by Calculated Risk on 10/01/2007 11:40:00 AM

Homebuilders are once again seeing rising cancellation rates. KB Home reported Thursday:

The company posted a cancellation rate of 50 percent during the most recent quarter, down from 60 percent in the year-ago quarter but well above the 34 percent rate in the second quarter of this year.

This is well above the normal range. According to D.R. Horton, the normal range for cancellations (for Horton) is between 16% and 20%. For those trying to analyze the housing market, this means that the inventory levels reported by the Census Bureau are probably too low right now.

The Census Bureau, during periods of rising cancellation rates, overstates New Home sales and understates the increase in inventory. Conversely, during periods of declining cancellation rates, the Census Bureau understates sales. Here is discussion from the the Census Bureau on cancellations. Note: this shouldn't be confused with revisions that are unrelated to cancellations.

Using cancellation rates from several of the publicly traded home builders, we can estimate the actual new home inventory (as opposed to the inventory reported by the Census Bureau). Note: The Census Bureau breaks down the inventory as Completed, Under Construction, and Not Started. The following chart show the reported and cancellation adjusted inventory levels for the hard inventory (excluding the "Not Started" category).

Click on graph for larger image.

At the end of Q2, this analysis shows the Census Bureau is currently understating the hard inventory of new home sales by about 77,000 units. Even though the Census Bureau has shown a slight decline in new home inventory in the third quarter (through August), I expect the adjusted inventory to increase because of rising cancellation rates.

This will be important to follow later in the housing cycle. However, it isn't just the inventory of new homes for sale that will impact the homebuilders. Existing homes are a competing product for new homes, and the record inventory of existing homes for sale will also pressure home-building activity.


This graph shows the year end inventory levels since 1982 for new and existing homes. (2007 numbers are for August).

Inventory levels are at an all time record of 5.1 million units.

The third graph shows the total inventory normalized by the number of owner occupied units (this adjusts inventory for increases in population and household size).


Total inventory is currently 6.8% of the total owner occupied units in the U.S. This is far above the previous peak of 4.7% in the early '80s.

Finally, it's not just the level of inventory that matters, but also the level of distressed inventory. We are already seeing record levels of foreclosures in some states, and IMO it is about to get much worse. I spoke with one of the top agents in San Diego this weekend, and she was analyzing one neighborhood for a client in the $375K to $450K price range. There were 70 listings (very high for that neighborhood and price range), but she was shocked to find that approximately 75% of the listings were short sales, and a similar percentage were vacant. This suggests a flood of REOs in the coming months.

by Calculated Risk on 10/01/2007 10:16:00 AM

From MarketWatch: Big write-downs to slash Citi's quarterly net 60% (hat tip Lyle)

Citigroup Inc said Monday it expects ... huge write-downs for unsold debt it issued to finance corporate takeovers and for big losses on the value of subprime mortgage-backed securities.
...
The decline "was driven primarily by weak performance in fixed-income credit-market activities, write-downs in leveraged loan commitments, and increases in consumer-credit costs," Chairman and Chief Executive Charles Prince said in a statement.

Earlier Monday, Swiss banking giant UBS said it will take a hit of 4 billion Swiss francs ($3.4 billion) in the third quarter from its subprime mortgage exposure and plans sweeping management changes and job cuts at its investment-banking division.

Citi sees a write-down of $1.4 billion pretax, net of underwriting fees, on funded and unfunded loans for clients doing leveraged buyouts.
...
Citi also cut the value of its mortgage-related positions, as rival Wall Street investment banks did last month.

It said it expects losses of $1.3 billion pretax, net of hedges, on the value of subprime mortgage-backed securities warehoused for certain securitizations, and $600 million pretax in fixed-income credit trading due to significant market volatility and the disruption of historical pricing relationships.

I guess the music has stopped.

“As long as the music is playing, you’ve got to get up and dance. When the music stops, in terms of liquidity, things will be complicated.”
Chairman and Chief Executive Charles Prince, July 2007

by Anonymous on 10/01/2007 10:08:00 AM

From the NYT, "The Foreclosure Pickings Are Plentiful but Not Easy," comes this classic quote from an "investor" in foreclosed properties:

“I’ve been good on picking up properties, but I haven’t been good on an exit strategy,” said Mr. Vela, who paid cash. “I’ve had to hold them longer than I originally liked. That’s O.K. That’s part of the game. It’s affected my holding times but not my profit.”

I apparently understand "profit" as little as I understand "loss." No wonder I'm just a blogger.

by Anonymous on 10/01/2007 09:52:00 AM

I thought we'd take a moment for philosophical reflection on this bright sunny Monday morning. What is "a loss"? If an accountant bangs her head against the desk in a deserted office, does anyone hear the sound?

Our text today is "Owners face selling at a loss now that the housing bubble has burst." The owners in question are currently marketing their home for $868,000, even though--alas!--it was valued by a real estate broker 18 months ago at $930,000. Another distressing story of borrowers upside down on their mortgage, forced into the horrors of the short sale? Well, not quite.

The Bellomos' house is sited on the edge of the wetlands. The large picture window on the second story overlooks acres of wetlands filled with egrets and other wildlife. Barker said his firm has put a value of $40,000 to $50,000 on the view but said he couldn't value the home because he's unfamiliar with it.

When the Bellomos bought their house on Wetlands Edge Drive in 2002, the market was so hot that they took time off from work to drive up from the Peninsula on a Friday morning. They nabbed one of the last houses in the development with a view of the wetlands. They paid $424,000. Because they had no children, the Bellomos bought the 3,300 square-foot, four-bedroom, 41/2-bath home for themselves, their cats Felicia and Felix, and for the many family members who visit often.

From the outside, the home is similar to many on the block: a large, nondescript house on a smallish lot. But inside, the house is large and stately. The Bellomos put considerable work and money into making it that way. They upgraded cabinets and added granite in the kitchen, placed an inlay in the foyer's hardwood floor and added marble and granite slabs in the bathrooms.

Saverio Bellomo got his dream library-study with built-in cabinets and the couple added expensive Venetian plaster to many of the walls in the house. The same high-end cabinets and granite countertops used in the kitchen were installed in the laundry room. Every closet got a built-in closet organizer. New built-up baseboard and crown moulding was installed throughout the house.

The trouble is, upgrades for one family are renovations waiting to happen for another family, Barker said. For instance, the Napa Valley school district is a huge draw for many home buyers in American Canyon. But the Bellomos have converted two rooms to an office and a library, respectively - with built-in cabinets. For many potential buyers these would be kids' bedrooms.

The Bellomos declined to say how much they paid to make the renovations but admitted that even if the house fetches full price they won't break even.

These people put more than $444,000 in luxury "improvements" into the home over five years? That's some serious granite.

Fortunately, the Bellomos are taking this well:

They braced themselves for the financial loss. But they are also looking at it positively. "We're trying to be Zen about it," Robinson Bellomo said. "This is the market we have here. Hopefully, the market in Albuquerque will be the same and the real estate gods will be good to us, too. In the meantime, the home buyer is going to get an incredible value."

You crazy Californians.

by Calculated Risk on 9/30/2007 04:46:00 PM

From the WSJ: UBS Is Expected to Report Large Loss From Fixed-Income Unit

...UBS ... is projecting a third-quarter loss of ... ($510 million to $600 million) based on a writedown of 3 billion to 4 billion Swiss francs for fixed-income assets ...
...
Its losses resulted from applying sharply lower market values to asset-backed bonds ... Many banks had serious troubles with securities-tied to mortgages when liquidity dried up in the last quarter.

The confessional is now open.