By Mike Caggeso
Housing market investors take heed: The mortgage meltdown is heading uptown.
And that has to be the most disconcerting revelation yet for investors, most of who believed that the downturn would be limited to borrowers with questionable credit histories.
It started with a housing slowdown. Then it turned into a mortgage meltdown involving sub-prime loans – those made to homebuyers with blemished credit. But now the U.S. housing mess is apparently affecting the luxury home market.
Clearly, the U.S. real estate sector – as it relates to both home sales and mortgages – has months and months, and perhaps even years, to go before it even begins to recover from the financial mess that it faces right now.
In the past week alone:
- Luxury homebuilder Toll Brothers Inc. (NYSE: TOL) said Wednesday that it expects a 21% decline in third-quarter revenue, and company officials have said that the situation could get worse before it gets better.
- The National Association of Realtors, a trade group for real estate agents, also on Wednesday lowered its outlook for existing home sales in 2007 by 1%, or 70,000 homes.
- American International Group Inc. (NYSE: AIG), which is also one of the biggest mortgage lenders in the United States, yesterday (Thursday) gave investors a double-barreled warning about its business outlook . First, it said, defaults are spreading. And second, it said, delinquency rates for first mortgages (90% of their loans) are growing.
- Rates on 30-year mortgages this week fell to their lowest point in two months, which is definitely a welcome dose of good news for folks who are still considering the purchase of a home. Mortgage company Freddie Mac (NYSE: FRE) said yestereday (Thursday) that the a fixed-rate mortgage of 30-years length was averaging 6.59%. That’s down from 6.68% a week ago and was the lowest point since June, when mortgage rates for that kind of loan were 6.53%.
- And, lastly, looking at the Twin Cities as an example for what’s happening in the rest of the market, July construction permit activity was the best in nearly a year, but the market still is generally headed downward as builders try to cull inventory, according to a report in the Startribune.com newspaper for Minneapolis/St. Paul, Minnesota. Twin Cities homebuilders were issued 440 permits to build 974 units – the most since August 2006. Compared to last year, however, permits were down 31% and units 7%. Activity is still backsliding from the record results of 2004 and 2005, and builders are focusing on reducing inventories of unsold homes rather than building new ones as buyer activity remains stagnant. From January through July, planned units were 28% behind last year, while the number of permits was down 33% – figures that are in line with, or slightly below, historical norms. "We are beginning to see small signs that activity in the new home market is leveling out from our recent correction," insists Michael Noonan, president of the Builders Association of the Twin Cities.
After a five-year boom – during which prices soared like never seen in recent memory – the U.S. housing market fell into a slump last year. And that slump has since skidded into a full-blown downturn that subsequently infected the credit markets. The slump is now expected to drag on well into 2008.
Robert Toll, the chairman and CEO of Toll Brothers, said that demand finally appears to be rising, but that the damaged credit markets are slowing down home sales.
Out in her market area, homebuilders “are still cautious about what they'll put in the ground," said Wendy Danks, marketing director for the Builders Association. “But they're seeing some folks out looking and thinking seriously that they can't wait and are just going to buy."
However, Lawrence Yun, the senior economist for the National Association of Realtors trade group, blames overdevelopment – as is demonstrated by all the “for sale” signs hanging in windows, or planted on sign posts in the dirt in front of countless homes, in every urban and suburban area, it seems.
“More buyers, and cutbacks in new construction, will eventually draw down the inventory levels and support future price appreciation, but general gains will be modest next year,” Yun said. “Serious buyers today have a long-term view of housing as an investment — speculators have left the market.”
That begs the question: Is Yun’s view a fact, or is that just more “speculation?”
U.S. Census data shows that home ownership for people 35 and under has actually increased in the past decade. So have homeowner incomes. This explains the increased demand for bigger houses – financed by bigger mortgages – in newly developed areas, most of them further away from the key thoroughfares for commuters. That means that the buyers of these new luxury homes often have much longer commutes to their jobs.
But gas prices have doubled in the past five years, wiping out thousands from a household’s budget. And in that time, the suburban real estate seemed unstoppable as it climbed inexorably higher and higher in price.
But sooner or later, those prices would exceed the spending ability of consumers to purchase the homes.
This suggests that the real estate market — particularly new houses — was already about to take a hit before the mortgage crisis even began. But then came the sub-prime crash, which jacked up rates for Alt-A and jumbo loans, which in turn further pounded the home-sales market, and caused consumer confidence to ebb.
One of the latest victims is financial-services giant American International Group Inc. (NYSE: AIG), which is also one of the biggest mortgage lenders in the United States.
Yesterday (Thursday), AIG gave a double-barreled warning to analysts and investors. First, it said, defaults are spreading. And second, it said, delinquency rates for first mortgages (90% of their loans) are growing.
As long as this trend continues, first-time homebuyers will continue to have difficulties getting mortgages. And, because of that, second-home buyers will continue having trouble selling their existing houses.
But this very dark cloud seems to have a couple of silver linings:
- First, there is AIG’s recent stock performance. Over the past week and a half, AIG’s shares have actually outperformed the Standard & Poor’s 500 Index, possibly indicating that AIG is weathering the credit storm better than companies not even tied to the banking, credit or real estate markets.
- And second, while the mortgage and real estate markets haven’t hit bottom, yet, each gloomy report by a homebuilder or mortgage lender hopefully brings us closer to that market bottom – even it it’s much farther away than most experts first thought.