs, photocopying borrower signatures and copying them onto other, unsigned documents and similar conduct,'' Bomchill said in a sworn statement.

``It wasn't really done behind closed doors,'' Bomchill said in an interview.

Ameriquest spokesman Chris Orlando said the Irvine, California-based company, which once was the biggest subprime lender, has ``zero tolerance for fraud'' and works hard to find it and prevent it.

Fraud Complaints

``When we discover an employee involved in fraudulent activity, we take decisive action up to terminating employment and pursuing criminal action,'' Orlando said.

Mortgage fraud complaints more than doubled in the U.S. from 2003 to 2006, according to the Financial Crimes Enforcement Network, a division of the U.S. Treasury Department. Suspicious activity reports pertaining to mortgage fraud increased 14-fold from 1997 to 2005, according to the organization.

There is a pattern of ``exaggerated or fabricated income information associated with subprime loans,'' the Vienna, Virginia-based enforcement network said in a report in November.

The difficulty in calculating mortgage fraud is only one- third of lenders are required to report suspicious behavior, said Mortgage Bankers Association spokesman John Mechem.

The FBI targets what it calls ``fraud for profit,'' which is related to conspirators who lie to get multiple mortgages and have no intention of repaying them, said Special Agent Stephen Kodak in Washington.

Lying About Income

Individuals lying about their income to buy a house they intend to live in, or ``fraud for housing,'' occurs more often but accounts for less money lost, Kodak said. The FBI generally does not go after ``fraud for housing,'' he said.

Yet many ``fraud for housing'' schemes end up as ``fraud for profit'' conspiracies, said David McLaughlin, head prosecutor for the Georgia attorney general.

``Even the most benign-looking fraud can have far-reaching consequences,'' McLaughlin said. ``Those properties will fall into foreclosure and there's a risk when you have a fraud scenario and the person is in so far over their heads, those are the prime targets for fraud-for-profit criminals to prey on.''

McLaughlin said his priority is ``fraud for profit'' cases, though he would like to prosecute homebuyers who lie on their mortgage applications.

Low documentation loans were established in the 1980s mainly for the self-employed and non-U.S. citizens whose pay was difficult to verify. They can be processed quicker than standard loans and typically cost the borrower an extra quarter point on his mortgage. They were made possible by relaxed lending guidelines, or what Bear Stearns Cos. analyst Gyan Sinha calls ``Hail Mary underwriting.''

`Anyone With a Pulse'

``The loans were available to anyone with a pulse,'' said Greg Bass, a former account executive in Austin, Texas, for subprime lender Long Beach Mortgage Co.

When interest rates started to climb from the lows of June 2003, subprime lenders eased their standards so more people could afford homes, said Sandor Samuels, executive managing director of Calabasas, California-based Countrywide Financial Corp., the biggest U.S. mortgage lender.

Homeowners flooded lenders with requests to refinance mortgages during the U.S. housing boom from 2001 to 2006 when median home prices increased 56 percent, according to the Washington-based National Association of Realtors.

Prices Peak

``When everyone was eating up the subprime market, it was great to be in the business,'' said Josh Tullis, sales director for A. Anderson Scott Mortgage Group in Falls Church, Virginia. ``In the heyday, I knew guys who went from making $2,000 a month working 60 hours a week at McDonald's and they'd come over here and work 15 hours on a loan and make $4,000.''

The riskier mortgages generally command higher broker commissions. Tullis said one subprime mortgage, which typically costs 2 to 3 percentage points more than a standard loan because it goes to borrowers with bad or limited credit, pays him the same as five mortgages for borrowers with good credit.

The number of subprime mortgages has grown 10-fold in the past seven years to 5.97 million, according to the Mortgage Bankers Association.

As many as 2.4 million U.S. homes are in danger of foreclosure, according to the Durham, North Carolina-based Center for Responsible Lending. Foreclosure filings rose 47 percent last month from a year ago, said RealtyTrac Inc. of Irvine, California.

Borrowers with low-documentation subprime mortgages were almost 10 times more likely to suffer foreclosure than homeowners with fully documented prime loans, the company said.

Increase in Foreclosures

The number of subprime borrowers who are late on their mortgage payments is at a four-year high, according to the Washington-based Mortgage Bankers Association. The median U.S. new home price peaked at $257,000 in April 2006 and slipped to $250,000 in February, according to the U.S. Census Bureau.

``A lender funding the transaction doesn't have an incentive to make a fraudulent loan,'' said Chuck Cross, a director at the Conference of State Bank Supervisors in Washington. ``But the originator does not have the same economic incentive not to. He makes the fee regardless of whether the loan is good or not.''

With prices falling, it's no longer as easy for homeowners to wring cash out of their properties by refinancing. New home sales slowed to a seven-year low in February.

Nancy Olland said the loan she took out last year is too expensive and she can't make her monthly payments. She tried to contact the broker who wrote her mortgage, but she said she can't find him.

The broker's boss, William Gregg of Tanager Mortgage Group Inc. in Cleveland, said Olland's broker was fired for not following the firm's ``strict guidelines.''

Olland said she is considering bankruptcy.

``Probably the most difficult thing for me in all of this is I'm well-educated,'' Olland said. ``I have a master's degree. I'm not stupid, but I handled this situation stupidly.''

Uncle Festivus · 26 April 2007

Tip of the iceberg - wait for the revisions

http://www.marketwatch.com/news/story/us-economy-poised-fall-so/story.aspx?guid=%7B1C5F619F%2D92BD%2D498D%2D8AEB%2DC1D3B8E5BCFD%7D

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WASHINGTON (MarketWatch) -- Boosted by warmer weather in the Northeast and Midwest, sales of new homes increased by 2.6% in March to a seasonally adjusted annual rate of 858,000, the Commerce Department reported Wednesday.
Sales of new homes were off 23.5% compared with March 2006.
Despite the small gain, economists saw little to cheer about in the numbers.
"The spring season is off to a rocky start," concluded economists at Lehman Bros.
"The numbers are bound to get even worse over the coming months," wrote Richard Moody, chief economist for Mission Residential, in a research note.
"The next three months are crunch time for the housing market," Stephen Stanley, chief economist for RBS Greenwich Capital, wrote in an e-mail. "It is the spring selling season, a critical time of the year, and it is the period during which the fallout from the subprime situation will show itself."

Sales in the previous three months were revised lower as well. February's revised annualized sales pace of 836,000 was the lowest since September 1999.

http://www.marketwatch.com/news/sto...-3D84-407D-81CC-A0701532DB88}&dist=TNMostRead

It's always interesting to see how the market rallies on the initial data but ignores the revisions lower.

Uncle Festivus · 26 April 2007

Fears of a property crash swept the Spanish stock market yesterday, sending shares of construction companies into free-fall, and hitting banks exposed to the mortgage market.
Spain's biggest property group, Sacyr, fell 8.15pc, while developers Colonial and Inmocaral plunged over 11pc.

Valencia builder Astroc first set off alarm bells last week after the regional junta changed planning laws. Its shares have since fallen 62pc, but there appears to be no obvious trigger for the sudden switch from euphoria to panic on the Madrid bourse.

Enrique Banuelos, Astroc's president, said he had no idea why investors had turned on his company. "Astroc is just the same company it was in January," he said. The firm's value was then â‚¬9bn (£6bn), after rising tenfold since listing in June. It has now given up almost all the gains.
The gloom spread to Banco Sabadell and BankInter, which both fell over 5pc on concerns over mortgage arrears. Madrid's IBEX index closed down 2.73pc.
Low interest rates set by the European Central Bank have fuelled a housing boom since Spain swapped the peseta for the euro in 1999, but excess stimulus has now seriously distorted the economy.

The current account deficit has reached 9.5pc of GDP, a sign of extreme over-heating. Spain is now the second biggest net contributor to global demand after the US, far outstripping China, astonishing for a country of only 40 million still living in the shadows of the Franco regime a generation ago.

More than 800,000 homes were built last year, beating France, Germany, and Italy combined, leaving a glut of property hanging over the market. House prices have risen 270pc over the past decade to an average price of â‚¬276,000, but began to slow sharply late last year. Household debt has risen to 133pc of disposable income from 75pc in 1995.
Manuel Romera, director of Madrid's Instituto de la Empresa, said: "I can see a mortgage crisis building. We have a serious property bubble in this country and everyone is in denial; it's worse than the US." Re/Max International said it had cut prices by 25pc on holiday homes in saturated regions earlier this year. Some four million foreigners own property in Spain.

Miguel Fernandez Ordonez, the Bank of Spain's governor, blamed the bubble on the wrong interest rates caused by euro membership.
"The single monetary policy has meant that excessively loose conditions for our economy have been almost continuous," he said. "A less relaxed tone would have been better for our needs." A report by the bank concluded that house prices were 35pc overvalued.

The monetary policy is switching rapidly from too loose to too tight as the ECB caters to German needs. Interest rates have risen seven times to 3.75pc since December 2005, hitting Spain with an "asymmetric effect" since 96pc of mortgages are on floating rates. Most loans in Germany are on fixed rates.

Spain could now find itself facing a monetary squeeze just as the economy swings from boom to bust, more or less the fate suffered by Britain in the ERM debacle of 1992, except that Spain has no way out.
Bernard Connolly, global strategist for Banque AIG and former head of economic research for the European Commission, said the country will face a brutal adjustment over the next two years - if it can remain in the euro at all.

He said: "Spain is going to face the very direst of economic circumstances: a cycle of recession, deflation and widespread private sector default - a depression in fact. This stock market slide is not just a 'correction'. It has a very, very, long way to go."

Kimosabi · 26 April 2007

Why do I get the feeling this is going to be like Domino's.

Is it just me or have the countries that have had Property Boom's recently, been the same countries that participated in the Iraq war?

It astounds me how quickly sentiment can change.

YChromozome · 26 April 2007

Uncle Festivus said:
Fears of a property crash swept the Spanish stock market yesterday, sending shares of construction companies into free-fall, and hitting banks exposed to the mortgage market.

It's interesting to watch this in contrast to OECD figures on House Price to Income Ratios. Indexed to 1970, the United States got to about 120, United Kingdom 160, Australia 180 and Spain 210.

All the above mentioned countries have shaky housing markets, except us?

Household debt has risen to 133pc of disposable income from 75pc in 1995.

That's nothing. Australia's Household debt to disposable income is just under 160% from 60pc in 1995. (USA is ~130% at the moment)

Maybe that is why our housing market is holding up? We just keep getting into debt faster.

Kimosabi · 26 April 2007

YChromozome said:
It's interesting to watch this in contrast to OECD figures on House Price to Income Ratios. Indexed to 1970, the United States got to about 120, United Kingdom 160, Australia 180 and Spain 210.

All the above mentioned countries have shaky housing markets, except us?

That's nothing. Australia's Household debt to disposable income is just under 160% from 60pc in 1995. (USA is ~130% at the moment)

Maybe that is why our housing market is holding up? We just keep getting into debt faster.

Our housing market has held up because of the money flowing into the country from the commodities boom. This is just prolonging the inevitable.

The market will turn as soon as they have lent as much money possible to as many people as possible....

constable · 26 April 2007

Kimosabi said:
Our housing market has held up because of the money flowing into the country from the commodities boom. This is just prolonging the inevitable.

The market will turn as soon as they have lent as much money possible to as many people as possible....

Little bit off topic but we are in a federal election year, hello, there's going to be tax cuts and a bonanza of incentives and breaks thrown at the joe average out there. Housing market im sure will reflect this (speaking in general terms as per arguement) and for the pessimists out there Australia just happens to be one of the greatest places on earth! Kimo comodities have had a great impact no doubt but replacement cost of houses has gone up, population growth is positive and those old people just wont die!

Uncle Festivus · 28 April 2007

Yes, largely contained to sub-prime, alt-A's - I don't think so

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WASHINGTON (AP) -- The worst economic growth in four years is raising concern that troubles in the U.S. housing market will spread and throw the country into a recession before the year is out.The economy practically crawled at a 1.3 percent pace in the opening quarter of 2007, the Commerce Department reported Friday. That was even weaker than the sluggish 2.5 percent rate in the closing quarter of last year.

The main culprit in the slowdown: the housing slump, which made some businesses act cautiously. The bloated trade deficit also played a role.

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US = tick
Spain = tick

Who's next?

Ireland -

Figures released this morning show that house prices fell in March for the first time in more than five years.
The latest Permanent TSB/ESRI house price index shows that the average price paid for a house in Ireland in March was €309,071, down 0.6% compared with February.

http://rte.ie/business/2007/0427/houses.html

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The UK -

April 27 (Bloomberg) -- U.K. home prices, rising at the fastest pace in two years, are ``very highly inflated'' and at risk of collapsing, said Vincent Tchenguiz, one of Britain's largest residential property owners.
A shortage of housing has driven the price of an average home up 11 percent over the past year, according to HBOS Plc, the U.K.'s largest mortgage lender, even after the Bank of England raised its benchmark interest rate three times to a 5 1/2-year high.
``It is not sustainable in the long term, prices are very high,'' Tchenguiz, 50, said in an interview. ``The bubble could burst in the event of a financial shock or terrorism.''
The influx of international capital into the U.K. has created a real estate market similar to the one in Japan that collapsed in 1991, said Tchenguiz. Japanese land prices have dropped about 50 percent from their peak. They increased in 2006 for the first time in 16 years.

http://www.bloomberg.com/apps/news?pid=20601109&sid=a7G5QKPGtMGE&refer=home

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Retirees -

NEW YORK - Americans over the age of 55 are filing for bankruptcy at a faster rate than the general population as growing mortgage debt and higher health care costs make them more vulnerable, a new study shows.

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And who can forget the ones who actually make things and employ people, the homebuilders

April 26 (Bloomberg) -- U.S. homebuilders are in jeopardy of violating their lending agreements in coming months because of a drop in sales, according to Moody's Investors Service.
More than half, or 11, of the 21 builders that Moody's rates failed to generate more cash than they spent in 2006, analyst Joseph Snider in New York said in a report today. Homebuilders often have to promise banks that they will have twice as much operating revenue as interest expenses over a given time or the bank can demand immediate repayment of a loan, Snider said.
The homebuilders' situation is especially dire because cash flows usually turn positive during a slump as they cut back on starts and sell existing inventory, according to the analyst. The housing market is so weak that homebuilders haven't been able to cut their inventories, leading many to ask their bankers for so- called covenant relief, Snider said in an interview. Ratings may also be in jeopardy, he said.
``The next year or so for them is going to be pretty grim,'' Snider said. Some of the requests being asked of lenders are to relax rules that govern the amount of cash flow they must have in relation to interest expense.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a40fjXzhI_q8

PS - don't shoot the messenger

Smurf1976 · 28 April 2007

constable said:
replacement cost of houses has gone up, population growth is positive and those old people just wont die!

But surely the replacement cost is well below the actual market value? I mean, has the actual cost of construction really gone up as much as the market value? I'm somewhat doubtful - if it has then that's truly massive inflation in an industry where labour costs are highly significant.

As for all being positive, one word - drought. That's the big potential spanner in the property works IMO. If we really do end up with 100%+ rises in food prices then that's not going to help Joe Average in the slightest. Actually it would likely push quite a few over the edge financially.

Buffettology · 29 April 2007

YChromozome said:
It's interesting to watch this in contrast to OECD figures on House Price to Income Ratios. Indexed to 1970, the United States got to about 120, United Kingdom 160, Australia 180 and Spain 210.

All the above mentioned countries have shaky housing markets, except us?

That's nothing. Australia's Household debt to disposable income is just under 160% from 60pc in 1995. (USA is ~130% at the moment)

Maybe that is why our housing market is holding up? We just keep getting into debt faster.

I would not worry about the Australian housing market.

The HUGE rise in property prices has ended, and income to house price ratios are slowly adjusting. Not to mention, this is a political concern at the moment, and policy is being written as we speak in order to not impact on the housing prices dramatically, but to slowly bring income/house price ratios back in line over the medium-term. I attended a seminar with the guy who is heading this policy on Friday, and the Australian housing market does not look in trouble whatsoever at the moment.

Kimosabi · 29 April 2007

Buffettology said:
I would not worry about the Australian housing market.

The HUGE rise in property prices has ended, and income to house price ratios are slowly adjusting. Not to mention, this is a political concern at the moment, and policy is being written as we speak in order to not impact on the housing prices dramatically, but to slowly bring income/house price ratios back in line over the medium-term. I attended a seminar with the guy who is heading this policy on Friday, and the Australian housing market does not look in trouble whatsoever at the moment.

Would you have any idea how long it will be until these ratio's come back to more respectable levels?

robots · 29 April 2007

hello,

building costs are around 15k/sq, and you should insure for this amount

this is run of the mill, therefore 30sq house around 450k to build

how's that sound

thankyou

robots

YChromozome · 29 April 2007

Buffettology said:
Not to mention, this is a political concern at the moment, and policy is being written as we speak in order to not impact on the housing prices dramatically, but to slowly bring income/house price ratios back in line over the medium-term.

Thanks, good to know its all under control.

Do you know what the government is going to do? Are they going to increase unemployment benefits by 500% so when we lose our jobs because the global economy and resources fall back to a normal pace we can still service our overstretched mortgages? Maybe they have a new strategic direction for the country. We have lost lots of manufacturing jobs, might lose lots of mining jobs come the end of the mining boom. R&D spending is crap, not that we would want to invest into new growth industries such as low emission technologies.

I'm glad its a political concern to the government. I work for a semi federal government institution and was notified last last year that our department is no longer viable and is closing. This year, we were given a grant to keep the department running for 6 months, because closing it prior to the election could be a political issue. Closing it after is no problem. . . Good thing I don't have a mortgage.

I also agree with Kimosabi. Just how long will house prices have to stagnate before they return to normal levels?

Flying Fish · 29 April 2007

robots said:
hello,

building costs are around 15k/sq, and you should insure for this amount

this is run of the mill, therefore 30sq house around 450k to build

how's that sound

thankyou

robots

Robbie robot, this sounds good, but where did you pluck the figures from. What happenms when building interestry cools and every trady and his doig is looking for work? Materials cost next to nothing. All that is being paid for is the land.

YChromozome · 29 April 2007

Kimosabi said:
Would you have any idea how long it will be until these ratio's come back to more respectable levels?

It's not a graph of income to house price but you get the idea. . .

Looks like wage growth has exceeded CPI in recent years, probably due to the mining boom. Assuming wages to continue in this manner you could expect the ratio to return in about 2030?

The PE ratio of houses is normally House Price/Rent - Expenses, and rent has historically never increased far from inflation.

Assuming wages follow CPI, this could blow out to 2050+.

The house price data stops in Jun 2005, so house prices have actually risen more than shown. It also assumes houses never appreciate in the 50 or so years and in real terms they fall in price by inflation each year. For investors, this capital depreciation would have to be offset by higher rents.

Put it another way, the length of time is many, many Federal elections, probably a recession or three, another asset boom and all the baby boomers moving into retirement homes or sadly perishing.

Buffettology · 29 April 2007

Kimosabi said:
Would you have any idea how long it will be until these ratio's come back to more respectable levels?

Personally, I would not have an idea (its not an area I work in, and I assume even if I did, I still would not know, its a slow process). I agree, house prices are WAY too high currently! Though, my point is this is not of concern to the economy or the stockmarket, as far as it causing a recession or crash.

Wages are probably rising faster than CPI due to unemployment being at very low levels and the skill shortage, I would definately think that would be moreso the case than the mining boom. Skilled labour especially.

The main issue of the Government is housing affordability, they want to ensure the low-middle income earners can afford their own houses. Of course increasing land supply is one main method. Increasing the quality of data on the quantity of land currently available is another big issue (at the moment, its hard for Government to know how much land is actually out there at the moment). Building well designed houses on smaller blocks, enabling buying of land half the price is another thing being looked at. Renting land in another. There are a heap of policies at the moment, but Im not sure how much I can say until the details are decided upon. These were just a few of the policies.

One thing is for sure though, the housing price boom is well over, and wages are slowly catching them. As someone also stated, the aging population self funding their retirement is sure to impact on the housing market as they retire, just as it will the stockmarket.

I am by no means and expert on the housing market and housing affordability, but one thing I am pretty sure about, this overpriced housing market does not look like it will cause concern in our economy and lead to a correction of our stockmarket. This is what the thread is about afterall.

Buffettology · 29 April 2007

YChromozome said:
Thanks, good to know its all under control.

Do you know what the government is going to do? Are they going to increase unemployment benefits by 500% so when we lose our jobs because the global economy and resources fall back to a normal pace we can still service our overstretched mortgages? Maybe they have a new strategic direction for the country. We have lost lots of manufacturing jobs, might lose lots of mining jobs come the end of the mining boom. R&D spending is crap, not that we would want to invest into new growth industries such as low emission technologies.

I'm glad its a political concern to the government. I work for a semi federal government institution and was notified last last year that our department is no longer viable and is closing. This year, we were given a grant to keep the department running for 6 months, because closing it prior to the election could be a political issue. Closing it after is no problem. . . Good thing I don't have a mortgage.

I also agree with Kimosabi. Just how long will house prices have to stagnate before they return to normal levels?

Man, I dont agree with politics and how it runs the country either.

A new strategic direction? Arent we already doing that with the service sector? Manufacturing has declined for years, but the service sector has grown incredibly. Tourism, education etc. R&D, what compete with Japan in an area they have a comparative advantage? Also, have you heard of NICTA? Remember, its inefficient for the Government to subsidise industries, and it the private sector and capital markets cannot do this more efficiently than international economies, then it would be a HUGE waste of resources.

Of course we will eventually experience a recession, that will happen to any economy in the long-run. But the global economy is still forecast growth in the short-term.

YChromozome · 29 April 2007

Buffettology said:
but the service sector has grown incredibly. education etc. . . Also, have you heard of NICTA?

I guess we are getting off topic, but actually both those areas (including engineering) is [was] my industry.

Edit: To clarify that was ICT, not specifically NICTA. (ICT is a service India can pick up . . )

Buffettology · 29 April 2007

YChromozome said:
I guess we are getting off topic, but actually both those areas (including engineering) is [was] my industry.

Yeah, definaetly getting off topic.

You were working for NICTA? They are closing a portion of NICTA down? I just put through a HUGE amount of funding for NICTA over the next few years personally.

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