Listening to CNBC this morning, I heard that residential construction spending has just increased, bucking the consensus and being lauded as good news. The home builders, who are the largest contributors to this index, are buried in debt and need to build in order to monetize the land they cannot sell for positive cash flow. This is their business, and they must build in order to try to make money.  I know it sounds counterintuitive to build houses when you currently have more houses than you can possibly sell, but from their perspective land is worth more with a finished house on it then it is in a raw condition. This is in their individual selfish interests. The problem is that adding more houses is negative for the homebuilding industry in general, negative for the economy since it adds supply to an oversupplied market that has slackening demand, and it steals wealth from homeowners by dropping the values of homes as supply increases further.

I am a contrarian along these lines, as in my viewpoints on share buybacks.

I am so convinced of the title, that I have compiled a list to illustrate. Of course, I didn't include the home builders in this list since they have obviously been hit, and I didn't include the banks earnings (since they have obviously not been doing well), and I didn't include the mortgage insurers results (since they have been hit hard), and I didn't include the foreclosure rates (since those are dismal), and I didn't include REOs (with CountryWide becoming the largest holder of single family housing in the country), and I didn't include... Well, you get the message. So let's see what I did include in my compilation to show how far away from recession we are...

My team's latest forecast of real estate price trends 4 years forward (the entire table may not fit in this post, width-wise):

3Q2007 4Q2007 1Q2008 2Q2008 3Q2008 4Q2008 1Q2009 2Q2009 3Q2009 4Q2009 2010 2011 2012
West -5.30% -4.90% -3.90% -4.10% -3.80% -3.10% -2.70% -2.30% -2.30% -2.00% -2.50% -3.10% -2.20%
North -4.10% -3.80% -2.80% -2.10% -1.80% -0.90% -0.80% -0.70% -0.30% 0.20% 0.40% 3.70% 4.10%
Texas -0.80% -0.20% 0.20% 0.30% 0.70% 1.30% 2.70% 5.40% 10.80% 21.50% 30.30% 24.20% 19.40%
Southeast -6.00% -6.20% -3.90% -2.60% -1.40% -1.20% -0.40% -0.50% -0.60% 2.00% -2.70% -8.50% -9.30%
Average -4.10% -3.80% -2.60% -2.10% -1.60% -1.00% -0.30% 0.50% 1.90% 5.40% 6.40% 4.10% 3.00%


Banking Jobs Lost - Challenger, Gray & Christmas Inc, the consulting firm, said in August the U.S. financial industry had announced 87,962 job cuts this year, 75 percent more than in all of 2006. It said 35,830, or 41 percent, relate to housing market problems.

  • Bank of America, the No. 2 U.S. bank, said it was cutting 3,000 jobs, a majority of them in corporate and investment banking, and the rest elsewhere. The cuts amount to 1.5 percent of the bank's 198,000-person work force.
  • Bear Stearns said on Oct. 3 it was cutting 310 jobs in its mortgage origination businesses as part of a reorganization of its mortgage operations. It had said in August that it cut 240 subprime lending jobs.
  • Credit Suisse on Sept. 26 cut 150 jobs in its mortgage-backed securities business.
  • Capital One, an independent credit card issuer, said on Aug. 20 it will eliminate 1,900 jobs. In June, it announced plans to cut 2,000 jobs.
  • Citigroup said on April 11 that it would eliminate 17,000 jobs and move an additional 9,500 jobs to lower-cost locations.
  • Countrywide Financial, the largest U.S. mortgage lender, plans to cut 10,000 to 12,000 jobs, or up to 20 percent of its work force. It said on Oct. 16 that it expected a $125 million to $150 million pretax restructuring charge from the move.
  • HSBC Holdings' U.S. mortgage unit said on Sept. 5 it would cut about 600 jobs.
  • JPMorgan Chase, the No. 3 U.S. bank, is cutting 100 jobs across its global credit markets unit, or about 10 percent of that group's head count, people familiar with the situation told Reuters on Oct. 11.
  • Lehman Brothers Holdings said it will fire another 850 workers, or about 3 percent of its work force. The cuts come after the investment bank said it was cutting 1,600 jobs.
  • Morgan Stanley said on Oct. 17 it was cutting about 300 jobs in its institutional securities division, mostly in mortgages. On Oct. 2, it said it would restructure its residential mortgage business and cut about 600 employees.
  • National City, the ninth-largest U.S. bank, said on Oct. 24 it is eliminating 2,500 jobs, 1,200 more than it disclosed the month before, after it merged its home equity and mortgage lending units.
  • SunTrust Banks, the seventh-largest U.S. bank, said on Aug. 20 that it plans to eliminate about 2,400 jobs by the end of 2008.
  • Wachovia, the fourth-largest U.S. bank, said on Aug. 28 it plans to eliminate about 2,000 of 2,600 jobs at the Richmond, Virginia headquarters of its Wachovia Securities brokerage unit as part of the company's acquisition of A.G. Edwards. The company also said recently it plans to eliminate about 200 investment banking jobs, or roughly 5 percent of its 3,900-strong investment banking operations.
  • Washington Mutual, the largest U.S. savings and loan, is laying off 1,000 employees as it copes with slumping housing demand.
  • Wells Fargo, the fifth-largest U.S. bank, said on July 26 it would cut 170 jobs
    "Imploded" Lenders:

    175. Bank of America (subsidiaries)
    174. Diablo Funding Group Inc.
    173. Honor State Bank
    172. Spectrum Financial Group
    171. National City - Home Equity, Correspondent
    170. Priority Funding Mortgage Bankers
    169. BrooksAmerica Mortgage Corp.
    168. Valley Vista Mortgage
    167. New State Mortgage Company
    166. Summit Mortgage Company
    165. WMC
    164. Paragon Home Lending
    163. First Mariner Wholesale
    162. The Lending Connection
    161. Foxtons, Inc.
    160. SCME Mortage Bankers (Wholesale)
    159. Aapex Mortgage (Apex Financial Group)
    158. Wells Fargo (various Correspondent and Non-prime divisions)
    157. Nationstar Mortgage
    156. Decision One (HSBC)
    155. Impac Lending Group (Wholesale)
    154. E-Trade Wholesale Lending
    153. Long Beach (WaMu Warehouse/Correspondent)
    152. Expanded Mortgage Credit Wholesale
    151. The Mortgage Store Financial
    150. C & G Financial
    149. CFIC Home Mortgage
    148. BrokerSource (BSM Financial - Wholesale)
    147. All Fund Mortgage
    146. LownHome Financial
    145. Sea Breeze Financial Services
    144. Castle Point Mortgage
    143. Premium Funding Corp
    142. Group One Lending
    141. Allstate Home Loans / Allstate Funding
    140. Home Loan Specialists (HLS)
    139. Transnational Finance Wholesale
    138. CIT Home Lending
    137. Capital Six Funding
    136. Mortgage Investors Group (MIG) - Wholesale
    135. Amstar Mortgage Corp
    134. Quality Home Loans
    133. BNC Mortgage (Lehman)
    132. Accredited Home Lenders, Home Funds Direct
    131. First National Bank of Arizona (FNBA) Wholesale, Correspondent
    130. Chevy Chase Bank Correspondent
    129. GreenPoint Mortgage - Capital One Wholesale
    128. NovaStar (Wholesale), Homeview Lending
    127. Quick Loan Funding
    126. Calusa Investments
    125. Mercantile Mortgage
    124. First Magnus
    123. First Indiana Wholesale
    122. GEM Loans / Pacific American Mortgage (PAMCO)
    121. Kirkwood Financial Corporation
    120. Lexington Lending
    119. Express Capital Lending
    118. Deutsche Bank Correspondent Lending Group (CLG)
    117. MLSG
    116. Trump Mortgage
    115. HomeBanc Mortgage Corporation
    114. Mylor Financial
    113. Aegis
    112. Alternative Financing Corp (AFC) Wholesale
    111. Winstar Mortgage
    110. American Home Mortgage / American Brokers Conduit
    109. Optima Funding
    108. Equity Funding Group
    107. Sunset Mortgage
    106. Fieldstone Mortgage Company
    105. Nations Home Lending
    104. Entrust Mortgage
    103. Alera Financial (Wholesale)
    102. Flick Mortgage/Mortgage Simple
    101. Dollar Mortgage Corporation
    100. Alliance Bancorp
    99. Choice Capital Funding
    98. Premier Mortgage Funding
    97. Stone Creek Funding
    96. FlexPoint Funding (Wholesale & Retail)
    95. Starpointe Mortgage
    94. Unlimited Loan Resources (ULR)
    93. Freestand Financial
    92. Steward Financial
    91. Bridge Capital Corporation
    90. Altivus Financial
    89. ACT Mortgage
    88. Alliance Mortgage Banking Corp (AMBC)
    87. Concord Mortgage Wholesale
    86. Heartwell Mortgage
    85. Oak Street Mortgage
    84. The Mortgage Warehouse
    83. First Street Financial
    82. Right-Away Mortgage
    81. Heritage Plaza Mortgage
    80. Horizon Bank Wholesale Lending Group
    79. Lancaster Mortgage Bank (LMB)
    78. Bryco (Wholesale)
    77. No Red Tape Mortgage
    76. The Lending Group (TLG)
    75. Pro 30 Funding
    74. NetBank Funding, Market Street Mortgage
    73. Columbia Home Loans, LLC
    72. Mortgage Tree Lending
    71. Homeland Capital Group
    70. Nation One Mortgage
    69. Dana Capital Group
    68. Millenium Funding Group
    67. MILA
    66. Home Equity of America
    65. Opteum (Wholesale, Conduit)
    64. Innovative Mortgage Capital
    63. Home Capital, Inc.
    62. Home 123 Mortgage
    61. Homefield Financial
    60. First Horizon Subprime, Equity Lending
    59. Platinum Capital Group (Wholesale)
    58. First Source Funding Group (FSFG)
    57. Alterna Mortgage
    56. Solutions Funding
    55. People's Mortgage
    53. Zone Funding
    52. First Consolidated (Subprime Wholesale)
    51. EquiFirst
    50. SouthStar Funding
    49. Warehouse USA
    48. H&R Block Mortgage
    47. Madison Equity Loans
    46. HSBC Mortgage Services (correspondent div.)
    45. Sunset Direct Lending
    44. Kellner Mortgage Investments
    43. LoanCity
    42. CoreStar Financial Group
    41. Ameriquest, ACC Wholesale
    40. Investaid Corp.
    39. People's Choice Financial Corp.
    38. Master Financial
    37. Maribella Mortgage
    36. FMF Capital LLC
    35. New Century Financial Corp.
    34. Wachovia Mortgage (Correspondent div.)
    33. Ameritrust Mortgage Company (Subprime Wholesale)
    32. Trojan Lending (Wholesale)
    31. Fremont General Corporation
    30. DomesticBank (Wholesale Lending Division)
    29. Ivanhoe Mortgage/Central Pacific Mortgage
    28. Eagle First Mortgage
    27. Coastal Capital
    26. Silver State Mortgage
    25. ResMAE Mortgage Corporation
    24. ECC Capital/Encore Credit
    23. Lender's Direct Capital Corporation (wholesale division)
    22. Concorde Acceptance
    21. DeepGreen Financial
    20. Millenium Bankshares (Mortgage Subsidiaries)
    19. Summit Mortgage
    18. Mandalay Mortgage
    17. Rose Mortgage
    16. EquiBanc
    15. FundingAmerica
    14. Popular Financial Holdings
    13. Clear Choice Financial/Bay Capital
    12. Origen Wholesale Lending
    11. SecuredFunding
    10. Preferred Advantage
    9. MLN
    8. Sovereign Bancorp (Wholesale Ops)
    7. Harbourton Mortgage Investment Corporation
    6. OwnIt Mortgage
    5. Sebring Capital Partners
    4. Axis Mortgage & Investments
    3. Meritage Mortgage
    2. Acoustic Home Loans
    1. Merit Financial

    Ailing/Watch List Lenders:
    11. Countrywide Financial
    10. ComUnity Lending
    9. Secured Bankers Mortgage Company (SBMC)
    8. Delta Financial Corp
    7. Meridias Capital
    6. Option One
    5. Ocwen Loan Servicing
    4. Doral Financial Corp.
    3. Evergreen Investment/Carnation Bank
    2. Coast Financial Holdings, Inc.
    1. Residential Capital, LLC*
    "Imploded*" Funds:

    21. Niederhoffer Matador Fund
    20. Absolute Capital Management Holdings
    19. Pirate Capital (Activist Funds)
    18. Synapse High Grade ABS Fund
    17. Cheyne Finance LLC (Cheyne Capital Management)
    16. Geronimo Multi-Strategy, Sector Opportunity, and Option & Income
    15. Basis Capital Fund Management, Ltd. - Basis Yield Alpha
    14. Solent Capital Partners LLP, Mainsail II
    13. Sentinel Mangement Group
    12. Sachsen LB: Ormond Quay conduit fund
    11. Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia (BNP Paribas)
    10. Union Investment Asset Management Holding AG
    9. Oddo: Cash Titrisation; Cash Arbitrages; and Court Terme Dynamique
    8. Sowood Capital Management
    7. Galena Street Fund
    6. United Capital Markets Holdings Inc.: Horizon Strategy
    5. Caliber Global Investment
    4. Lake Shore Asset Management
    3. Ritchie Capital Management
    2. Bear Stearns: High Grade Structured Credit Strategies Enhanced Leveraged Fund; High Grade Structured Credit Strategies Fund
    1. Dillon Reed Capital Management (UBS)

    Historical Implosions:

    1. Amaranth Advisors [2006-09]
    2. MotherRock [2006-08]
    3. International Management Associates LLC [2006-02]
    4. Wood River Capital Management [2005-10]
    5. Bayou Group [2005-07-27]
    6. GLT Venture Fund [2007-07]
    7. KL Group [2005-03]
    8. Eifuku Master Fund [2005-01]
    9. Long-Term Captial Management (LTCM) [1998-12-31]
    10. Askin Capital Management [1994]

    Ailing/Watch List*:

    16. Ellington Capital Mgmt. (certain funds)
    15. Golden Key Ltd.
    14. Queen's Walk Investment, Ltd. (Cheyne Capital Management)
    13. Carlyle Capital Corporation
    12. Capital Fund Management
    11. John W. Henry & Co.
    10. Campbell & Co.
    9. Tykhe Capital, LLC
    8. North American Equity Opportunities and Global Alpha (Goldman Sachs)
    7. Black Mesa fund
    6. Second Curve Capital (various funds)
    5. Axa IM
    4. Macquarie Fortress Investments Ltd.
    3. Frankfurt Trust
    2. Absolute Capital (Yield Strategies funds)
    1. Mariner Bridge
  • the lender expects to be profitable in the fourth quarter. I don't know about this. Countrywide is taking in more overvalued, underwater residential property in a the midst of a massive residential slowdown, than any other entity that I know of in America. In addition, they have significantly shrunk their business so it will be hard for them to earn their way out of this. Mortgages sales volume and size will decrease since home sales are decreasing amid shrinking housing values, and thier business model is going conforming.

    What is CFC going to do with all of those significantly devalued mortgages on their books? What are they going to do with all of the increasing foreclosures coming down the pike? They already wrote many billions of dollars of bad loans, and now they are taking loads of zero equity property in as well. What are they going to do with those? If you think the homebuilders have written down the value of their assets significantly, imagine the competition they will get from Countrywide. Hey, I am being pessimistic, let me take a close look at their numbers before I jump to conclusions.

    My analysts have performed a lot sell side research, and I am an industry outsider that thinks out of the box. I have never worked for the sell side, thus I think very differently. Hence we tend to come at things from differing angles. This is good. Diversity is good, even when it results in others disagreeing with my theses. When creating the pricing and forecasting engine for the Ryland model used in my last post, I noticed that the numbers appeared to be too optimistic, at least according to my grassroots investor's gut instincts. I know "gut instincts" is not very scientific, but regardless, I told the team to go back and check the numbers. It received a slight tweak, but my gut still told me something was off, despite the fact three smart and knowledgeable people scrubbed the numbers for 2 weeks straight. They used many sources for each city that Ryland built in OFHEO, CME, Case/Shiller, MLS, REOs, Foreclosures, etc. I then got the following email which created a spark:

    You’ll love this:

    While fishing one day I was introduced to the recently retired president ( age 42) of Ryland Homes and his view was that the housing debacle in Florida is going to get much worse than the current state. He had conveyed the disturbing number of houses that would not be completed to a finished project currently being constructed and their internal projections of available buyers at higher interest rates and more importantly qualification standards. In his opinion the bottom is still years away there and most like the same in other areas of previously high appreciation above the norm. They are renting unsold condo's on the beach for 1% per year of asking price in an attempt to at least generate some type of CF until a sale might take place in an unbelievably overbuilt and overpriced market. He also thought that a 30% decrease in value from today's number ( already discounted from the top) is probable and the most important idea is that most in his industry are still in the denial mode vs the desperation mode necessary to make a true bottom.”

    Now, I just reviewed this guy's company so the numbers were fresh in my mind. In addition, I was pondering what could have been wrong with the analysts numbers. Empirically, the methodology was sound. So, I took their numbers and removed ALL government data, scrubbed them with market data only taking into consideration the foreclosure and REO rates (using proprietary algorithms), then back tested the results. Voila! Numbers that matched my gut feel, and more importantly numbers (or at least a methodology) that can be partially verified through back testing. Having just went through this exercise when the email above arrived prompted me to run the new numbers through the Ryland model. The result, whewww!!! No wonder all of those insiders are selling all of those shares. Things looked pretty bad with the ivory tower, conservative numbers. The more realistic grassroots numbers pushed through the Ryland model screams Bad News!!! For the record, we have Miami dropping (32.07%) from this month to 2011. You see, Ryland management and I really do think alike. We're both selling Ryland stock and we're both forecasting similar numbers for real estate pricing. Hey, to agree with me, those Ryland guys must be pretty damn smart:-)

    I will have my analysts thoroughly back test the results and refine the model even more, but in the mean time I think we are on to something. Let's take a look at what we have.

    For the record, this data has yet to be adequately and fully adjusted for condos. This, and the filtering of new construction and investment properties, is the weakest component of the Case Shiller index (see my opinion on that topic here). YTD, condos have underperformed single family housing in 14 out of 24 Metropolitan Statistical Areas. Needless to say, the new construction is being heavily discounted. Also, keep in mind that most of the markets that did not participate in the bubble are still participating in the recession due to the fact that many homeowners used exotic financing for their homes, which ended up with a non-traditional, often unpleasant result of distress, foreclosure an REOs. A perfect example of this would be Detroit. In the graph below I have outlined the last 20 years of housing appreciation in the US for 10 metro areas. Click the picture to enlarge.


    Notice the difference in intensity between the last residential real estate bull market and this most recent bubble. It is a BIG difference. Each market entered the Boom, the Burst & eventually, the Recovery at a separate and individual date, thus have been calculated and graphed accordingly. Residential real estate is very local. What is very different this time around is the severity of the bubble, and how correlated the markets are - not just across the US but throughout the Americas, parts of Asia, N. Africa, & Europe as well. For more on how this occured, you can read “The Great Global Macro Experiment”

    for a macro primer on the risky asset bubble environment. Next, notice how long the recovery took. Then take notice the steep, steep incline up representing this most recent bubble. This has been the biggest real estate bubble since the gold rush (at least that I am aware of)!!! Now, notice the burst and recession, both current and forecasted (in case there is anyone who has not realized it yet - Yes, we are in a recession!). For all of those who are looking for a "bottom" this year or next, well "I (and the management of Ryland) have some home building stocks to sell you!"

    Look at the home builder's stock prices at the height of the bubble in 2005. Compare it to the graph above. Now look at the stocks in 2000 - 2001 and compare it to the chart above for the same years. Do you see the correlation. Now, where would you draw the trend line for the builder stock's decline in years 2007 through 2011???

    Now referring to the first graph again, although there have been periods where prices have dropped - and recently, have dropped significantly - housing prices generally trend upward. It may take a decade, or even two, but prices do trend upward over time. The pertinent questions are:

    1. How much farther will prices drop?
    2. What is the extent of the damage of the busted bubble from peak of the bubble to trough of the bust?
    3. Where will the individual markets end up in terms of pricing?

    Well, since you have paid so damn much to access the info on this blog, I am morally and ethically obliged to give you what you ask for. The graph says it all. A picture is worth a thousand (an one) words.


    The pretty green lines show where we calculate these markets will ultimately end up at the end of the recession. NY was already a very expensive place to live. It went up a lot, will come down a lot, but end up about where normal housing appreciation would have put it without the bubble. Now, this is the MSA, and not Manhattan only. Manhattan is harder to due due its building type mix.

    Place like Miami and Vegas were popular places but not necessarily higher income employment or housing bastions of excess. Due to excessive speculation through the bubble, housing prices literally skyrocketed - way above the level of affordability or rational rental yields. These prices are falling, and will fall much farther. Yet, despite the painful fall that is coming, at the end of the day, these areas are going to be considerably more expensive after the bubble than before the bubble. In order for this to be true, socio-economic demographics have to shift. In other words, the older demographic makes much more money, or they are gentrified out. I will actually post a model on socio-economic measurement to assist in quantifying the finer and more ambiguous points of forecasting real estate pricing and valuation trends. But before I do that, I will plug these more grass roots forecast numbers into the Ryland model and share the results. I will then use the price forecasting engine to map out the likely future of the other big public builders, and then move on into socio-economics.