by Calculated Risk on 1/17/2015 06:38:00 PM

On Friday I posted an article from housing economist Tom Lawler: Lawler: “Surprise” Warnings on Margins/Effective Prices Whacks Home Builder Stocks

A few people took this as Lawler being "surprised". Nothing could be further from reality!

First, from the piece from Lawler:

"While most competent housing analysts had expected diminished price increases and increased sales incentives at most home builders in 2014 and 2015 following the surprising sharp price increases in 2013, the majority of housing analysts and investors had no such expectation."

That was Lawler making fun of the people who got it wrong!

Lawler started 2014 warning about incentives and reduced margins - and he warned about them all year.  As an example, Lawler wrote in May:

"it seems highly likely that the “pricing power” builders had in 2013 will not be evident in 2014, and in fact “effective” home prices may ease a bit as builders significantly increase their use of sales incentives from 2013’s unusually low level."

Many people were "surprised" by the builder announcements, but not Lawler!

by Calculated Risk on 1/17/2015 12:15:00 PM

The key economic reports this week are December housing starts on Wednesday, and existing home sales on Friday.

----- Monday, January 19th -----
All US markets will be closed in observance of Martin Luther King, Jr. Day

----- Tuesday, January 20th -----
10:00 AM: The January NAHB homebuilder survey. The consensus is for a reading of 58, up from 57 in December.  Any number above 50 indicates that more builders view sales conditions as good than poor.

----- Wednesday, January 21st -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

8:30 AM: Housing Starts for December.

Total housing starts were at 1.028 million (SAAR) in November. Single family starts were at 677 thousand SAAR in November.

The consensus is for total housing starts to increase to 1.040 million (SAAR) in December.

During the day: The AIA's Architecture Billings Index for December (a leading indicator for commercial real estate).

----- Thursday, January 22nd -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 300 thousand from 316 thousand.

9:00 AM: FHFA House Price Index for November 2014. This was originally a GSE only repeat sales, however there is also an expanded index. The consensus is for a 0.3% increase.

11:00 AM: the Kansas City Fed manufacturing survey for January.

----- Friday, January 23rd -----
10:00 AM: Existing Home Sales for December from the National Association of Realtors (NAR).

The consensus is for sales of 5.05 million on seasonally adjusted annual rate (SAAR) basis. Sales in November were at a 4.93 million SAAR. Economist Tom Lawler estimates the NAR will report sales of 5.15 million SAAR.

A key will be the reported year-over-year increase in inventory of homes for sale.

by Calculated Risk on 1/17/2015 08:11:00 AM

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for Jan 16, 2015.

Changes and comments from surferdude808:

A bank failure and the OCC releasing an anticipated update on its recent enforcement action activities led to several changes to the Unofficial Problem Bank List. This week there were eight removals and one addition that leave the list at 392 institutions with assets of $122.8 billion. A year ago, the list held 605 institutions with $199.8 billion in assets.

First Federal Savings Bank of Elizabethtown, Elizabethtown, KY ($754 million) and Bank of Coral Gables, Coral Gables, FL ($103 million) found merger partners to make their way off the list. The OCC terminated actions against The Bank of Maine, Portland, ME ($790 million); The First National Bank of Talladega, Talladega, AL ($389 million); Universal Bank, West Covina, CA ($321 million); Atlantic National Bank, Brunswick, GA ($142 million); and Clay County Savings Bank, Liberty, MO ($87 million).

First National Bank of Crestview Crestview, FL ($80 million) was the first bank failure in 2015. It is the 72nd failure of a Florida-based institution since the on-set of the Great Recession in 2008. With 88, only Georgia has more failed institutions.

The OCC issued a new action against First National Bank, Waupaca, WI ($778 million).

Next week will likely see fewer changes to the list.

CR Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The list peaked at 1,002 institutions on June 10, 2011, and is now back down to 392 - almost full circle!

by Calculated Risk on 1/16/2015 07:51:00 PM

And it begins ... from the FDIC: First NBC Bank, New Orleans, Louisiana, Assumes All of the Deposits of First National Bank of Crestview, Crestview, Florida

As of September 30, 2014, First National Bank of Crestview had approximately $79.7 million in total assets and $78.6 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $4.4 million. ... First National Bank of Crestview is the 1st FDIC-insured institution to fail in the nation this year. The last FDIC-insured institution closed in the state was Valley Bank, Fort Lauderdale, on June 20, 2014.

The FDIC closed 18 banks last year, down from 24 closures in 2013 and 51 in 2012. Failures peaked at 157 in 2010.

by Calculated Risk on 1/16/2015 04:05:00 PM

From housing economist Tom Lawler:

While two major home builders this week reported ‘ok” (KB Home) to better than consensus (Lennar) operating results for the quarter ended November 30, 2014, both home builders “stunned” many investors by warning that weaker than anticipated demand and “diminished” pricing power in several markets across the country had resulted in increased sales incentives and in some markets modest price reductions – developments which, when combined with continued increases in labor and material costs, would result in lower margins in FY 2015 compared to FY 2014. I say that many investors were “stunned” because home builder stocks took a savage beating this week, especially the stock of KB Home, whose ‘margin warning” was the most surprising.

KB Home
	Housing Units			Average Price
Qtr. Ended:	11/30/2014	11/30/2013	% Change	11/30/2014	11/30/2013	% Change
Net Orders	1,706	1,556	9.6%	$344,500	$309,600	11.3%
Deliveries	2,229	2,038	9.4%	$351,500	$301,100	16.7%
Backlog (EOQ)	2,909	2,557	13.8%	$314,200	$266,900	17.7%
Net Orders/Community	7.97	8.19	-2.7%

Lennar Corporation
	Housing Units			Average Price
Qtr. Ended:	11/30/2014	11/30/2013	% Change	11/30/2014	11/30/2013	% Change
Net Orders	5,492	4,498	22.1%	$325,000	$320,000	1.6%
Deliveries	6,950	5,650	23.0%	$329,000	$308,000	6.8%
Backlog (EOQ)	5,832	4,806	21.3%	$339,000	$337,000	0.6%
Net Orders/Community	9	8.7	3.4%

In terms of unit sales guidance, KB Home said that it expected its community count to increase by 15-20% over the next year, and that it expected its order pace to track the increase in its community count. Lennar said that it expects home deliveries in FY 2015 to be between 12% and 14% above deliveries in FY 2014.

While most competent housing analysts had expected diminished price increases and increased sales incentives at most home builders in 2014 and 2015 following the surprising sharp price increases in 2013, the majority of housing analysts and investors had no such expectation. In the latter part of 2012 and the first half of 2013 many builders experienced a significant and unexpected increase in demand that outpaced their ability to finish homes (partly related to “supply-channel” issues), and in response many builders hiked prices substantially in order to keep demand on pace with their ability to produce homes. As builders’ ability to increase production increased in 2014, however, few builders responded by paring back prices or increasing incentives, and as a result overall unit sales lagged expectations. Another key factor in 2014 that kept demand below expectations was mortgage credit conditions – many analysts and builders had expected mortgage credit to be significantly less restrictive in 2014, but that was not the case for most of the year. Indeed, by some “metrics” mortgage credit was actually a bit “tighter” in the first half of 2014 than in 2013, in part reflecting lenders’ “adjustments” to the January implementation of the CFPB QM rules as well as its new servicing rules.

Yet another factor that appeared to contribute to lower than consensus new home sales last year was that many (though not all builders) were not very aggressive in opening and marketing communities designed for the “typical” first-time buyer (as opposed to the “high income/strong credit first-time and trade-up buyer), which generally have lower price points, fewer amenities, and lower margins than communities targeted to the “trade-up” buyers. The notion that new SF home building could start to return to “normal” levels while at the same time the elevated home sizes, prices, and margins would remain the same seemed silly, and in hindsight it was.

While the notion that builder margins will on average be lower in 2015 than the “higher than sustainable” levels in 2014 seems quite reasonable and was quite predictable, by the same token the outlook for improved sales volumes at lower margins/price points has improved. Obviously, of course, mortgage interest rates have come down; the FHA lowered its annual insurance premium by 50 bp; and it appears as if an increasing number of mortgage lenders have eased mortgage credit conditions/credit overlays in recent months. In addition, the overall US economy has continued to improve, as has the labor market – though more in terms of jobs than in terms of income growth, highlighting the need for lower price points for homes targeted for potential first-time buyers.
emphasis added