Tuesday, June 26, 2007

Freddie Mac: Subprime Mortgage Woes Limited To Seven States

Here they are:

That's a joke, of course. Things are really bad around the country.Minyanville summarizes the bad news from the housing market today:

* Sales of new homes fell 1.6% to an annual pace of 915,000 last month, the Commerce Department said.
* The decline follows April's unexpected surge of 16%, which was revised lower to 13%, though that remains the largest increase since September 1993.
* The median price of a new home fell 0.9 percent to $236,100 last month from $238,200 a year earlier.
* Inventories declined, but the decline was less than sales, pushing the supply of homes at the current sales rate to 7.1 months from 7 months in April.
* Although new home sales account for just 15% or so of the total home sales (existing homes make up the rest) conventional economics wisdom is that purchases of new homes are considered a timely snapshot of market demand since they are recorded when the contract is signed, while existing home sales consist primarily of closings that may reflect contracts signed weeks or months in advance.
* The catch, however, are contract cancellations, which leads us to today's Number Two.

This morning Miami-based Lennar (LEN) reported a second-quarter loss of $244.2 million. Can you believe that as recently as last July the company actually reported a net profit of $324.7 million?

* By just about any measure the results were worse than expected.
* The company reported a 28% drop in home deliveries year-over-year.
* Consequently, revenue fell 37%, the most in at least 10 years, Bloomberg said.
* New orders in the quarter declined 31%.
* The average sales price of homes fell more than 7% year over year.
* The cancellation rate came in at 29% - among the reasons new home sales figures (see Number One, above) are so deceiving.
* It is quite disturbing that Lennar has made absolutely no progress on the company's cancellation rate this quarter.
* Back on April 7 the company reported a first quarter cancellation rate of, again, 29%.
* In April's 10-Q filing, the company said:
"Although our cancellation rate in the first quarter of 2007 increased compared to the first quarter of 2006, we focused significant efforts on reselling the homes that were the subject of canceled contracts, which, in many instances, included the use of higher sales incentives (discussed below as a percentage of revenues from home sales), to avoid the build up of excess inventory."
* And what about those sales incentives?
* The company reported higher sales incentives offered to homebuyers of 9.6% in the first quarter of 2007, compared to 4.9% in 2006.
* In this quarter the company reported sales incentives surged to $43,700 per home delivered, compared to "just" $24,700 per home delivered a year ago.
* So two things: cancellation rates are not making progress, and the company is resorting to a stunning increase in incentives.
* The company is even as we write this on a conference call, saying, among other things:
- The market has "eroded" over the past six months
- The subprime market needs to be "replaced"
- The company is facing a "great deal of downward pricing pressure."

Also, the Case-Shiller Home Price index showed that 14 out of 20 cities tracked saw year-over-year home price declines. Home values declined 2.1% in April. This was the fourth straight decline for the index. Robert Shiller, chief economist at Macromarkets, said "No region is immune to the weakening price returns."

Gee, I dunno. Outside of the seven states in the map above, everything looks swell in the housing market.

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