Thursday, March 03, 2005

Brookings Institute to Hovnanian: "Don't Worry, Be Happy."

Hovnanian reported today, and the numbers were all--this is a homebuilder, you see--excellent.

Except for one small piece of the business, which happens to be Hovnanian's captive finance business.

"Due to the falloff in the re-finance business, Hovnanian is experiencing competition from third-party mortgage lenders who have been reducing their margins in order to originate more new business."

Seems also that there's an increasing demand for adjustable rate mortgages, which are less profitable than the old-fashioned fixed-rate kind--and this too hurt the finance arm.

ARM's were--get this--45% of origination volume in the quarter. That's right: almost half of all Hovnanian's mortgage volume is of the let's-take-the-lowest-monthly-payment-mortgage-because-otherwise-I-can't-afford-this-house variety.

But not to worry: "According to the Brookings Institute," the company reported on their conference call, "new housing starts should average 2 million a year for the next 25 years."

Phew! Thank goodness. If somebody at the Brookings Institute says so, it's gotta be true!

Seems to me the Housing Bubble is here. But not to stay.

Jeff Matthews
I'm Not Making This Up

7 comments:

Hayseed said...

So Brookings is now officially in the sell side business, effectively offering us 25 year earnings estimates on the housing industry - who is that Brookings Fellow? Is that Henry Blodget I see??? I guess the next step is for a $500 target price on one of these housing stocks.

As an aside, went back to Austin, TX last fall to catch up with some friends from college. Haven't been in couple of years, but Austin is about as good a test market for housing as any. The tech boom made cowboys in Austin millionaires overnight and housing prices and new development went through the roof. A couple years ago I asked around about pricing after the boom had come and essentially gone, and the reaction from people was sort of "well, there's a lot for sale and it's sort of a buyer's market." I checked the prices and it may have been a buyer's market vs 2001, but prices were still very high vs replacement. So what I saw then was a sort of Aggie standoff, where the sellers had no pain yet and not yet motivated, and the buyers were kicked back waiting for better prices. In other words, all you needed were a few transactions at a 10-20% discount from market prices per square foot. Well, looks like the pain threshold from the buyers has now flown right past the demand from buyers - prices/foot are down about 10% in two years according to my realtor friend, and the supply just keeps steady. And this is occurring in the greatest mortgage market in modern history. Granted, Austin is on the tail of the real estate boom distribution, but Mr Market always hits the weak first.

See you later, going to close on my new condo on the redneck riviera - got a subsidized 4.00% 30 year interest-only with 2% down on a sweet li'l 2 bedroom where me and the honey can sack out after eatin' some catfish down at the Pink Pony. Maybe I'll rent it out and make some money. Heck, if I'm gonna do that, let's buy 5 or 6 of these condos and put nothing down and I can rent'em out and think of the cash flow - to the moon!

Carlton Sheets, eat your heart out.

jay-b says said...

It's not surprising to me that the number of ARM originations has spiked and it shouldn't have been a surprise to HOV either. But fortunately for them the yield curve is beginning to flatten and so the ARM rates are just in the beginning stages of losing their appeal to many buyers.

The spread between the 30 year fixed rate and say the 5/1 or 10/1 ARM is shrinking. So I do believe the ARM trend will slow for a time as the Fed continues to raise rates and the yield curve continues to flatten.

But instead you'll probably see more buyers move towards fixed rate mortgages that offer interest only payments for the first 10 years of repayment.

The margins will continue to be squeezed...there is definitely an oversupply of mortgage lenders out there! Just open the yellow pages and look under "mortgages" (Does anybody open the yellow pages anymore...hmmm?).

Also, the way most builders run their captive finance business is a little, how shall we say, non-consumer friendly (aka. racket). But I guess that's something we can save for another day.

Its_strange said...

Alot of man hours in building a home and it takes alot of different trades ( carpenters , painters etc ) . I would love to know if HOV or TOL are offering thier people or sub-contractors discounts or deals to buy a home or make a investment .

Its_strange said...

What inflation rate does Brooking use ? And does anyone believe the inflation data our government puts out ? I do not.

razor said...

Hayseed. You have it wrong it is not Blodget, it is G. Gilder over there.

AA said...

A word of caution trying to capture a top in housing: bubbles run longer and higher than most people anticipate, and almost always end when the last disbeliever is squeezed out or seriously in doubt about their sanity. Taking that principle in this instance means:
a) ARMS going to 70-80% of originations (from current 45%).
b) Emergence of 40 and 50 yr mortgages (look! my monthly payment is so low! I can afford more house for my money).
c) Arguments that housing should have a PE multiple equal to that of the market, and/or based on rates (which currently at 4.4% imply a PE of 23x).

AA said...

A word of caution trying to capture a top in housing: bubbles run longer and higher than most people anticipate, and almost always end when the last disbeliever is squeezed out or seriously in doubt of their sanity.
Applying that principle in this instance means:
a) ARMS going to 70-80% of originations (from current 45%).
b) Emergence of 40 and 50 yr mortgages (look! my monthly payment is so low! I can afford more house for my money).
c) Arguments that housing should have a PE multiple equal to that of the market, and/or based on rates (which currently at 4.4% imply a PE of 23x).

Waiting six months after that!