April 19, 2006 at 11:33 AM #6504KingKongParticipant
Just read this from the UT that on last Fed meeting back in March, they expressed concern on over tightening and the wall street think it is the end of rising interest rate.
I think this will have some effect on the housing. The ARM rates have going up for while and now they will stop going up.
How about long term mortgage rate? I think it may even drop a bit because inflation worries were lessened.
All these will be a boon to housing because it continue to make borrowing cheap.April 19, 2006 at 12:52 PM #24353BugsParticipant
I dunno, raising the interest rates didn’t seem to have much effect on mortgage rates. I’m not sure I’d translate a “not raising the Fed rate” as having a corresponding effect on mortgage rates. It would be of influence but I think the withdrawal of the foregin banks from the dollar would be of greater effect.April 19, 2006 at 2:24 PM #24357
Housing is a dead horse.
I heard this on the radio yesterday: several Fed members wanted to stop raising rates. Well, they didn’t get their way! Bernanke will keep raising until inflation is contained, and to keep foreigners buying our dollars. He doesn’t care if housing tanks.
The effect of raising interest rates has a 6-12 month lag in the economy. The 4.75% effect won’t be felt until fall or spring 2007. That’s why the Fed has to be careful, so they don’t overdo it. They won’t know they’ve overdone it until it’s too late. We also must be patient for the effect of raising interest rates to be felt in the economy. Look, banks are still making record profits. Did you read the U-T today? Banks are down on the lending side,but up on fees (I assume credit card late fees). Only subprime lenders are shutting down. The big banks are not affected, (yet…)
Let’s all remember that we’ll have about $1trillion of ARMs resetting next year, and $330 billion this year. When those ARMs reset, even if interest rates stay at 4.75%, folks with intro rates of 1% or 2% will see their payments go up 50-100%! The Fed is expected to raise to 5% in May. Anyone with an ARM is screwed, and they won’t know it until later this year, or sometime next year.
What happens if the Fed actually lowers the rate? It could save housing, unless the psychology against housing is too strong, and monetary tightening is keeping lenders from making those silly loans.
It’s unlikely the Fed will lower to save housing. First, they don’t care about housing per se. They need to contain inflation, and keep foreigners buying our dollars. This requires keeping rates up.
The Fed has additional reasons to keep raising. First, competition. The European and Japanese Banks are raising their rates. I think the Fed will have to keep raising, to entice those foreigners to buy Treasuries instead of euro or yen notes. Second, inflation. The commodity bull market is good for investors, but bad for inflation, as the higher cost of materials will get passed on in increased costs of goods.
Long term mortgage rates are set in the bond market, which gets their lead from short term rates, but is held artifically low by excess demand from foreigners. As their demand wanes, prices decrease and rates go up. That’s one reason that the rates on long-term bonds went up recently: Japan purchased less than usual at the last auction.
A little off-topic: at what point will foreigners really shift from buying our debt to buying our assets? On one hand, China must support the dollar, bec. they need work for those millions of peasants moving into the city. They need to keep the USD strong, since we are their biggest customer.
At some point, their consumer spending will pick up, and they will no longer need to keep their currency weak enough to support our purchasing. Then they can buy US assets, like ports and buildings and oil companies, instead of our Tnotes. They can buy euros, francs, and invest in their own factories. They will, but I just don’t know if the shift will be this year or in 5 years.April 19, 2006 at 3:43 PM #24358daveljParticipant
since paul volcker left the fed, generally, and over the last ten years, more specifically, the fed has responded to one thing and one thing only: wall street’s applause meter.
if the fed feels that raising rates will blow up the housing market (which will then blow up the economy), it will lower rates eventually, regardless of the inflation rate. if the fed were really concerned about inflation, rates never would have been reduced to 1% and they would have been at 6% a loooong time ago. the fed is comprised of spineless economic hacks who care more about politics and being liked than about limiting the debasement of the u.s. dollar. it’s all a bunch of smoke and mirrors.
and it will all end in tears…April 19, 2006 at 4:00 PM #24359
Did the Fed care when billions or trillions or whatever it was, were lost in the stock market? They lowered interest rates to stimulate the economy, but most American stock owners lost big time in stocks in 2000.
They’ve already said they don’t care about housing, and that history doesn’t look kindly upon people who don’t expect a risk premium.
I disagree with your assumption. The Fed looks out for the health of the economy, perhaps favoring businesses, but not John and Suzie Q Homeowner. Layoffs from manufacturing losses? Did the Fed jump in with fiscal policies, or Bush w/ trade policies, to prevent offshoring?
Just remember, for every Joe Q that is in foreclosure, there is a John Smith who pocketed the profits, or a bank that made the interest. The benefits were reaped. It’s a zero sum game…April 19, 2006 at 4:12 PM #24362
Why are smart money managers like Bill Miller (Legg Mason Value Trust) and David Einhorn (Greenlight Capital) out buying up homebuilders?
Miller, who has outperformed the S&P for 15 years in a row, has been buying like crazy and now owns 15% of Ryland; 11% of Beazer; 9% of Centex and 8% of Pulte. Einhorn owns 10% of MDC Holdings and is it’s second largest shareholder next to the CEO.
Talk about going against the herd. I read somewhere that Einhorn thinks MDC is worth about 2.5 times more in share price than where it is now trading. BS? Or do they know something we don’t?
Is it because homebuilders are trading at dirt cheap multiples of earnings, have low debt to capital ratios and are swimming in cash from the huge runnup in housing prices over the last few years?
If you just look at homebuilders from a value standpoint, they look pretty darned good with many showing trailing PE’s less than 7. William Lyon Homes – WLS – is trading around 4.5 and it’s CEO just upped his offer to purchase all the outstanding shares by about 7.5% – from 93 to 100. Why?
I just have to ask myself: What are all those cash rich homebuilders with strong financial statements going to do with all that cash? They sure aren’t going to stop building (or selling homes), are they?
Sheesh…now I’m really confused 🙂April 19, 2006 at 6:04 PM #24369AnonymousGuest
I have been watching the home builders actually because of their very low price to sales ratios. Toll Bros in particular. Most of their debt ratios also still look good. Since I expect a general market decline, I have stayed clear. I do not think that sector can escape what is developing clearly. However, strictly on a valuation basis, they are good values right here.
I have been talking about the Hedge Funds, and found the following article on another blog. This is a quote regarding Hedge activity in the housing sector. Remember, these funds have been major accelerators of the bubble, and also larger players in creating the yield curve inversion last year. If this indicates they are running to the exits, look out!
“One example Rajan used was the housing sector. The great thing about credit derivatives is that they allow the banks to buy protection for the possibility that borrowers will default on loans. Since last September the market for a particular kind of credit derivative, technically described as ‘credit default swaps on subprime ARM pools,’ has taken off.”
“According to Mark Whitehouse of the Wall Street Journal, such derivatives doubled in price between mid-September and December of 2005. So who is doing the buying? According to Whitehouse, the main players are hedge funds that specialize in debt trading.”
“‘The new credit-default swap ‘allows us to express a bearish opinion’ on the housing market, says Steve Persky, managing partner at a Los Angeles hedge fund. ‘A lot of people debate whether the housing market is overpriced, but, for sure, the credit quality of home borrowers has deteriorated.’”
Also, a comment on interest rates. The Fed does not determine mortgage rates. They control short term rates between banks etc.. Mortgage rates are determined in the free market and mostly correlate with the 10 year note. Now that the yield curve is steepening, look for higher rates in the near term.
We have had a big selloff in the 10 year recently ( higher rates ). Just because the fed stops raising short term rates, that is no lock that the 10 year stops moving at the same time, or in sync with them.
These hedge funds unwinding their longs is in my opinion what has caused the selloff, and the above seems to support that opinion.
Time will tell – Buy or sell if you wish, but do your research and do not get caught up in all the bs!April 19, 2006 at 6:32 PM #24370
Docteur, I’ve held that Legg Mason fund since 1999, and I sold it yesterday. Bill Miller wasn’t always right. He admits losing 4% in returns last year because his internet stocks were down. Next year, he’ll have to admit he lost 6% in returns because his homebuilders were down. I disagree with his decision to load up on homebuilders, so when I reviewed my investment portfolio (for the first time since 2000), and saw what the large exposure to RE, I sold it immediately.
This is what Bill had to say in an interview 2 weeks ago:
Q: How are you positioning the fund? Have you made any changes recently?
A: We run the fund with a long-term orientation. We try to buy businesses that are cyclically undervalued due to the economy or specific to the company. We have no energy exposure. We’ve been increasing our technology exposure for the first time since 1995. We’ve went to 38% to 40% in tech.
We recently added Dell (DELL) and H-P (HPQ) to the portfolio. We think they’re as cheap as they’ve been since ’95.
We also added homebuilders, but we’ve bought a cluster of them, such as Centex (CTX), Pulte (PHM), Ryland (RYL), and Beazer (BZH). The biggest mistake people make in the markets is confusing the trend of fundamentals and the direction or attractiveness of stocks. Builders are just too cheap at six times earnings, even with housing weakening, which it undoubtedly is.
As a value investor, Bill looks for companies/industries which are temporarily out of favor, betting that in time, they will shine again. He’s betting that their strong balance sheets will overcome their bad timing in the market. I bet he will lose money on that portion of his portfolio. He’d be better off putting that homebuilder money into commodities: copper, coffee, sugar, lumber, gold, palladium silver.
Here are some bullish arguments in favor of homebuilders from MSN Money.April 19, 2006 at 8:23 PM #24371
Thanks to both Chris and Powayseller for the insights. You two are on top of this stuff.
Honestly, I am really impressed by the level of sophistication on this blog. There are some incredibly bright people contributing what I consider to be very reliable information with the sole intention of sharing that information without some ulterior motive. I can’t tell you how much I appreciate that.
So, once again, I extend my sincere thanks to all of you for participating in this blog and especially to Rich for starting this whole thing rolling. I can’t wait to see how this all plays out. These are exciting times we live in and assuming we are correct in our collective analysis, they should get even more exciting…April 20, 2006 at 7:02 AM #24394AnonymousGuest
Just curious, does your handle mean that you live in Poway and recently sold your home and are renting? It kind of seems obvious, but I just was curious?
I have lived in Newport Beach for most of my life, but recently sold my $2 Million McMansion there. I am now renting in Laguna Niguel. I do need to state clearly that I am bearish on real estate, but that was not the main reason I sold my property.
I just found that I had too large a % of my new worth in one place that seemed primed for a reversion in price. I felt that I could get a better return on the over $1 million in equity that I had investing it in other places during the next few years.
It is amazing going into other blogs and watching the bulls ( although there are only a few of them ) criticizing everyone who thinks prices are going to drop. Their arguments are not solid, but my favorite one is the poor sport argument. I wonder if they have any idea that there are professional investors like me that made “essentially a re-balancing decision” and that could easily afford to buy whatever I wanted if I chose to do so?
I still am of the belief, although I cannot quantify it, that the smart money is moving out of real estate right now. Participants like docteur are an example of this. My best friend, who owns his own commercial real estate brokerage firm has been given the nickname “Sunshine” by me. I call him this because he is so negative on real estate right now it is almost shocking.
We are talking about someone that makes millions/year in this business. He alone sold over $1 Billion in real estate last year, so he is no small fish. He has told me repeatedly the last 2 months, “if you do not have to buy anything in the next 18-24 months, don’t. There is no blood in the street yet.” The reason I post this is as follows. Here is someone who deals with investement banks and pension funds, the truly big money in this country. He tells me that the underwriting of these deals is changing dramatically, and this is a sign of things to come. It is best to follow the smart money in life whenever you can. It is leaving RE itleast for now it appears.
This is the first time he has ever been this extreme either way, and it is the only job he has ever had. He has lived through good and bad cycles, and he thinks this is going to be the worst one he has seen.April 20, 2006 at 9:15 AM #24402
I had a good laugh at the “Sunshine” comment.
I am by no means smart money but have done pretty well for an old surfer with no formal business education (luck played a big part in that as did dumb persistence).
I am completely out of real estate, after being in it for more than 30 years, except I paid off my $ 2 Million McMansion (because I intend on living there for a long, long time – we love where we live) and am looking for alternative investments to place a lot of cash.
It’s a very difficult “shift” out of something I have always known into an arena with so many choices. I am overwhelmed sometimes by the uncertainty and conflicting views on various investment vehicles. Growing older has taught me to be pretty conservative, yet at the same time that type “A” personality always pushes me into thinking that I should be doing “something” instead of just waiting.
I keep thinking I should stick with what I know (real estate) but I can’t find any opportunity in this market, anywhere (commercial, residential, industrial, etc.) Honestly, nothing looks good because it is all so overvalued (in Southern California anyway).
And all the folks I have worked with over the years aren’t finding any opportunity either. You know things are going south when you get phone calls asking “You finding anything good out there?”
Equity underwriting is changing dramatically and is getting far more conservative, meaning the risk is increasing daily (or the perception of it anyway).
Your smart money friend is absolutely right. Patience will rule the day. The last time this happened (a market compression), I remember meeting a really nice guy from Canada who came down to San Diego to look for opportunity in a failing market (early nineties).
He waited and waited and looked and looked and then jumped on hundreds of finished lots that had gone into foreclosure and made an absolutely screaming deal from the bank.
He sold those lots in a closed bid situation to several builders about five years later (too “early” according to him) for about $ 60 Million in profit. (I figure his investment was less than $ 3 Million).
I remember as a kid my father always telling me that big money was patient and quiet (like a leopard stalking its prey). I guess I should just kick back, wait it out and go sailing for the next few years and then when the behemoths start to move, just follow their lead and go for one more round.
Staying in cash and losing to inflation for a few years while patiently waiting until we bottom out, and then buying again as the market starts to improve is probably a pretty good strategy. The only problem I see is it may take several years for this market to go through its cycle and I’ve got the “jumpies” already. I feel like a third grader waiting for recess…April 20, 2006 at 10:25 AM #24411
I rent in Poway, and I sold a house about 2 blocks outside the Poway city limits, rural Poway.
My financial situation is greatly improved since renting. We have more free money now.
Although my husband makes a very good income (and he deserves it!), we were barely getting by on a $475K mortgage. Kids are expensive, esp. in regard to activities and saving for college. And I’m not the most frugal person either…We are both relieved to have the $2100 rent. The house is the same size, although we went from over 5 acres to a concrete patio. However, the move into the city cut our gas bills in half. I used to fill up my car every 3 days, and can now go 6-7 days. Enough about me. I’m fascinated by the life of a day trader. What’s it like? What do you think about payday/pawn shop plays? Which companies do well in a recession?April 20, 2006 at 11:27 AM #24415
Bars do well in a recession, as do liquor and tobacco companies…
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