2008 August 29 | money blog

Via [DrHousingBubble]

Continue reading Why a drop in demand could end Lehman

29 08 2008

Why a drop in demand could end Lehman

Posted by: admin in Stocks Money News

Filed under: Lehman Br Holdings (LEH)

As my colleague Doug McIntyre posted this morning, the New York Times reports that Lehman Brothers Holdings Inc. (NYSE: LEH) plans to cut 1,500 jobs — that’s 6% of its workforce and Lehman has already terminated 6,000 staffers since June 2007. While Lehman has been a big player in mortgage origination and securitization, there is also the potential for cuts in other lines — such as investment banking and trading, according to the Times. Since the credit crunch is so enormous in scale and scope, there may simply not be enough demand for Lehman to survive in its current form.

Lehman is expected to have a rough quarter. The Times reports that it could take a “$4 billion loss for the quarter of $3.30 a share.” Much of the loss is due to its mortgage- and asset-backed securities — of which it owns “about $61 billion.” And since there is no market for them, Lehman must write down their value and take a charge against earnings and capital. Meanwhile after dropping 71% in the last year, Lehman’s stock market value is roughly a sixth of the size of that portfolio of dodgy securities.

Lehman has evidently leaked several options for raising capital — to add to the $6 billion it got earlier this year. The Times reports that these include “the sale of Lehman’s investment management division, which includes Neuberger Berman and could fetch $7 billion to $10 billion. Other options include the sale of about $40 billion of troubled commercial real estate, and the creation of a separate unit that would be owned by Lehman shareholders and house a substantial portion of Lehman’s commercial and residential mortgage assets, freeing the investment bank to try to move forward.”

Continue reading The right REITs focus on rentals

29 08 2008

The right REITs focus on rentals

Posted by: admin in Stocks Money News

Filed under: Products and services, Newsletters, Stocks to Buy, Housing, Recession

“Home prices are becoming affordable again, so the decline in prices is likely more than half over,” say Dr. Marvin Appel and Gerald Appel of Systems & Forecasts.

Meanwhile, the technical experts believe that long-term investors can now look to get back into the real estate investment market and recommend two ETFs that are based on rental REITs.

“Many analysts do not expect the financial markets to improve significantly until home prices stop falling. The pace of existing home sales remains low, and available inventory relatively high, both indicating that buyers are not yet able to step into the market at current prices.

“However, that could change within a year. Home prices are becoming affordable again, so the decline in prices is likely more than half over.

“The median home price is now more affordable to the median household than at any time since the start of 2004. My analysis suggests that housing prices will have to fall a bit more, but the housing market is not far from being reasonably valued for the first time in five years.

29 08 2008

Lehman may mark down $61 billion worth of mortgage assets

Posted by: admin in mortgage industry

Bloomberg is reporting that Lehman Brothers may take up to $4 billion in losses as a result of marking down $61 billion worth of mortgage-related assets. The losses would be announced in their 3rd quarter earnings. Lehman was the biggest underwriter of mortgage assets prior to the meltdown. They continue to be on the watch list as analysts wonder aloud if they can limit their exposure fast enough before suffering the fate of Bear Stearns.

I think we’re due to lose one more big I-Bank - and Lehman is as good a better as any.

From Bloomberg:

Lehman Brothers Holdings Inc. may write down about $4 billion in credit-related investments and other assets when it reports fiscal third-quarter earnings, JPMorgan Chase & Co. analysts said.

“The credit environment continues to be difficult,” New York-based analysts led by Kenneth Worthington wrote in a report yesterday. “It will be another difficult quarter for Lehman.”

Lehman may mark down some of its $61 billion of mortgage and other asset-backed securities after benchmark residential and commercial mortgage-related indexes declined by as much as 20 percent, the analysts wrote. The company may have already been selling some commercial mortgage assets, they added.

Lehman, the largest underwriter of mortgage bonds before the subprime market collapsed, has slumped 77 percent in New York trading as it struggles to pare its debt holdings. The bank has reported writedowns and credit losses of $8.2 billion in the past 12 months, according to data compiled by Bloomberg.

Source [blownmortgage]

29 08 2008

It’s Not Over!

Posted by: admin in mortgage industry

Even with the cheerleaders trying to put a sunny face on the credit crisis we’re still not out of the woods yet. We’ve had another bank failure and we’re still looking at billions in write downs. But feel free to sing “the sun will come out tomorrow” if it makes you feel warm and fuzzy inside.

Some of the dour news of the day - just to make sure the message isn’t being lost on everyone.

From Market Watch:

U.S. stocks dropped on Monday, retreating from the last session’s strong gains, as oil remained near $115 a barrel and as concerns about mortgage giants Fannie Mae and Freddie Mac continued to weigh on investor sentiment.

“Financial stresses are still permeating global financial systems, despite massive accommodation from the Fed,” said analysts at Action Economics.

And Bloomberg:

AIG, the world’s largest insurer, tumbled 5 percent after Credit Suisse Group said the company may lose $2.41 billion this quarter on mortgage-related writedowns. Huntington Bancshares Inc. and KeyCorp each dropped more than 3 percent after Columbian Bank & Trust Co. became the ninth U.S. bank to collapse this year.

Morgan Stanley cut its year-end forecast for the S&P 500 on concern banks will report more credit-related writedowns and the global economic slowdown will curb profits at technology and industrial companies.

“Our biggest concern for 2009 earnings estimates is that a combination of global growth slowdown, declining operating leverage, a stronger U.S. dollar, less share count reduction and a long tail to dysfunctional credit markets will create powerful headwinds for what appear to very optimistic consensus expectations,” Abhijit Chakrabortti wrote in a note to clients dated yesterday.

Source [blownmortgage]

Continue reading U.K. home prices record largest annual decline in 20 years

29 08 2008

U.K. home prices record largest annual decline in 20 years

Posted by: admin in Stocks Money News

Filed under: International markets, Forecasts, Bad news, Economic data, Housing, Recession

The protracted housing slump that has devastated U.S. home prices now appears to have fully-enveloped the United Kingdom. Home prices in the United Kingdom in August fell at their fastest pace in two decades (pdf), U.K.-based mortgage lender Nationwide Building Society announced Thursday.

On a year-over-year basis, the average price of a U.K. home plummeted 10.5% to $301,500 or 164,654 British pounds in August, NBS said. Further, it was the first year-over-year double-digit decline in the U.K. since 1990.

London-based economist Mark Chandler told BloggingStocks Thursday the August U.K. housing data, “is just dreadful.”

“Housing in the U.K. is becoming a bit of a ‘magical mystery tour,’ to borrow a phrase from The Beatles. For a month or so, we thought the declines in home prices had moderated. Apparently not,” Chandler said. “Tighter lending requirements and real concern about the economy have sapped sales and it’s really showing up in the price data.”

29 08 2008

Option Update: Jackson Hewitt and H&R Block volatility flat into earnings

Posted by: admin in Stocks Money News

Filed under: Options

Jackson Hewitt (NYSE: JTX) is recently down 10 cents to $17.07. JTX is scheduled to report Q1 EPS on September 4. Soleil Group says: “We believe there are too many uncertainties to be aggressive one way or the other; we are maintaining our Hold rating.” JTX September option implied volatility of 50 is below its 26-week average of 55 according to Track Data, suggesting decreasing price movement.

H&R Block (NYSE: HRB) is recently up 24 cents to $25.23. Soleil Group has a Buy rating and price target of $28 on HRB. HRB September option implied volatility of 40 is near its 26-week average, suggesting non-directional price movement.

Volatility Index S&P 500 Options-VIX down 27c to 19.48; 10-day moving average is 20.24

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Real Homes of Genius: Revisiting a Past Downey California Home. $305,000 Discount in 2 Years. $1.7 Trillion in California Equity Gone in One Year.

29 08 2008

Real Homes of Genius: Revisiting a Past Downey California Home. $305,000 Discount in 2 Years. $1.7 Trillion in California Equity Gone in One Year.

Posted by: admin in Real-estate news

People have sent a few e-mails wanting to know the eventual history and life story of past Real Homes of Genius. Given the current housing market in Southern California many of these homes were taken back by lenders and have been sold for significantly lower prices. The home that we’ll examine today takes us to […]
Related Posts:
■California Housing Inequality: Top 4 and Bottom 4 Zip Codes in Los Angeles California. Foreclosures and Zip Codes do Matter.
■Real Homes of Genius: Today we Salute Inglewood. Bought in 1970 for $20,000 now selling for $397,400.
■Real Homes of Genius: Today we Salute you Downey. $270,000 off Peak!
■Real Homes of Genius: Today we Salute Inglewood at $430,000 for a 941 Square Foot Beauty!
■Real Homes of Genius: $438,000 for 816 square feet in Pico Rivera! Another Example of Manic SoCal Housing!

People have sent a few e-mails wanting to know the eventual history and life story of past Real Homes of Genius. Given the current housing market in Southern California many of these homes were taken back by lenders and have been sold for significantly lower prices. The home that we’ll examine today takes us to Downey California and was featured in January of 2008; it was being sold at a $270,000 discount from the peak price at the time.This home sold for $905,000 in August of 2006 and sold for $600,000 in June of 2008. Such has been the nature of the current housing crisis and in California and why housing issues will continue to persist throughout the foreseeable future.

Before we examine the home in detail, let us go over a few key things that are happening in the current housing market. Foreclosures are still running at historical highs. Even though we saw a minor jump in sales for the July data for Southern California this information simply reflects the seasonal sales history of the spring and summer selling months. This chart which shows sales for Los Angeles County shows an up and down curve highlighting the peak spring and summer seasons and the troughs which hit in the fall and winter:

This minor jump has caused some to question whether we are approaching some form of lull in the current housing market. The general stock market rallied this week on the poetic and inspiring words from Fed Chief Ben Bernanke:

Since when has the Fed taken any action against inflation? The reasons prices may be coming down in the future is because of wealth destruction which is more characteristic of deflation. This is the same logic that is used about the housing market. Here is a sample list of how to address problems according to the Federal Reserve:

(1) - Deny any problems

(2) - Deny any problems further

(3) - Deny the problem even though problem is causing problems

(4) - Mention that you knew problem existed all this time and that problem is now being solved

(5) - What problem?

That is essentially how things have been operating at the Federal Reserve. Want some evidence? Take a look at some quotes from Ben Bernanke:

“House prices are unlikely to continue rising at current rates,” said Bernanke, who served on the Fed board from 2002 until June. However, he added, “a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year.” October 2005 Source: Washington Post

“Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited,“ Bernanke said in May of 2007 Source: Forbes

“Although we have seen improved functioning in some markets, the financial storm that reached gale force” last August “has not subsided,” Bernanke said August of 2008 Source: CBS MarketWatch

We went from not seeing housing prices falling, to thinking subprime mortgage issues would be contained, to “gale force” credit problems all within three years. Now that is what I call forecasting ability. California is seeing a stunning amount of equity destruction in the current housing market and most of it has occurred in the last year. How much equity has been destroyed in California?

The median peak home price for California during the height of the bubble was $597,640 reached in April of 2007. That is, half the homes sold went for below this and half above this. Let us first run some quick numbers:

Total Housing Units in California: 13,174,378

Homeownership Rate California: 56.9%

This is simply a quick back of the napkin exercise here. So if we want to know how many homes are owned in California we can figure this out:

13,174,378 x 56.9% = 7,496,221

We can then do a quick multiplication out of this with the median price:

7,496,221 x $597,640 = $4,480,041,518,440 (peak California real estate value)

This of course isn’t exact. The housing unit count is only for homes that are “owned” and doesn’t take into accounts apartments or other rental/lease housing. Keep in mind that certain estimates put the peak residential nationwide housing value at $24 trillion and given that California makes up 12.1 percent of the population and makes up 10.4 percent on all housing units this number gives us a ball park figure. The last estimate I saw showing relative housing wealth in the United States via the flow of funds information from the Federal Reserve puts this number at approximately $20 trillion. So $4 trillion in “housing equity” has evaporated.

Now that prices have fallen and the median price for California is $368,250 let us run the numbers again:

7,496,221 x $368,250 = $2,760,483,383,250 (current California real estate value)

If you’re wondering why people are feeling poorer in California it can be that approximately $1.7 trillion of housing wealth has gone up in smoke. Given that nationwide prices values have taken a hit by $4 trillion you can see how big of an impact California has on the overall housing market.

Keep in mind many people are not planning to sell. The numbers above are completely rough estimates but simply highlight a quick point that housing in California has taken a large hit and overall wealth destruction is high because of the magnitude of the destruction.

Now how does this wealth destruction look like in the real world? Let us take a trip down Real Homes of Genius memory lane.

$305,000 Discount in 2 Years

We featured the above 3 bedroom 2 bath home in Downey back in January of this year. At the time the home had been on the market for over 300+ days and no action had happened even with the major reductions:

Now before you go out and think that this was a great deal, let us look at the sales history:

Sale History

06/30/2008: $600,000

01/30/2008: $735,000 *

08/08/2006: $905,000

At the time I was suspicious about the price being jumped up so quickly given the lack of interest but what appears to have happened is that the home was taken back by the lender. This was a few weeks after our initial report in early January. Now knowing what we know and the quickly disintegrating market, the lender might have taken the place back simply to unload at a later date.

This home is 2,197 square feet and let us look at the current per square foot median price for this zip code:

Per square foot median price: $310

Median home sale price: $444,000 (down 26.3% from a year ago)

You might do a quick calculation per square feet and find that this is a “good deal”:

$310 x 2,197 = $681,070

A great deal at $600,000 if we go strictly by the math. Yet this may not be the case in an area where the median home price is $444,000. You need to remember one simple rule in buying homes. It is better to buy a small home in a very expensive neighborhood then having an expensive mansion in a lower priced area. This holds true for California since most of what you are paying for is the land and not the physical home. Think this isn’t the case? Look at the assessed value of the land versus the actual home for 2006 and 2007:

It is amazing that this home with an assessed land value of $125,733 in 2005 suddenly saw a jump to $648,100 in one year! That is, the land magically went up in value by $522,367 in one year. Welcome to California folks. So now that prices are correcting it is the land value that is getting hammered. After all, concrete, wood, windows, and all the other pieces that psychically build a home have either gone up in price or have stayed the same.

I’ll leave it up to you to judge whether that $600,000 price is a good deal. Today we salute you Downey with our Real Homes of Genius Award.

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