Saturday, 01 September 2007 05:00

How low can prices go, again??


"An auction of about 135 foreclosed homes in San Diego Saturday provided more sobering news for mortgage lenders. Ramsey Su, an investor and former real-estate broker who attended, calculated that the high bids for the homes averaged 67% of the prices they fetched when they were last sold, mostly in 2004 or 2005. At a similar auction in San Diego in May, the average was 73%. The auction was held by Real Estate Disposition Corp., Irvine, Calif., which promotes such sales on the Web site. REDC officials couldn't be reached to comment."

Will this spread to the greater economy?

"Countrywide Financial Corp., reducing costs as part of its effort to weather a credit crunch, has begun laying off employees involved in originating loans, according to an internal email."

Saturday, 01 September 2007 05:00

Who else is in trouble?

By now, you probably realize that I think the homebuilders are in worse trouble than the mortgage lenders. Their collateral is not as ephemeral, since it is a real asset, but it is also much less liquid. Don't get me wrong, I think the mortgage lenders are in very big trouble as well, but the big lenders cannot be allowed to go out of business due to the damage to the economy. Nobody is going to miss a homebuilder going belly up.

The only way out of the mess is the way we got into it, the hard way.

Saturday, 01 September 2007 05:00

Correction, and further thoughts on the topic

It has been called to my attention that among the many typos in my earlier post, an important one was the reference to the funding costs of DHI. The company in question was actually DHOM - Dominion Homes, not DR Horton - DHI. The general theme still stands, though, these guys as an industry who hold significantly depreciating real assets or options on said assets, financed by debt (all of them) or those who have significant mortgage banking operations without internal financing (ex. deposit accounts, etc.) (the vast majority of them), and who are running consistent operating losses for the last quarter and foreseeable next half (all of them) are in trouble, to say the least.

Saturday, 01 September 2007 05:00

How Far Will US Home Prices Drop?

I do not know, and I doubt anybody else does either. How much they will drop nationwide is a fools question, and to hazard a guess would be an exercise in futility due to the extremely geographic nature of the housing industry. Remember, no one lives in a nationwide home!!! There are some areas where I would bet the farm on a 20-25% drop though from peak to trough, Vegas doesn't look to good and Southern Florida is in for a lot of pain (re: condos). There are southern Florida condo developers who have been foreclosed upon because they could not sell above their cost and the land was too expensive to convert into a rental. That, in itself represents a 25% drop, retail, so it has already started happening in some areas at a rate that is higher than the historical average - and we have just started the real estate bust. Florida is an interesting area due to the inherent demand for clear water, good weather and the pretty women night life effect, not to mention favorable homestead laws. It also has laws that favor condo development for you don't need a red herring in the same fashion as cities such as NYC, hence you can pre-sell condo units with a set of plans and then finance the actual construction with a bank loan and deposits from pre-sales.

Page 582 of 583