How Now Brown Cow?

Here's an update worth reading posted by Mr.Frank Barbera at FSO, Torpedoed by Sub-Prime -- Again

Here's a snippet of what's written:

"2007 is going to suck, all 12 months of it,” said CEO of D.R. Horton, the nation's largest homebuilder, Don Tomnitz at the companies March 7th conference call. Criticized for bluntly speaking his mind, the rather extreme verbiage coming from a top drawer CEO underscores the outlook ahead with Tomnitz really telling it like it is. While his wording may offend more sensitive ears, the content of his message is at least honest, and probably on the mark -- a far better outcome than the seemingly endless industry lying, deceit, and cover-ups that has led so many in the falling housing market, proclaiming a bottom, and the “worst is probably” over at virtually every turn. Few industries have a lock on more disingenuous behavior than the homebuilders and realty crowd who “somehow’ manage to consistently find the world's most blindly optimistic economists, (i.e. shills). So much so, even the guys on Wall Street blush. After all, we are now treated to the admission by New Century Financial – the nation's #2 Sub-Prime Lender -- that they made an “inadvertent error” on the magnitude of $500 Million Dollars? -- only 500 Million!!!! -- Hello? Nope, nothing but honesty, and good intentions there…

From CBS MarketWatch Today

“NEW YORK (MarketWatch) -- New Century Financial Corp. shares were delisted Tuesday as the company provided updates on criminal probes and disclosed a $500 million error over debt obligations as it approaches an expected bankruptcy filing. The New York Stock Exchange said New Century's common stock and preferred securities "are no longer suitable for continued listing on the NYSE" just one day after the Big Board halted trading of the stock and Wall Street signaled a looming bankruptcy filing for the lender. The company, whose credit problems have erased nearly $3 billion in market cap in a matter of weeks, said it received a grand-jury subpoena for documents in a previously disclosed investigation by the U.S. Attorney's Office for the Central District of California, as well as formal notice of a preliminary Securities and Exchange Commission probe. New Century also said in a filing to regulators that its obligations to Credit Suisse First Boston Mortgage Capital were $1.4 billion, not $900 million as it previously reported. New Century called it an inadvertent error.”

And of course, we also saw the major headlines coming from Accredited Home (LEND) where a liquidity crisis is taking shape.

From CBS MarketWatch Today

“Accredited Home after said it's seeking more capital and exploring strategic options after paying about $190 million in margin calls since Jan. 1. The mortgage company, which operates in the troubled subprime loan category, said it plans to seek additional capital. Accredited Home is also seeking waivers and extensions of certain financial and operating covenants under its credit facilities. Keefe Bruyette & Woods on Tuesday downgraded Accredited home to underperform from market perform and slashed its price target to $7 a share from $26 previously. "Based on our new significantly lower volume and margin assumptions, we estimate that LEND will lose money for the foreseeable future which will likely trigger a liquidity crisis," KBW said in a note to clients”

Of course, it is this writer's continued view that we are a long, long way from any type of important cyclical economic low, either for the broad economy which is weakening, or for the real estate/housing market which is in a serious recession. Just look at the latest information regarding the number of Homes For Sale that are Vacant. Going back to 1955, the US Vacancy Rate has never seen this type of dramatic surge. One year ago, the number of vacant homes waiting to be sold stood at a total of 1.57 million homes.

Today, the number of vacant homes waiting to be sold has surged by 34% to a total of 2.10 million homes, by far the most rapid increase ever recorded. As a result, the US Vacancy Rate for owned units has jumped to a record 2.70%, up from 2.00% a year earlier, which is now virtually double the long term average of 1.40% for the vacancy rate. From 1955 to 2005, the vacancy rate had never been above 2.00%, highlighting another element of just what kind of boom/bust dynamics are now potentially at work in the present cycle.

In addition, with more than one million housing units of excess supply, there is strong evidence for the case that Housing Starts, already down 18% in the last 12 months, to a seasonally adjusted rate of 1.64 million, will need to fall considerably further before any type of important bottom is seen. In the past, soaring vacancy rates have been a fairly good leading indicator for additional downside pressure on Housing Starts. In the next chart, we plot the 12 month Rate of Change for the US Vacancy Rate using an inverted scale and overlaid against the graph of US Housing Starts. Notice that surging vacancies tend to be a leading directional gauge for more weakness ahead in the Housing sector. In addition, as time passes and inventories continue to build, odds are high that homeowners will soon begin offering these properties for rent, which will put downside pressure on rents as the supply of new rentals hitting the market increases.

In a separate report out today, the Mortgage Bankers Association noted that late mortgage payments shot up to a 3 ½ year high in the final quarter of last year, with new foreclosures surging to a record high as borrowers with tarnished credit histories have had trouble keeping up their monthly payments. According to the MBA, “Home loan delinquency rates showed an increase for a fourth straight quarter as sub-prime defaults rippled through the real estate market. Past-due payments on 43 million loans tracked by the survey have climbed with about 4.6 percent of mortgage holders now at least 30 days late. “This includes about 2.4 percent of prime borrowers and 12.6 percent of subprime customers with poor or limited credit histories” noted Nicolas Retsinas, director of Housing Studies at Harvard University at Cambridge, Massachussetts. "The delinquencies and defaults have started to soar -- a lot of these lenders started to make loans and lost track of some of the fundamentals.'' Separately, Grant Bailey, analyst at Fitch Ratings noted that "with delinquencies going up, the rate of the increase doesn't appear to have slowed down,'' and that delinquencies on subprime loans have doubled in the past 12 months. According to Bailey, “If you graph that, it's a pretty steep line”.