The Mortgage Bankers Association Gives Us A Warning

Implications: The results of all this will be an implosion of prices in most markets.  I can make a case for New York City and Washington D.C., but the affordability there is so low that I think I’d be wrong to make the point.  Last year I was momentarily high on Las Vegas and I was wrong, so I’m reluctant to make that kind of call again in the face of so much bad news.

Analysis:

I can make the better call to wait on public homebuilder investments until the equity is gone and the pricing is below amortized book after the land portfolio is marked to market assuming a distress/opportunity market.  It may not be long before real estate brokers are a dime a dozen and prices there will depend on the auctioneer’s skill at disposing of used electronics and furniture.  I wouldn’t be leasing cars to this group based on historical incomes.  The travails of the sub-prime lenders and FNMA are well documented now.If you want evidence, look at New Century, Ameriquest, Novastar and Washington Mutual.Since there’s smoke, even Countrywide may be in play.  Again, the value of many of these companies may be dependent on the auctioneer’s gavel.

The Mortgage Bankers Association breaks ranks with the NAHB and NAR to tell us that defaults and foreclosures will hurt us big in 2007 and beyond.  Meantime, the public builders are trying to keep up with public market investors by accurately predicting the future bad news.  Toll Brothers, Lennar, Standard Pacific and the new leadership at KB Homes to me are the leaders here in the new truth parade.  While the NAR continues the looking up forecasts, the weaker of its members are closing down and the business plans of its larger members are being tested.

Meanwhile, Bill Gross at PIMCO, the nation’s biggest bond investor owned by the German insurer, Allianz AG, tells us he’s 43% in cash anticipating a rise in yields and a decrease in prices.  His nights are disturbed by the fact that 39% of his remaining assets are mortgage-backed securities.

At the same time, businesses supplying the housing industry or its offshoots are feeling the effects of reduced demand.  Layoffs and losses will hurt.  Try Whirlpool, Masco and other like them.

Fuel costs are fluctuating in and around a number just reduced from the peak.  Just wait until the summer travel season peaks for higher pricing here.  Your grocer is happier now as your food bill is significantly higher.  Healthcare is through the roof and care is suspect to many.

Twenty percent of today’s California home buyers are buying today with nothing down, a number over four times higher than seven years ago according to a survey by First Republic Bank of San Francisco.  Frankly, I’m surprised that the number is that high.  Certainly first time buyers are not saving a significant down, so the buyers with money down must be the sellers to the first time buyers, investors, the rich and the like.  If we're financing this even now, we're just carrying the risks to the nth.  It's one think to do this in distress markets to move inventory, but to make these loans at the elevated prices and unworkable affordability ratios today are asking for a default ratio breaking any modern record.