KB Home: Housing market 'unlikely to improve significantly' in near-term

News item from Bloomberg: "KB Home, the Los Angeles-based homebuilder that targets first-time buyers, reported a wider third-quarter loss after sales plummeted 56% and the company wrote down unsold homes."

KB Home C.E.O. Jeffrey Mezger said the proposed $700 billion bailout won't make much difference to the housing market: "The majority of the bill is focused on fixing Wall Street issues," he said on a conference call today. "I'm not hearing anything that will create housing demand or stabilize housing markets."

 

There's a bunch of other stuff worth noting from the company's assessment of the housing market today, including:

From CNN Money:

"KB Home Chief Executive Jeffrey Mezger was bleak: 'Market fundamentals appear unlikely to improve significantly in the near-term' amid competition from increased foreclosures, bloated inventory and tighter requirements for mortgage rates, even for potential buyers with good credit."

More from CNN Money:

"In California's Inland Empire, one of the nation's worst housing markets, KB Home has cut the size and prices of houses -- by more than half -- to make them competitive with resales and foreclosures, often bargain-priced to sell quickly. The change is working, Mezger said during the earnings conference call."

One analyst, Carl Reichardt of Wachovia, called KB Home's report "staggering" for its collection of gloomy numbers. The company's cancellation rate jumped to 51%, up from 27% in the second quarter.

--Peter Viles

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Photo credit: Associated Press

WaMu fails; bailout talks falter; USC loses shocker to Oregon State

A late-night attempt at levity in the headline. Quick links and headlines on the night's big developments:

First, the failure, seizure and sale of Washington Mutual:

Wall Street Journal: In what is by far the largest bank failure in U.S. history, federal regulators seized Washington Mutual Inc. and struck a deal to sell the bulk of its operations to JPMorgan Chase & Co.

Reuters, via CNBC, wraps both stories into one: A rescue for the U.S. financial system unraveled late Thursday amid accusations Republican presidential candidate John McCain scuppered the deal, and Washington Mutual was closed by U.S. authorities and its assets sold in America's biggest ever bank failure.

Los Angeles Times: Washington Mutual depositors won't lose access to any of their money, even if it wasn't fully insured, the Federal Deposit Insurance Corp. said.

At roughly the same time at the White House, bailout talks were, according to a New York Times headline, "imploding." The picture above shows downcast Democratic Sens. Harry Reid and Christopher J. Dodd leaving the talks. The scene that lingers in the mind is the image of Treasury Secretary Henry M. Paulson down on bended knee (I'm not making this up), pleading with House Speaker Nancy Pelosi to keep the deal alive.

Wall Street Journal: Wrangling among the nation's top political leaders threw the Bush administration's $700-billion bailout plan into disarray late Thursday, despite a dramatic day of negotiations on Capitol Hill that seemed to promise a deal.

New York Times: The day began with an agreement that Washington hoped would end the financial crisis that has gripped the nation. It dissolved into a verbal brawl in the Cabinet Room of the White House, urgent warnings from the president and pleas from a Treasury secretary who knelt before the House speaker and appealed for her support.

Los Angeles Times: What remained unclear was whether today's impasse marked the beginning of the end for the rescue effort, or merely a tumultuous interlude on the way to action that many in Congress consider unpalatable but unavoidable.

-- Peter Viles

Wild stuff. Your thoughts? Comments? E-mail story tips to Peter Viles

Photo: European Pressphoto Agency

Realtors' complaint: "tight credit" hurting housing market

The National Association of Realtors today reported disappointing sales of existing homes for the month of August, complaining that "tight mortgage credit" is hurting the housing market.

The NAR is supporting the Paulson bailout plan, which it says will "help stabilize the housing market," provided the government action helps increase what the NAR calls "unrealistically low valuations" of mortgage-backed securities. (This is the nub of the bailout problem: if the government drives a hard bargain, it pays fire-sale prices that don't help banks recapitalize; but if the government doesn't drive a hard bargain, it throws away taxpayer money).

The A.P.:

Sales of existing homes fell in August, but the number of unsold homes on the market also dropped sharply from the previous month's record high.

The National Association of Realtors said today that sales fell 2.2 percent to a seasonally adjusted annual rate of 4.91 million units, from an upwardly revised pace of 5.02 million in July. ...

There were 4.3 million unsold homes on the market, a 7 percent drop from the record set in July. It was the steepest drop in inventory since December 2006. At the current sales pace, it would take 10.4 months to sell all the properties.

From the Realtors' press release:

NAR President Richard F. Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, Calif., said the pendulum in the mortgage market has swung too far. “The difficulty in obtaining a mortgage increased over past couple months, making it more challenging for creditworthy borrowers to find financing,” he said. “Our hope is that overly tight lending criteria can be loosened with reasonable standards and credit so that sales activity can catch up with demand. Interest rates have already declined, but there is a serious question as to whether a cash infusion by the U.S. Treasury into Wall Street would help consumers by improving mortgage funding.

“We urge Congress to restore access to sound mortgage credit so people have the ability to make and keep a long-term investment in the American dream of homeownership. Congress needs to take care of Main Street and not just bail out Wall Street.”

For more on the NAR's take on the bailout debate, read this press release from NAR president Richard Gaylord, and this commentary from NAR economist Lawrence Yun.

--Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles

Photo Credit: Bloomberg News

He told you so: The mortgage broker who predicted all this

We are in the eye of a financial storm that evidently took much of America by surprise. Was it inevitable? That's for history to decide. I'll just say this: Many saw the storm coming. It did not appear out of nowhere. Tonight I'll highlight one storm-spotter and ask for your nominations for others.

I've made no secret of my admiration for mortgage broker, Fed watcher and weekly Internet columnist Lou Barnes. Not only did Lou stand on his Internet mountaintop and warn that this would happen, he said it again, and again. I'm not saying he's been right on everything, just that he saw this coming. From his weekly columns:

August 31, 2007: Structured-finance products all over the world are crashing in value or cannot be valued at all. Frequently leveraged, the fall in value is a balance-sheet risk both to investors and their lenders.

Sept. 7, 2007: The credit panic is spreading into a global affair far beyond mere mortgages...This is not a transient emergency, nor a single-firm threat like Long Term Capital Management in ’98; we and the Fed have a systemic problem growing worse.

Nov. 2, 2007: The last 48 hours make it clear that credit losses are systemic and too large to recognize. It is too late for daylight, proper valuation, and workout. It is firewall time, on the way to bailout.

Nov. 16, 2007: This predicament is unique (since the 1930s... heh-heh...): capital is evaporating, and the capital is leveraged.

Dec. 14, 2007: The acute economic problem today is the functional bankruptcy of the Western banking system. Losses in trillions of dollars of weird assets have impaired systemic capital; central banks have kept the system liquid, and undoubtedly will continue to do so, but nobody has an idea how to get the system to make new loans. You have to have capital to do that, and we’re fresh out.

Dec. 21, 2007: We have a wreck in the belly of the financial system: credit losses are so large that if recognized -- written off -- would bankrupt the whole show.

Read more of Lou Barnes' dire -- and accurate -- predictions below.

Gross on credit crunch: 'It continues to get worse'

The Dow industrials sold off twice today -- at the open and at the close -- to finish with a preliminary decline of 504 points. Certainly not financial Armageddon, but not a good day.

There is a temptation, particularly on Wall Street, to view each new wave of bad news as a potentially positive development -- "Thank God that mess is behind us" or "What doesn't kill me only makes me stronger," etc. It's hard to make that case today.

As Bill Gross said on CNBC today, the credit crunch is worsening.  Unless and until the federal government dreams up new government-supported mortgage programs (and I suspect the next presidential administration will dream something up in 2009), this means tighter credit and a longer and deeper housing slump.

Gross on the credit squeeze: "It continues to get worse. Credit markets worldwide are in the process of de-leveraging, which, in the absence of new capital, leads to asset sales and lower prices and margin calls and further price declines." The last thing he said was, "We need a buyer of assets."

There is one big buyer out there I can think of. It's the government. I'd sure like to hear a serious debate between the two presidential candidates on the government's proper role in the housing and financial markets in 2009.

Tidbits: Washington Mutual shares fell 27% today, to $2; Downey Financial actually rose a penny, to $1.48. Investor Wilbur Ross said he sees "possibly as many as a thousand bank closures in the coming months."

The Bank of America takeover of Merrill Lynch became quite a bit less generous today. BofA shares fell 21%, reducing the value of its bid accordingly, from $29 per Merrill share to roughly $22.82 per share.

--Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles
Photo Credit: Associated Press

Business lobby sees "unprecedented housing crisis" in L.A.

The Los Angeles Business Council says in a new report that Los Angeles is being squeezed by an "unprecedented housing crisis" that is hurting the region's economy.

The council's "Workforce Housing Scorecard" argues that the gap between wages and housing prices in Southern California is the largest in the country and "has caused many middle-income workers to move farther away from job centers, enduring longer and more arduous commutes or forcing them to leave the region altogether."

More: "According to the Scorecard, nearly two decades of rising housing costs have squeezed low and middle income residents, causing many to sink an increasingly large share of their income into their place of residence. In 2007, a family earning the countywide median income of $53,000 per year spent more than 50 percent of their earnings to purchase a home in Los Angeles County –- far greater than the 30 percent recommended by experts."

Analysis/bloviation: The controversy, if there is one, in the report is that it blames the region's high housing costs not on the recent housing bubble but on a lack of new housing supply. New home construction, the report argues, has not kept pace with population growth and job creation in the region. The council: "For example, between 1990 and 2007, Los Angeles County reported a net gain of 1,433,531 new residents but added only 194,554 housing units –- a seven-fold differential."

The business council generally supports the development of more housing in Los Angeles, which is a tough sell right now, given the weakness of the housing market, and in particular the market for newly built homes. It's hard to convince financial institutions that this is a good time to lend money to homebuilders.

-- Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles
Photo credit: Associated Press

NAR: Existing home sales rose 3.1% in July

From the National Association of Realtors this morning: "Existing-home sales rose in July to the highest level in five months, although sales have hovered in a relatively narrow range over the past 11 months, according to the National Association of Realtors."

More: "Existing-home sales –- including single-family, townhomes, condominiums and co-ops -– increased 3.1 percent to a seasonally adjusted annual rate of 5.00 million units in July from a downwardly revised level of 4.85 million in June, but are 13.2 percent lower than the 5.76 million-unit pace in July 2007."

From NAR President Richard F. Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach: “Buyers who’ve been on the sidelines should take a closer look at what’s available to them now in terms of financing and incentives. Given some of the inventory on the market, we also strongly encourage buyers to get a professional home inspection.”

Also: Inventory rose slightly in July, according to NAR, while prices fell. Prices: "The national median existing-home price for all housing types was $212,400 in July, down 7.1 percent from a year ago when the median was $228,600."

Inventory: "Total housing inventory at the end of July rose 3.9 percent to 4.67 million existing homes available for sale, which represents an 11.2.-month supply at the current sales pace, up from a 11.1-month supply in June. The rise in supply results from a sharp increase in condo inventory; the single family supply declined."

-- Peter Viles
Your thoughts? Comments? E-mail story tips to Peter Viles.
Photo credit: Associated Press
 

When the 'foreclosure price' becomes the market price

This lengthy update on the housing price collapse in Merced, written by the New York Times' David Streitfeld, is worthwhile weekend reading.  As with all good writing about the housing bubble and bust, the story, in the end, is pretty simple: In Merced, planners, developers, lenders and buyers were blinded by the bubble -- they approved, built and bought thousands of relatively expensive houses that the area's economy ultimately could not absorb:

Hardly anyone in Merced planned very far ahead.  Not the city, which enthusiastically approved the creation of dozens of new neighborhoods without pausing to wonder if it could absorb the growth. Certainly not the developers. They built 4,397 new homes in those neighborhoods, some costing half a million dollars, without asking who in a city of only 80,000 could afford to buy them all.... And, sadly, not the local folk who moved up and took on more debt than they could afford. They believed — because who was telling them differently? — that the good times would be endless.

You know the rest of the story: a tidal wave of foreclosures, driving median sales prices down 50%. The "foreclosure price" -- set by banks eager to unload distressed inventory -- has become the market price; other sellers must compete by dropping their prices. A downward spiral in prices.

A typical foreclosure price progression: "In November 2005, the house sold for $126,000. The bank, which took it back last spring, is asking $59,000. The Seattle man (a prospective buyer) offers $40,000."

Another foreclosure scenario: "The owners, who owe $350,000, can no longer make their mortgage payments. Mr. Seivert is negotiating to buy the house for $170,000 and then rent it back to the couple, who have jobs in the area. They will pay $1,100 instead of their current $2,600 a month."

--Peter Viles
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McCain not sure how many houses he owns

File this under "Problems most of us will never have" -- You are running for president. Someone asks you how many houses you own. You can't remember. Is it four? Six? Seven?

From Politico.com: "Sen. John McCain (R-Ariz.) said in an interview Wednesday that he was uncertain how many houses he and his wife, Cindy, own. 'I think — I'll have my staff get to you,' McCain told Politico in Las Cruces, N.M. 'It's condominiums where — I'll have them get to you.' "

More: "The correct answer is at least four, located in Arizona, California and Virginia, according to his staff. Newsweek estimated this summer that the couple owns at least seven properties."

Democrats are using the "he owns a bunch of houses" line to remind Americans that McCain, by marriage, is fabulously wealthy. More from Politico: "Sen. Charles Schumer (D-N.Y.) told Politico’s Ben Smith that it was McCain 'who wears $500 shoes, has six houses and comes from one of the richest families in his state.' "

--Peter Viles
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com

Greenspan housing solution: Admit more "skilled immigrants" to stablize U.S. housing market

Former Federal Reserve Chairman Alan Greenspan is arguing that the most effective solution to the housing downturn is for the United States admit more "skilled immigrants" who would earn enough to buy houses and stabilize the housing market.

In an interview with the Wall Street Journal, the 82-year-old economist estimates there are 800,000 units of "excess supply" housing for sale in the United States, and predicts the housing market will not recover until those homes are sold.

From the Journal: "He did offer one suggestion: 'The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants,' he said. The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.

More: "He estimates the number of new households in the U.S. currently is increasing at an annual rate of about 800,000, of whom about one third are immigrants. 'Perhaps 150,000 of those are loosely classified as skilled,' he said. 'A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale -- and hence help stabilize prices.'"

Also in the Journal interview, Greenspan sharply criticized the Bush administration's rescue plan for Fannie Mae and Freddie Mac, reasoning the government should have nationalized the companies instead of supporting them as for-profit, shareholder-owned entities. He says the administration and Congress should have "wiped out the shareholders."

-- Peter Viles
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo credit: Getty Images