House of Cards: Housing Levels The Street

Bad news in the housing market this week was enough to rock the stock market right off its foundation.

Existing home sales, new home sales, homebuilder earnings reports -- no one expected them to be bright, but the numbers cast a heavy shadow on any optimism for a quick recovery in housing.

“I think there’s not a rapid recovery in the immediate future without a doubt,” Hovnanian CEO Ara Hovnanian says.  “It’s a challenging market at the moment.”  Challenging was a word used by several of the homebuilder CEO’s reporting earnings this week.  The biggest hit to the collective bottom lines appeared to be impairments or “write-offs” related to land option contracts.  Just four of the homebuilders put together lost over two billion dollars in that category.

“We believe that market conditions will continue to be challenging, and our quarter-end impairment evaluations incorporated our more cautious outlook for the industry,” wrote D.R. Horton Chairman Donald Horton.  The company’s quarterly results included pre-tax charges to cost of sales of $835.8 million for inventory impairments.

“You’re seeing operating margins that are actually approaching break even in a lot of cases,” notes Nishu Sood of Deutsche Bank.  “I think that’s a trend that you’re likely to see continue, also the significant levels of impairments.”

The homebuilders continue to struggle under slow sales; the Census Bureau reported sales of new homes down 6.6% in June.  Prices of new homes are also down 2%, and that doesn’t include all the incentives the builders are offering, that in some cases can knock 40% off the real costs of the home.  But the bigger problem for the builders is tightening credit.

“Whereas Monday you could do a loan, Wednesday suddenly that loan no longer existed,” bemoans mortgage broker Michael Murray at First Savings Mortgage Corporation in Bethesda, Md. Murray says loan volume at the company is down 20-25% since the beginning of the year.

“Banks have changed their guidelines across the board, be it from a $100,000 loan to something for the $5 million loan,” says Melissa Cohn, President of Manhattan Mortgage.  “Banks want to make sure that you have enough money to make the down payment, pay your closing costs. But they also want to see that you have got money in reserve, so that you have the ability to make all of your payments.”

Tightened credit caused the CEO of the nation’s largest lender, Countrywide Financial, to shock the markets earlier this week, by pushing back his forecast for a housing recovery.  Angelo Mozillo said don’t expect to see it until 2009.

Others, like Hovnanian, say housing may “plateau” earlier than that, but will sit at that plateau, “for quite a bit.”  Existing home sales didn’t fare much better than new, down 3.8% from May to June, a time that usually sees a small bump before the August doldrums.  Sales of existing homes are actually down 11.4% from a year ago.

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“There's a continuing tighter lending standard, particularly on subprime markets. That is having an impact on home sales,” says National Association of Realtors Senior Economist Lawrence Yun. “A rise in mortgage rates in early June definitely knocked off a few buyers in the market.”

A new quarterly report from the Census Bureau now shows homeownership is falling off its record highs of 2004.  The rate, now at 68.2%, has fallen for four straight quarters, and new household formation, according to the NAR, has slowed dramatically.  A new report from Moody’s Economy.com deepens its forecast for home prices, predicting they will now fall 9% from their peak in 2005.

None of this is good news for Nicole Gray, who has been trying to sell her $1.6 million  home in Old Tappan, NJ for three months.  She has already dropped the price once, and is considering doing it again.  “I think the property's beautiful,” Gray says convincingly, “and the house is beautiful, and somebody's gonna come along and fall in love with it.”