The Boom Gloom Factor
Face it. A lot of this might be Baby Boomers’ fault. We’d like to credit “the big troubles” to subprime borrowers who wanted to waltz into homeownership without the financial necessaries.
Not so fast.
What about Baby Boomers, 78 million highly entitled adults who’d begun to believe that scrimping and saving was an “old hat” anachronism? Many of them thought they could ride the 401K Express to retirement, with the bonus of home appreciation to add extravagance to their Golden Age. Short cuts are us. The Golden Age, by the way, would never end because rock and roll and boomers will never die.
News flash.
Comeuppance is not pretty.
Here’s a CNBC article that’s like a lightbulb going on for those who may have needed a wake up call. The government and entrenched Wall Street establishmentarians are locked in a fierce school yard scrap, and that leaves a population that thought it would have its nest feathered featherless, spectators who’ve bought tickets to the rumble.
Check out a blog post from a real estate pro/radio host who’s been hearing it from Boomers who’ve slammed up against painful reality as their hasty home-appreciation retirement strategy gets drawn into the home price give-back.
Essentially, these callers are all asking the same sorts of questions: Is now a good time to sell my home? Should I sell my house and trade down to something smaller and less expensive? Will I have to keep working to afford the mortgage on a property I would have sold to help fund my retirement?
What these Baby Boomers have begun to realize is that when a market has stalled, it stalls for pretty much everyone, not just a few souls here or there.
Sure, some houses are selling. But in October 2008, around 45 percent of existing homes sold were bank-owned foreclosures, according to data from the National Association of Realtors. That means just 55 percent of homes were sold by homeowners (with or without agents) to buyers.
As the economy continues to slog through the current recession, the news won’t be good anytime soon for sellers who are looking to get out from under their adjustable rate mortgages (ARMs).
HousingCrisis.com sister brand, Builderonline.com last week analyzed recently released data from the Center for Economic and Policy Research that attempts to tally the dollar impact of the downturn on Boomers’ wealth.
The median wealth of 55 to 64 year olds in 2004 was $315,400. CEPR projects that this wealth will fall to $168,800 in 2009, or to $143,200 in the worst-case scenario. The average wealth drop would be 29% to $708,000. Even at the top wealth quintile, the average falloff is projected to be 25% from $3.8 million.
The 45 to 54 year old group is generally less affluent to begin with, so the hit it has taken from the downturn in the housing market is starker. The study projects the median wealth of this group will erode by 41% to $101,800 in 2009. In the worst-case scenario, the decline would be more than 45%. This group’s average wealth will decline 36% to $408,500, with the losses in scenarios two and three notably larger. For example, in the second scenario, median net wealth in 2009 is $94,200 (a drop of 45 percent) and the average net wealth is $387,900 (a drop of 39 percent).
This age group’s median equity in real estate was $83,600 in 2004, but that’s fallen drastically since. For instance, in the first scenario, median real estate equity in 2009 is projected to be $27,100—a drop of 68%—while in the third, median equity is projected to be only $6,600, or a loss of 92%. The projected decline for 55 to 64 year olds from their 2004 equity median of $142,000 will range from 47% to 63% in 2009.
The wealth of baby boomers could be further compromised when they are trying to sell their houses. The CEPR study states that only 2.6% of 45 to 54 year olds had less than 6% equity in their primary residences, meaning they’d have to bring cash to a closing when selling their homes in 2004. This year, however, 17% to 28% of each wealth quintile (depending on which they fall into) would need to bring cash to close a resale in 2009. Even households at the top of the wealth ladder won’t be immune: In 2004, no households in the top quintile of the survey had less than 6% equity in their primary residences. By 2009, between 10% and 20% of the most affluent households in this age group would need to bring cash to a closing.
Obviously, an owner’s wealth exposure magnifies if his or her house is worth less than the mortgage. The study projects that between 23% and 38% of homeowners in this age group with negative equity would need to bring cash to close a resale in 2009, versus only 3% in 2004.
Boomers can only take heart in knowing that if and when home prices revert to their century old mean, it’s more likely that their kids might be able to afford one of the suckers. It’s a be careful what you wish for thing, as in a bridge to what otherwise would be Generation Gap No. 358.
Warren Buffett’s Take on the Housing Crisis
The Oracle of Omaha–sins of commission, omission, warts and all–has spoken, and he’s got his devout host of acolytes and admirers poring over every word of the Berkshire Hathaway annual letter to shareholders.
Housing, particularly the financial storm and economic crisis around housing, is getting some attention in the wake of the B-H annual report release.
In this report, MarketWatch’s John Spence dissects Warren Buffett’s extrapolation of the performance and business environment challenges for Berkshire’s Tennessee-based manufactured home builder Clayton Homes, as he offers observations about the broader housing economy’s dislocation. Connecting the dots from the modular home marketer’s customer base to the bubble-crazed housing boom of the first part of the decade, Buffett coins this year’s letter’s most quoteworthy quotes.
“Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income.”
In most cases, homes go into foreclosure simply because the borrowers can’t keep up with the monthly payment, not because they owe more than the house is worth due to falling prices, he said.“Home ownership is a wonderful thing. My family and I have enjoyed my present home for 50 years, with more to come,” he commented. “But enjoyment and utility should be the primary motives for purchase, not profit or refi possibilities. And the home purchased ought to fit the income of the purchaser.”Buffett still lives in the house in Omaha he paid $31,500 for in the late 1950s.“Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective,” he wrote. “Keeping them in their homes should be the ambition.”
Freddie Mac’s Moffett Resigns
Here’s the text of the press release from Freddie Mac this morning:
David Moffett
McLean, VA – Freddie Mac (NYSE: FRE) today announced that its chief executive officer, David Moffett, has notified the chairman of the board of directors of his resignation from his position as chief executive and as a member of the board effective no later than March 13, 2009. The board of directors is working with the Federal Housing Finance Agency (FHFA) to appoint a successor to Moffett.
Moffett indicated that he wants to return to a role in the financial services sector. In his letter of resignation, he said, “I have enjoyed my time as CEO of Freddie Mac and I wish all the great employees the very best in the days to come.”
John Koskinen, chairman of the board, said “We are very sorry to see David go. He made valuable contributions to Freddie Mac as the company transitioned into conservatorship.” Koskinen also said, “We expect to name an interim CEO before March 13 to assume David’s responsibilities once he leaves.” He added, “The board remains fully committed to ensuring the company continues its critical role in supporting the housing finance system during this difficult economic period.”
Management continues to estimate that FHFA, in its capacity as conservator of Freddie Mac, will submit a request to Treasury to draw an additional amount of approximately $30 billion to $35 billion under the Senior Preferred Stock Purchase Agreement between Freddie Mac and Treasury, following the timely filing of the company’s annual report on Form 10-K with the Securities and Exchange Commission.
A CNBC report elaborates:
President Barack Obama last month outlined a home refinancing and foreclosure prevention plan that relies heavily on Freddie Mac and larger rival Fannie Mae. But the companies themselves are facing billions of dollars in losses and must rely on the government for support.
The Obama administration last month doubled its capital commitment to the companies to $400 billion.
James Lockhart, director of the Federal Housing Finance Agency, the companies’ regulator, said he would work with Freddie Mac to ensure
Funny he should want to return to the private sector just as the private sector becomes more and more the public sector. What comes around goes around.
Ken Moelis to Policymakers: Less is More
How about a strong case for government to do nothing? Ken Moelis, founder of Moelis & Co. speaks in a 17-minute interview with Chrystia Freeland, US managing editor of the Financial Times, essentially about there being “no fix.”
The conversation grazes across the issues of the moment–recession, deflation, the US government’s response, the stimulus and the banking system bailouts–and comes back on each topic to accountability and the need for “the rules” that make the system strong when their enforced.
Reality strikes, but there’s encouragement here too.
GSE’s Not Having a Whole Lot of Fund Out There
From HOUSINGFINANCE.COM, By Jerry Ascierto: Distinguishing one government sponsored enterprise from another these days is getting more difficult. They’re both in government conservatorship; both still hemorrhaging money; and both still trying to offset mountains of bad investments with some good ones.
Housingfinance.com senior editor Jerry Ascierto tackles the issue of GSE parity on rates, and what it might ultimately mean for those who’re trying to get access to their capital for affordable housing community projects in a credit-crunched environment.
Immediate funding deals for tax credit properties were quoting in the mid- to upper 6 percent range in late February.
But rates on forward commitments from the government-sponsored enterprises remain high. Interest rates for funded forward commitments are in the high 7 percent range, and prices are above 8 percent for unfunded forward commitments.
“They’re pricing in a significant amount of risk premium into forward pricing at the moment,” said Phil Melton, senior vice president of Grandbridge Real Estate Capital. “That’s driven by the fact that there is a significant amount of forwards that are not converting at the time that they’re supposed to.”
Forward commitments are loans on 9 percent tax credit deals undergoing new construction or substantial rehabilitation. In a funded forward, Fannie Mae agrees to purchase the permanent loan and also provides funds to the deal’s construction lender; an unfunded forward commitment provides a rate-lock and commitment to fund the permanent mortgage once construction is complete.
Meanwhile, ahem, we call them results these days because there are so few earnings, and here’s what they amounted to in Fannie’s latest financial period, thanks mostly in part to a 3-year insanity spree into risky home mortgages. The Wall Street Journal reports:
Graphic: Courtesy of the Wall Street Journal
The deepening financial problems at the companies set up some tough choices for the Obama administration, which will have to decide whether to continue pumping taxpayer money into the firms to keep them operating or break them into pieces and strip them of their government support. Another unsettled question is how long to retain as their regulator Mr. Lockhart, a friend of former President George W. Bush since their high school days.
Fannie and Freddie were battered by the worst wave of mortgage defaults since the 1930s and recorded combined losses of nearly $60 billion for the first three quarters of 2008. The government seized management control in September under a legal process known as conservatorship, and has since agreed to make as much as $400 billion of capital available to them. Under conservatorship, the regulator is charged with “conserving” the companies’ operations and nursing them back to financial health.
The conservatorship hasn’t produced all the results the government sought. Thus far, the two companies have rewritten just a tiny fraction of the 31 million mortgages they own or guarantee.
Multifamily is where the GSEs actually still have viability, but that scarcely appears to matter, since they’re on a different performance scorecard.
In an interview [with the WSJ's James B. Hagerty and Damian Paletta], Fannie’s government-appointed CEO, Herbert Allison, said: “It’s not about maximizing returns on equity or profits. It’s really about being of use to the country during this very difficult period.”
Less than Zero Equals Zombie
Next time you’re at the ATM, you might want to be on your guard. Living dead banks are on the prowl, both night and day.
Nobel prize-winner Paul Krugman, the Princeton economist and outspoken New York Times columnist who’s got enough credentials to tip over a two-wheeler, is getting depressed about the prospect of Zombie banks in a Lost Decade kind of way. Management and shareholders of banks, he believes, need to lose for America to gain. Government must step in, take banks into receivership–temporarily, zero out equity, secure debt, and find buyers for the banks who’ve been given revitalized liver, kidney, and pancreas function.
As long as capital injections are seen as a way to bail out the people who got us into this mess (which they are as long as the banks haven’t been put into receivership), the political system won’t, repeat, won’t be willing to come up with enough money to make the system healthy again. At most we’ll get a slow intravenous drip that’s enough to keep the banks shambling along.
More and more, it looks as if we’re headed for the decade of the living dead.
For those, like us, who need extra help with our Economics 101, Barry Ritholtz’s The Big Picture blog gives us the Zombies for Dummies version.
A Zombie Bank is a financial institution whose liabilities outweighs it assets, making its net worth “less than zero.” ZBs continue to operate because of the implicit or explicit government guarantee — along with truckloadsof taxpayer monies.
Consider the two biggest Zombie banks — Citigroup, and Bank of America.They have each recieved $45 billion in capital from the US government — far more than either bank is worth. Additionally, the US had guaranteed up to 90% of the bad assets each zombie is holding — $250 billion and $306 billion respetively.
As you might already know, Ritholtz is a no-holds-barred source of opinion, whether he feels his is welcome or not. His view [and the views of a pantheon of economists] on nationalization–vs. IV-drip tax payer meds–is compelling, and what’s more you can bet that he won’t let go of the cuff of policy-makers with a casual flick of the leg.
The reason I favor nationalization is that I hope we here in the US avoid a lost Japan-like decade from September 08 forward. Keeping these banks propped up with more and more taxpayer monies — the Obama Administration has proposed another $750 billion more in bank-rescue aid — is not the way out of this mess.
One way another, a dreaded consequence of the economic intellectual pyrotechnics being brought to bear on why we should turn Swedish rather than Japanese is that we’ve stopped merely living–instead we’re living through what will be a textbook case in policymaking during a global economic crisis.
Banks, AIG on Debt Row
The Big Picture’s Barry Ritholtz calls attention to this 11-minute audio capture from editor and publisher of the Gloom, Boom & Doom report Marc Faber on Bloomberg yesterday. It illuminates the shrinking options to pick from to deal with financial system crises.
Lowe’s Ebb: Same Stores Cede 7% in ’08, More in ’09
From PROSALES ONLINE, By Craig Webb: DYI consumers and “prosumers” powered the explosion of hybrid building materials, hardware, home appliance, and home and garden supplies super stores through the latter part of this decade. Now, the triple-threat of job losses, household balance sheet deleveraging, and choking commercial credit has cut off important oxygen supplies to both longstanding No. 1 player Home Depot and its feisty rival Lowe’s.
ProSales magazine and online editor Craig Webb reports on Lowe’s reel of fortune, both a 60% year on year earnings decline, and a sharply challenged 2009 outlook.
Lowe’s Companies Inc. today reported its sales at stores open at least a year fell 7.2% in fiscal year 2008, ended Jan. 30, and predicted same-store sales will drop another 4% to 8% over the next 12 months. The company also said it will open just over half as many stores in the coming year as in 2008.
Net earnings for the fiscal fourth quarter ended Jan. 30 sank 60.3% from the year-earlier period to $162 million on a 3.8% drop in revenue to $9.98 billion. Net earnings for the fiscal year shrank 21.9% to $2.2 billion on a drop of just 0.1% in sales to $48.2 billion. Those sales numbers were boosted by the addition of 115 stores last year; as of Jan. 30, Lowe’s operated 1,649 stores in the United States and Canada.
Tuning into the company’s conference call with analysts, ProSales editor Webb reported Lowe’s senior strategists’ read on whys and wherefores of the sales swan dive and continued challenges. In short, consumers are simply shying away from the big bills that come with major home improvement undertakings right now. They’ll only do what they have to to keep their homes secure from heavy weather, financial or meteorological.
Larry Stone, President/COO of Lowe's
Larry Stone, Lowe’s president and chief operating officer, told analysts during a conference call that one reason why sales fell was that customers were doing fewer big-ticket renovation projects, such as kitchen projects. Similarly, Lowe’s revenue for installed sales projects, such as carpet and window installations, declined 14.4% in the fourth quarter from the previous year and was down 6% for the year. Discretionary expenditures accounted in 2006 for 45% of sales, he said. Now, they account for about one-third of sales. “[Customers are] hesitant to invest in large projects,” he said.
On the other hand, hurricanes and storms spurred purchases of shingles and other building materials. Had those purchases not occurred, the sales totals would have been one percentage point worse.
For those in dire need of a silver lining, look east, Stephen East, that is, Pali Research’s home building and building materials analyst. East reports that Lowe’s ebb-tide outlook is no surprise. What could non-plus industry observers, however, can be found under the rug. Here’s what we mean.
On Lowe’s conference call this morning, the details of the quarter were unsurprisingly negative for most categories, thereby transferring the pain to building products companies. However, there were a couple of positives for our coverage, one surprisingly so. Lowe’s saw same store sales start weak in November, improve in December then weaken again in January, which obviously causes consternation for investors of building products companies.
Fortune Brands (FO) and Masco (MAS) likely suffered with most all product categories, while Mohawk Industries (MHK) may have been a beneficiary of a surprisingly positive performance. Only two categories associated with our companies covered had positive commentary—Paint and soft flooring. Management specifically mentioned that while total flooring was down double digits, Carpet sales remained strong. Given that Mohawk is a significant supplier, we find that encouraging. Paint was strong, which, while not helping Masco directly, implies that Home Depot will also turn in a good performance there, helping Masco and its dominant floor share in paint. To the negative for both FO and MAS, both Cabinets and Fashion Plumbing were down double digits. Given American Woodmark’s aggressive market share stance in Cabinets, we worry that these two companies could have not only endured poor comps, but also lost share. In Fashion Plumbing, these two competitors dominate the floorspace, so expect that to impact sharply on results in the quarter.
In sum, we are pleasantly surprised with the ray of hope on Carpet sales and the potential impact on Mohawk, however, the overall trends portend more struggles for FO and MAS.
The data suggests that rather than tackle the big ticket home improvement projects, consumers–showing that good old American ingenuity–would like to sweep things under a new carpet for the time being.
Here’s how equity investors are discounting for Lowe’s continued headwinds. Above is an intraday chart that shows how the market reacted to the company’s earnings announcement. Below is a 6-month look at the stock’s trend.
Friday, Feb. 20, 2009... A tough outlook.
Lowe's stock performance for the past 6 mos.
Spigot Tightens on Lumber and Building Materials Supply Line
From PROSALES Online, By Andy Carlo: No sense in burying the lead here. Cash = King.
Cash conservation is and will be the new growth, as least for the visible future.
Builders FirstSource, a Dallas-based lumber and building materials dealer that amassed a distribution and market presence empire on the back of a high volume builder strategy, is in heavy-duty damage control mode. Its new scorecard, reports ProSales magazine senior editor Andy Carlo, is to outperform a free-falling market and try to stick around for the eventual and inevitable salad days ahead. Survival is tantamount to a rocket ride to top-tier status in the LBM sector, but no one’s saying it’s going to be easy.
Carlo gleaned statements from Builders FirstSource CEO Floyd Sherman for perspective on the survival plan.
Floyd Sherman, CEO Builders FirstSource, link to Q4 financials
“We felt the impact of these difficult conditions on our 2008 results although we were able to limit it through our action plan,” said Floyd Sherman, Builders FirstSource CEO.
“Our action plan principally consisted of growing market share, reducing physical capacity, adjusting staffing levels, implementing cost containment programs, managing credit tightly, and, most importantly, conserving cash,” he added.
The dealer closed or mothballed 14 facilities during 2008 while lowering its average headcount by over 1,600 to 4,850 in 2008, a decrease of 25.2 percent from 2007. Our headcount at December 31, 2008, was down over 2,100 to 3,274, a 39.3 percent decrease from the beginning of 2008, the dealer said.
As of today, Builders FirstSource operates 58 distribution centers and 57 manufacturing facilities in 11 states.
During a Friday conference call to discuss Q4 financials with analysts CFO Charles Horn was asked about the ability of builders to pay their bills. He said the larger builders still have been paying their bills, but at the same time BFS is seeing more regional and small builders moving toward an orderly liquidation. He said this is because a number of builders’ operations are structured for tax purposes so that the losses incurred by the construction company can flow back to the company’s owner. “I think you’ll see more and more builders say ‘I’ll take the tax refund and wind down operations’,” Horn said.
BLDR intraday stock performance. Click for company update.
Meanwhile, CEO Floyd Sherman said it’s apparent that banks are forcing their private builder borrowers to stop any spec construction, and are requiring builders to reduce inventories before they get any more loans. “We’re going to see some really diminished inventories over the next few months,” he said. Sherman (who appeared to base his forecasts in part on Harvard Joint Center for Housing Studies numbers), said Builder FirstSource doesn’t expect any upturn until at least the third and fourth quarters of this year.
Barron’s Plan Hits a Raw Nerve
Barron’s presented its plan to “fix America’s financial system and pull us out of recession,” and it’s arguable. Some would argue, it’s insane. Some would argue, it’s wrong. It’s subject to debate.
One reader’s response to the proposal was this:
I challenge you to produce one single article Charles Barron ever wrote that would support the wild, socialistic ideas you suggest in your 02/16 piece.
Were you to dump all the ink for 02/23′s magazine, and only reprint the negative letters and emails you will get this week against your scribblings, it would require a double issue to put a dent in the pile.
This is no Plan you are proposing. Its Stalin communism. What were you thinking? How could you sign the piece?
Still, it aims at the crux of the displacement going on in how people get, use, and lose money. Is there a clearer way to state this set of facts?
We know this type of debt relief will spark a chorus of complaints about the government helping one class of homeowners, some of whom may not need help, some of whom may not deserve it. But to solve our national economic problems quickly, we have to admit that mistakes were made by bankers, by the government and by homeowners. Getting our economy back on track, and getting our financial system fixed, is far more important than assigning blame or waiting around for a solution that is perfectly fair.
This Barron’s plan resolves perhaps the most vexing problem in the complicated approach outlined by Secretary Geithner last Tuesday, which puts him in a no-win situation: If the government pays too much for toxic securities, it hurts taxpayers; if the government pays too little, or helps vulture investors pay too little, it hurts the very banks it is trying to help.
Effectiveness of any plan, it turns out, is only part operational. The other part is a mix of philosophy and psychology. Ultimately, priorities shape themselves around deciding whose psychology needs the most influencing, and how do you influence it.
Barron’s plan will engage the publication’s readers in the conversation, which is what should happen. That conversation needs to be as rich as it can be until, ultimately, the answer is found.