Sunday, 02 September 2007 05:00

Centex is trying hard to move inventory

Advertising 56% discounts in price, as well as discounts in financing, Centex is showing that the pressure to move inventor at any cost is mounting. Remember, they are probably going to lose the ability to fund their mortgage arms through swaps due the impending loss of their investment grade rating, and their warehouse credit line (the loan they use to fund mortgages before they sell them off to investors) matures in part this month. This means dump'em while you still can. A 56% drop in revenue portends a much larger drop in profits when you add the write-offs for land devaluation, etc.

I am sure they are going to get stuck with many non-conforming loans on their warehouse line, which they will not have much longer as well. It should be an interesting reporting period for Centex.Webshell_madison3_3 Click thumbnail to expand...

From their site:

Madison Park, located between Radio Road and Davis Boulevard in Naples, exudes a small town neighborhood feeling and is just minutes away from Fifth Avenue restaurants and shopping.

QUINCY SQUARE #11-101. Villa home, 2BR/2BA + den, great rm, 2-car garage. 1,747 A/C sq. ft. Old Price $391,022 New Price $254,990 Save $136,032 Old Payment $1,955/mo New Payment Only $956/mo

Sunday, 02 September 2007 05:00

The Real Trend in US Housing Prices...

Quote from the WSJ: "Underscoring the growing pessimism about housing, economists at Goldman Sachs in New York raised their forecast for the drop in U.S. home prices this year to 7% from a previous 5%. The forecast is based on the S&P/Case-Shiller national home-price index, considered the best such gauge by some housing economists. The Goldman economists expect a further 7% decline in house prices next year. In this year's second quarter, the index was down 3.2% from a year earlier.

Reggie's grassroots analysis:

The S&P index severely understates the glut in housing and the downward pressure on pricing. It uses the repeat sales methodology which only includes houses have that have been sold at least twice, which excludes all new construction. So the homebuilder’s product which is being slashed in price with butcher knives and cleavers don’t even show up in the index, and these homes must be slashed enough to sell in a slow market that no longer has cheap credit, has much competition in excess supply, and no longer has the phantom appraisal pricing which helped sustain the bubble in the first place (more on this later).

Moody's just put Lennar, Pulte and Centex on negative watch for downgrade to junk status. For those who read my earlier posts, non-investment grade entities cannot participate in swap agreements with investment grade entities through the banks to fund the mortgage special purpose companies. In addition, Centex's warehouse credit line expires this month (the credit line that they use to fund mortgages to sell their homes),

and somehow I doubt they will be able to find a replacement. For those who thought the homebuilders will be reaching a bottom soon --- Now, the party begins... They will be saddled with the depreciating assets and increasingly unfunded debt burdens that are throwing the mortgage bankers out of business just when the housing market spiral starts to accelerate downward. Pulte homes relies on their internal financing for almost 100% of their home sales. This is going to get much uglier and I foresee insolvency for more than a few. Despite what I see (and I have been wrong before) the home builders rallied yesterday and are definitely off of their lows.

Macro-economic theory and research as well as the theme in general credited to Dr. Drobny. For the record, the piece this is derived from was written towards the beginning of the year. It may seem to state the obvious now, but it was quite predictive when it was written.

Once upon a time, there was a man at the helm of the Federal Reserve during one of the most explosive equity market bubbles in the history of the US. Technology stocks, and internet stocks in particular, exploded in price by several hundred percent, fledging start-ups with no profit, often no revenue, and speculative business models were being brought public at astronomic multiples, and vast fortunes were being made as mom and pop investors bought IPOs in margin accounts. The Chieftain warned of the “irrational exuberance” in the markets and the dangers that ensued, but oft to no avail, as the market shot up higher and higher. This was an obvious speculative bubble, and during the past extreme bubbles in this country, previous Chieftains pricked them with higher interest rates which invariably led to a recession or worse shortly thereafter.
Now, this chieftain, being the historian that he was, knew the historical effects of the pricking the bubble, so he tried to talk it down through speeches of “irrational exuberance”. Since that did not work, he decided to try something different from all of his predecessors,

and wait for the market to collapse on its own, which, of course, it did. After the market crashed, this chieftain lowered interest rates to near 1% (in terms of real rates) and consequently flooded the US with inexpensive money in the form of easy credit. Since the US is the economic epicenter of the world, the flooding of the US with money is the equivalent of flooding the world with money, and the result was that risky assets US wide and world wide became more liquid, and thus from a liquidity perspective, perceived as less risky. This love fest with risky assets ranged from real estate and mortgages to derivatives, commodities and emerging market debt (and practically everything in between). As a result of this “Great Global Macro Experiment,” real estate (primarily residential) led the US out of the dotcom implosion caused recession and powered the economy for the 6 years.
As a matter of fact, the speculative excesses of the real estate industry, and consequently the mortgage industry that financed it, easily matched if not surpassed that of the dot com era just a few years ago. The Chieftain in seeing this, raised interest rates in an attempt to soak up some of the liquidity that he flooded the world with, but his efforts were to no avail. For the first time in the history of US Fed Reserve Chieftains, the power to directly or even indirectly affect interest rates were out of his reach. He remarked that for some strange reason, that he did not understand, as he would raise rates, the market rates would actually decrease. Thus, one effect of the experiment was that the Chieftain and the fed lost the power to directly manipulate market rates.
As the real estate and mortgage markets crashed (as all speculative bubbles do), this author and investor predicts that real estate will lead us into a recession, the same as it led us out of one several years ago. The difference between now and then is that the entire globe’s risky assets were “mispriced” downward due to excessive and easily available credit and liquidity, thus as the US goes the world will follow. Think about the fact that it took 6 years for the bubble to form, it will not dissipate in 6 months or even 16 months, due to the illiquid nature of the base asset. These are not internet stocks sold in a minute and settled by the end of the day. My experience in selling residential in the NE of the US was a 90 day marketing period to sell a property. These days, many properties have been on the market over 6 months and have not sold (in a fairly wide cross section of locations). Now, if it takes six months or more to move property that is part of a 10 month inventory supply (don’t believe many of the official reports that exclude condos, coops, and multi-family residences that have the inventory stated lower) and that marketing time is getting longer, not shorter, how healthy do you think the environment is??? As the US real estate market (residential, and soon commercial) is tanking, the opaque derivative structures that allowed banks to write loans bigger than their balance sheets follow. This will ripple throughout the world as speculative real estate and exotic financing vehicles follow the same paths in Europe, Africa, Asia, and South America. Spain’s residential real estate market is currently on fire and 92% of the mortgages issued are ARMs, most of which are concentrated to the lower income buyers. Sound familiar? Similar scenes in Brazil. UK residential prices have soared, Australia up nearly 3 times (relative), China homebuilders and contractors or roaring, condos in Dubai everywhere… Add in the US exported structured products… Practically all of the popularized risky assets are destined to follow suit, not just real estate – expect pressure in the emerging market debt markets as a follow-through...

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