Rant About It

Archive for the ‘Real Estate’ Category

Subprime Lenders: Screwed Real Bad

Posted by rantaboutit on March 15, 2007

Last few days the market is full of news about how the number of foreclosures are increasing around U.S. and how badly subprime lenders are screwed. I do not want to reiterate the same point again and again. Instead i will list a few interesting pointers/takeaways from this whole episode. But just before doing that for those who do not know what subprime is…
What is a subprime loan ?
This is a loan to someone with a bad credit history. These people pay higher interest rates, earning more money for lenders, so long as the mortgage payments keep coming.

Delinquencies & Foreclosures

  • The delinquency rate for one-to-four-family houses rose to 4.95% of all loans outstanding compared with 4.67% during the 3rd quarter. The North Central region had an overall delinquency rate of 5.68%, the South 5.71%, the Northeast 4.59% and the West 3.18%.
  • A record high number of homeowners faced a serious threat of foreclosure during the 4th quarter of 2006. Foreclosures were highest in the North Central region, at 2.02%. The rate in the Northeast was 1.16%, the South was 1.08% and the West just 0.63%.
Subprime Issues
  • 7.78% of nearly 6 million subprime loans were seriously delinquent, since many borrowers have difficulty making payments when home price appreciation fades and interest rates on their adjustable-rate loans jump up from their original low teaser rates.
  • At least 20 lenders in the subprime mortgage sector have gone out of business.
  • Total subprime mortgages outstanding amount is about $1.3 trillion, of which $700 billion are held by private asset-backed securities issuers.
Stock Market Saga
  • Homebuilders like D.R. Horton (DHI), Toll Brothers (TOL) and Pulte Homes (PHM) have cut the number of new homes built, but a large supply of existing homes is also forcing them to reduce prices or offer incentives. DHI, TOL & PHM stocks lost -14.4%, -12.2% & -20.1% respectively in the last 3-months.
  • Countrywide Financial Corp (CFC) the largest U.S. mortgage lender, told its brokers to stop offering borrowers the option of a no-money-down home loan. CFC stocks sank -16% in the last 3-months.
  • No. 2 subprime lender New Century Financial (NEW) warned that it faces $8.4 billion in loan repayment obligations. Its shares had already been badly battered over the last month on rising concerns of a possible bankruptcy filing. 1-year return was -95.81%.
  • Other subprime lenders like Accredited Home Lenders Holding Co. (LEND) and Fremont General Corp. (FMT) are facing a major meltdown at the stock market too. FMT, have cited mortgage fraud, along with the softer housing market and loose underwriting standards, as contributing to a rapid run-up in delinquencies. FMT said it would exit the subprime business amid regulatory pressure, and severed relationships with 8,000 brokers.
Few More Facts
  • The FBI is seeking to stem a rising tide of crime in home financing. They warned borrowers and lenders that mortgage fraud can result in stiff fines and prison time.
  • Late payments for residential mortgages shot up by 15.6% in the fourth quarter.
  • National inventory is 20% higher than last year, vacancy rates have soared and prices are down about 3%. With tighter credit, prices might fall another 5-7 %.
  • Even though the housing market has slowed down, the U.S. economy and job market has held solid.
  • Housing meltdown is bad news for investors in U.S. residential mortgage-backed securities.
Check Out The Video

So who is at fault. The lenders or the borrowers ?
Taking a loan is a give and take relation. The lenders were stupid/greedy to loan out an amount they knew borrowers could not afford. Lenders had all the information (W2, credit score, paystubs) they needed to make the right decision. The borrowers were stupid/naive to not understand their own financial strength. Borrowers made decisions without weighing all the possibilities and got burned out. Both are at fault.

Conclusion: Subprime lenders are already slaughtered, but what remains to see is how will rising mortgage delinquencies affect home prices overall ?

Recommended Books:

(Source: CNN Money)

Posted in Mortgage, Real Estate, Video | 1 Comment »

More facts about housing…

Posted by rantaboutit on January 8, 2007

Housing activity is a function of several factors: Rates, the overall economy, supply, population growth, rental prices, sentiment, speculation, liquidity (easy financing terms, loans, mortgages) Over the past 5 years, rates dropped, supply expanded, population expanded, prices rose. That’s normal. But then rates plummeted even further, prices rose more quickly. That is where we saw crazy boom. Now that we are seeing inflation problems, the Feds have raised rates and that is why we are seeing drop in prices.

Lets have a look at few interesting facts about housing/real estate.

  • California is hit the hardest in falling home values in the nation. San Diego will drop more than 13% on average in 2007, Los Angeles more than 11% and Miami will have a 13.6% drop.
  • However on the good side, Washington state and Utah are experiencing massive areas of growth. Texas is undergoing the largest growth in its history since alot of people are moving in from New Orleans due to Hurricane Katrina.
  • In California, the standing unsold housing inventory is moving down rapidly, also a considerable drop in excess inventory in condominium conversions, with owners either selling out or reverting back to rental status. Town house and other low-density home building will continue normally, but there will be a cutback on high-rise development in urban cores.
  • San Antonio was a market experiencing modest growth until recent times. It is predicted that it will appreciate 8.3%. Out-of-town investors flooded in, glutting the market with rental homes.
  • In Colorado the record number of foreclosures has given it a bad rap. Home sales in Pitkin County, home of Aspen and Snowmass, were up 19% in 2006.
  • Alot of borrowers are refinancing ARMs in the past six to eight weeks. One reason people are switching is that the difference in the rate on adjustable and fixed mortgages has narrowed. The rate on a mortgage that can adjust annually was 5.84% recently, compared with about 6.22% on a fixed-rate mortgage. Borrowers are opting to pay a little more for the fixed-rate mortgage to avoid the risk of a reset on an adjustable mortgage in the future.
  • When the housing market goes bust, the rental market should expect a boom. But this is not the case right now. Developers overbuilt rental properties in recent years, leading to the highest vacancy rates in more than 15 years and forcing landlords to offer incentives. A big drop in the housing market could actually make matters worse. When home prices fall, foreclosures often increase rapidly, and many are converted into rental units until a buyer can be found. That only adds more rental supply to the market, creating oversupply problems.
  • Decline in private residential projects caused a gain in private non-residential construction, reflecting increases in spending on transportation projects, hotels and commercial space, helped offset the decline in residential building.
With all these bad news i recommend staying away from housing stocks. If you really love real-estate learn more about REIT. I will post more about REIT soon. This could also mean a good time to jump into buying a house as an investment in growing cities which is expected to see boom in the near future.

Recommendation: These are few of the stocks i follow and recommend to keep away from it or think about shorting them. HSOA, RSTO, BLDR, BECN, FUR, TOL

Posted in Real Estate | 1 Comment »

Housing boom or bust ??

Posted by rantaboutit on January 6, 2007

Strong housing sales is an indication of strong economy. With increase in interest rates, the mortage rates also are up.

Rule of thumb: High mortage rates = Slow housing sale

Pending sales of existing U.S. homes fell 0.5 percent in November but held above the low hit in July, suggesting the housing market is stabilizing.

The Pending Home Sales Index is pointing toward fairly stable home sales in the near future. Home sales climbed the two months after September.

The index covers pending sales of existing single-family units, condominiums and co-ops. A home sale is pending when a contract has been signed but the transaction has not closed.

Shares of homebuilders is all down, and i do not recommend holding it this qtr. Some of the stocks make for good shorts like Toll Brothers (TOL), DR Horton (DHI), Pulte Homes (PHM), Restoration Hardware Inc (RSTO), Home Solutions of America Inc (HSOA)

I am bearish about Real Estate/Construction stocks this quarter, but the second half of 2007 looks more promising for housing.

Posted in Real Estate | Leave a Comment »