The madness of the nation’s housing bulls reached new highs this week as they continued to chortle that the show must go on. Desperate for fresh evidence that the boom still has legs, they even stooped so low to quote a government report, of all things.
The report, released by the U.S. Congressional Budget Office (CBO) only yesterday, said that the country can expect stabilizing home prices and a modest turnaround in homebuilding during the second half of 2007.
The CBO also said it assumes "the national average price of housing will decline slightly this year but edge up next year." It was all the bulls needed to hear.
But as rosy as those comments were, the truth is they fly in face of the reality. Comments stemming from the earnings releases of two of nation’s biggest homebuilders painted an entirely different story.
In fact, during an earnings call on Tuesday, Donald Tomnitz, CEO at D.R. Horton, the nation’s largest homebuilder , said "we are in the very early stages" of the current housing slowdown. "Most of these are longer and deeper, and right now we don’t see anything on the horizon that would change that opinion," he said.
The builder from Fort Worth, Texas, announced that its net earnings had plunged 65% as the company took some $41 million in land charges and write-offs on options that it no longer intends to pursue.
Orders tumbled 24% and the company’s cancellation rate for the quarter rose to 33%, well above its historical range of 16-20%.
Down the road at Centex Homes the news was just as bad. The Dallas-based homebuilder announced yesterday that it had recorded its first-ever loss and that it expected to cut its workforce by 2,392 employees. The company had already reduced its workers by 17% just last quarter. In total, that means a 30% reduction for the company vs. last year.
Centex CEO Tim Eller said that the moves would "get our balance sheet and our organization to their fighting weight," adding that "this is one of the most challenging housing markets in the past 25 years."
But even so, the bulls were undeterred. Goldman Sachs, in fact, greeted the sour news with a whole slew of new upgrades for the industry-which in my view makes them as reliable as a government report.
After all, if you wanted to know about housing, whom would you ask? The builders themselves or a collection of analysts and bureaucrats?
The bottom in housing is nowhere in sight.
Mortgage MattersHi Steve,
I enjoy reading your articles. I just received a notice from my mortgage lender to sign up for their Equity Accelerator Program.
The program states that I can save $27,283 in interest and pay off the mortgage five years faster by letting the bank pay half my monthly payment every two weeks by electronic draft from my bank account.
There is a $5.42 monthly fee and a $295 one-time enrollment fee. The notice also states that the $295 one-time enrollment fee is deferred until you have accumulated the extra funds, so there is actually no cash out of my pocket. My loan is a 30-year fixed rate.What do you think about this?
T.D.
Dear T.D.
Thanks for reading. This is a question that I used to get quite often when I was a loan officer, and for me the answer is simple. Don’t do it.
Here’s why.
What your lender says in their advertising is 100% correct. But there is no magic here. By making one half of your monthly payment every two weeks, you simply end up making the equivalent of 13 payments per year rather than the usual 12.
Think about it, there are 52 weeks in a year which means that under their plan, you would be making 26 seperate 1/2 payments. That’s equal to 13 full payments
Naturally, doing so "accelerates your equity" since that extra payment is applied to the principal.
If that is indeed your goal, you can do this on your own, either by making one extra payment a year or by adding a fraction thereof to your regular monthly payment. Just be sure to mark that amount as payable towards the principal on your payment slip.
Save your $295 enrollment fee and the nearly $60 a a year in monthly fees by doing it yourself. It’s not that hard.
Remember, also, that once you sign up for this twice-a-month withdrawl, you’re stuck with it. Paying once a month gives you much more flexibilty in dealing with life’s little surprises.
Hope that helps.
Steve
By the way. . . .North Carolina-based Stock Building Supply, one of the nation’s largest building material suppliers, is cutting 1,500 more jobs as the U.S housing slump continues to depress sales and profits.
That’s in addition to the 2,000 jobs lost at Stock that it announced last November.
The latest round of layoffs was announced Monday by the company’s British parent, Wolseley Plc, which is also closing 22 Stock branches and cutting 500 jobs at its Ferguson plumbing division, headquartered in Virginia.
Company officials blamed its worsening financial condition on the decline in both housing starts and lumber prices. "We’ve responded swiftly to the challenging market conditions as a significant amount of our business is in residential construction," Stock VP of finance Jim Major said.
Wishing you happiness, health, and wealth,
Steve Christ, Editor
The housing bubble has popped, but the banking debacle has just begun. Email me your mortgage questions at steve.christ@angelpub.com.
