Reuters is reporting Toll Brothers 2nd quarter orders drop 32 percent.

Toll Brothers Inc. (TOL) on Friday cut its forecast for the number of homes it expects to sell in fiscal 2006, as quarterly orders fell 32 percent.

The decline in orders reflects softening demand and a build up of homes on the market, especially by speculators who are unloading their investments as their anticipated profit evaporates. “Speculative buyers are no longer fueling demand,” Robert Toll, chairman and chief executive, said in a statement. “Instead they’re putting the homes they’ve recently acquired back on the market, or are canceling contracts in mid-construction.”

He added that the oversupply is being “aggressively discounted by others.”

Would-be buyers also were spooked, as the cancellation rate for the quarter was 8.5 percent, above Toll’s historic average of 7 percent, the company said.

Toll Conference Call Notes

Mike Morgan at MorganFlorida listened to the Toll Brothers conference call and offered these comments:

Robert I. Toll, chairman and chief executive officer, stated: “We are entering our ninth month of slower sales in most of our markets. Looking at the market in general, I offer the following comments: Speculative buyers are no longer fueling demand; instead they’re putting the homes they’ve recently acquired back on the market or are canceling contracts in mid-construction. Additional supply is also coming from speculative homes started by other builders, as well as from their ”non-spec-buyer“ cancellations. Much of the oversupply described above is now being aggressively discounted by others. Generally we do not sell to speculators nor build spec homes, but we have certainly been impacted by the overall increase in supply.

That’s all folks. Finally we hear an almost true statement from a major home builder that puts the supply problem in perspective. However, the last sentence in his release is misleading. I can assure you that most of their buyers have been speculators during the past two years. If you take a look at how many of their homes have been flipped prior to closing or within a few months of closing, you will be shocked. Yesterday the President of the Florida division for a top 5 builder called me to explain that they were returning to the “old fashioned” way of doing business. No speculators, and they will build model homes. They offered me (exclusively) all of their models. They offered to sell them to my HNW investors at a deep discount and to pay market rents with 12-24 month leases.

In any event, Toll’s guidance of 9000-9700 units is still unrealistic considering how many homes speculators have on the market. If they sell 8000 homes, I will be surprised. Would you buy a million dollar home form a builder with a $100,000 incentive, or would you buy the same home from a desperate flipper for $800,000? The builders have built their own competition . . . and the builders cannot compete.

Job growth is slowing down, and the largest sector of job growth has been real estate related industries. Personally, I’m seeing real estate agents, mortgage brokers, suppliers and subcontractors losing jobs, lots of jobs. A year ago we could not find a subcontractor to do repairs or renovations. Now they call us. If you read Chris’s story . . . and eliminate the outside Spin Masters, you’ll see that most economists are banking on job growth to support the crashing housing market. That’s an unrealistic view, as job growth is suffering in the sector that supported job growth for the last 5 years.

Jim Cramer recently said people will start fixing up homes versus buying new, so Home Depot is a Mad Money Buy. Well, he fails to realize a major portion of Home Depot’s sales are from contractors. The first sector to get hit here are all the subcontractors and small builders that line up at Home Depot every morning. See the comment below from the Midwest building supply company. If they are laying off staff in the heartland . . . which many say is not effected by this mess . . . you can bet your last donut the hot markets are suffering even worse.

Also consider this. A year ago mortgages at 5%. 6.5% right now. On a $500,000 home that means $2684.13 a month last year and $3,160.35 this year. Looking at this another way, last year they could afford a $500,000 house but this year they can only afford a $426,000 house if they want to keep it to the same payment. That’s a 15% haircut. This worked in reverse for the past few years, and that is one big reason prices rose.

With oil taking a big bite out of consumers’ budgets, they can’t even afford the $426,000 house anymore. Our savings rate is already zero, so unless they give up the $5 coffee at Starbucks every morning, they are not going to be able to buy these homes at these prices. I think Starbucks numbers supported the fact that some people are starting to give up the coffee. On a recent visit to a Starbucks, there was no line. First time I’ve ever been in a Starbucks with no line.

And there is all of the inventory we have, where tens of thousands of gamblers are going to lose gazillions of dollars, because they went to the ATM machines and mortgaged their primary residences to the hilt to gamble. With ARM rates rising, this will sink in fast. Maybe . . . just maybe . . . that’s why the refinance numbers are up so high. And for many that bought flip properties with real savings, they are now forced to mortgage their homes in order to carry the flip homes.

If you sit down and put this all to paper, it is very, very ugly.

Ameriquest Layoffs

Yesterday we reported Ameriquest’s owner lays off 3,800.

The parent company of Ameriquest Mortgage Co. and Town and Country Credit laid off 3,800 workers nationally at retail mortgage subsidiaries and closed 229 branch offices yesterday. It has 10 Massachusetts branches.

Orange, Calif.-based ACC Capital Holdings said it’s centralizing the operations into regional mortgage production centers in California, Arizona, Illinois and Connecticut and consolidating corporate functions at its headquarters.

The announcement follows a $325 million January settlement between 49 states, including Massachusetts, and Ameriquest, the nation’s top subprime lender. The states alleged that Ameriquest used predatory lending practices.

Industry Job Losses

Reuters is reporting US mortgage industry may lose more jobs.

The decision by the parent of Ameriquest Mortgage Co. to fire one-third of its employees may be the most sweeping recent overhaul by a mortgage lender as rates rise and borrowers retreat.

It may not be the last.

The announcement by Ameriquest’s parent ACC Capital to fire 3,800 people and shutter 229 branches reflects an industry groaning as loan growth slows, competition rises, margins narrow — and some 500,000 people hope to keep their jobs.

“A year from now, I expect employment in this industry to be 20 to 25 percent lower,” said Michael Moskowitz, president of Equity Now, a New York lender. “This will be driven by a need for increased efficiency, and lower production.”

“We think 40 percent of the people who are buying homes are merely speculators,” said David Olson, co-founder of Wholesale Access in Columbia, Maryland, which tracks the industry. “It would be good for prices to burst, because sooner or later no one will be able to afford a house.”

Seattle’s Washington Mutual Inc. (WM), the No. 3 lender, in February said it would lay off 2,500 mortgage employees. A year earlier, it wrapped up a downsizing that eliminated 8,600 mortgage jobs.

Let me see if I have this straight. A year ago WM “wrapped up” downsizing by eliminating 8,600 mortgage jobs. Now it seems they are getting rid of 2,500 more. Is that the bow tie on the package or are there more packages to come? Somehow I expect more packages and more bow ties.

Merit Financial Bankruptcy

The Seattle Times is reporting Merit Financial considers bankruptcy.

Kirkland-based mortgage company Merit Financial will meet with its 300 employees this morning to let most of them go as executives decide whether to file for bankruptcy, according to two people familiar with the company’s plans.

Merit Financial will keep a skeleton staff to process loans in progress, but otherwise will be working to liquidate the company, said the sources.

Merit was founded in 2001, making residential loans during a hot real-estate market. It grew quickly from a company with 12 employees and $50 million in loan volume its first year to passing the $2 billion mark in cumulative loans last May, after just four years in business, according to the company’s Web site. At that time, it had 430 employees and planned to hire more.

Like others in the mortgage business, Merit fell on hard times as the refinancing market dried up. Six months ago, it laid off about 20 people in its lending division and stopped making loans itself, acting only as a broker.

The problems at Merit are peaking just two days after Ameriquest, one of the country’s largest lenders to people with blemished credit, announced the elimination of about a third of its work force — 3,800 people.

Rising interest rates and declining demand for mortgages are expected to lead to more job losses at mortgage firms.

Is Merit a package, a bow tie or simply a harbinger of more housing woes to come?

Comments on Merit

David Donhoff at No Bull Mortgage had this to say about Merit:

KerTHUNKKK! Sayonara Merit Financial

One after another every company with business models relying on the “easy money” of dropping-rate refinancing is shuttering its doors, kissing off its employees, and “becoming one with the ages.”

Scott Greenlaw, CEO and founder of Merit Financial, just finished delivering a tearful acknowledgement of failure and filing of Chapter 11 Bankruptcy to a morning meeting of the remaining employees that showed up to work today (despite the broken rumor yesterday of the impending collapse.)

Merit was a significant regional poster child “Flash-In-The-Pan” operation modeling itself on the AmeriQuest business plan. It comes as no surprise to industry veterans that their collapse comes just two days after it’s icon’s fall.

The news sent immediate tremors through the local young “loan officer grapevine” who’ve never known anything EXCEPT the lending business in a dropping rate environment. There was no surprise, however, among the veteran professionals who had privately been wagering when (not if) AmeriQuest, Merit and a few satellite copycats would collapse.

The mortgage financing business is rapidly reverting to the “ancient, old-school, old-fashioned” business model of reliability-and-trust-centric relationship development. Relentless cold telemarketing for slam dunk rate-and-term refinancing is officially dead, for the greater foreseeable future, anyway.

Fannie Mae “Free Daylight Credit” by the Fed comes to a close

Even as the housing bubble is clearly popping, the Fed is still attempting to rein in Fannie Mae and Freddie Mac. Clearly the Fed is spooked and is acting on its own since Congress seems reluctant to do so. Please ponder a Fed announcement under the name Alternative Arrangements for the Distribution of Intraday Liquidity.

In July 2006, the Federal Reserve will end its provision of free daylight credit to government-sponsored enterprises (GSEs), financial services corporations created by Congress to establish a secondary market in mortgages and other consumer loans. To meet their payments to investors, the GSEs can use a wide variety of alternative funding arrangements. While such arrangements can in theory distribute liquidity efficiently, a decline in the intraday funds in circulation following the Fed’s move may lead to some slowing in payments by both the GSEs and commercial banks.

Boston Condo Prices

Mish is there anything else that is dwindling? Good question.
Please check out prices on Boston Waterfront Condos.

The Boston Herald is reporting Skydiving prices on waterfront condo.

Boston’s waterfront, the epicenter of a high-rise condo building boom, is starting to see a trend that might make even the most bullish real estate investor flinch – skydiving prices.

The average price of a harborside condo perch plunged nearly 40 percent during the first quarter compared to the same period last year, falling to an average of $564,944, according to the Listing Information Network, or LINK.

That’s down from $902,644 in the first three months of 2005, widely considered to be the high-water-mark of the recent, record run-up in real estate prices, statistics show. The price declines came even as the number of waterfront condos sold more than doubled, to 86.

The disturbing data, though, emerges against a backdrop of frenzied construction activity, with developers racing to open a pair of glitzy new waterfront towers, one near Rowes Wharf and the other on the North End’s harborfront.

It’s only a matter of time before California catches up with Boston, Washington DC, and Florida. Even though speculators and jobs are dwindling, there are a couple of things that are rising: home inventories and foreclosures.

Rising Defaults in California

The LA Times is reporting Mortgage Defaults Rise in California.

The number of California homeowners who received mortgage default notices increased in the first quarter to the highest level in more than two years, a real estate research firm said Tuesday.

Lenders sent 18,668 default notices to homeowners from January to March — a 23.4% increase from the fourth quarter of 2005 and a 28.7% rise from the year-earlier period, according to La Jolla-based DataQuick Information Systems.

The rate of change in the six-county Southern California region was higher, DataQuick said. The number of defaults rose 33% year over year to 11,102 from 8,330. San Diego and Riverside counties saw the biggest jumps in defaults, more than 50%.

The notices serve as an early indicator of possible foreclosures and signal a shift in housing market trends.

The hike in first-quarter default notices coincided with a slowing in the state’s annual rate of home-price appreciation.

No one seems alarmed (yet) as the numbers are still historically low. But on a percentage basis it is clear to see that trend reversal is not good. Foreclosures and defaults are normally a lagging indicator so that is exceptionally bad news in places like Denver and Ohio where the numbers do not look good on any basis. By the way, California is a mirage, defaults are only low because people have been able to consume their houses. Once appreciation stalls (and it has), along with it will be a cascade of lost jobs and defaults.

Sign On San Diego is reporting Mortgage default notices increase.

The number of homeowners in San Diego County who fell behind on their mortgage payments increased in the third quarter, reversing a years-long trend of declining mortgage defaults.

Lenders filed 906 notices of default against borrowers in the county during the third quarter, up from 649 notices for the same period last year, according to a survey by DataQuick Information Systems, a housing research firm in La Jolla.

While default notices remain far below levels seen during the county’s housing bust in the early-1990s, the third quarter’s 39.5 percent increase is only the second time the number of defaults has increased year-over-year since the end of 2002.

Denver

The Rocky Mountain News is reporting Foreclosures bury Denver metro area in unsold inventory.

The number of unsold homes on the Denver-area market hit a record 29,045 in April, according to reports released Thursday.

Rising foreclosures were the driving force for the skyrocketing inventory, which is 19.2 percent higher than a year ago, experts said.

April typically sees more homes on the market as sellers try to unload properties during the summer school break, and the foreclosures – more than 4,700 in the metro area in the first three months of this year – added to the number.

“There’s a glut of unsold homes on the market,” said Doug Pierce, owner of Pierce Realty Co., a Metro Broker company. And that is extending the length of time to sell homes, he added.

“There’s a glut of unsold homes on the market,” said Doug Pierce, owner of Pierce Realty Co., a Metro Broker company. And that is extending the length of time to sell homes, he added.

Pierce said that the Denver-area market increasingly has become a two-tiered one composed of the haves and have-nots.

He noted two homes in Cherry Hills Village recently came on the market in the high $900,000s, and within a week they were both under contract for full-price cash offers, with others standing in line to buy them.

“Flying in the face of that activity, I have a listing in south Aurora,” Pierce said. “The house is in good shape and has been updated. It was on the market in the $180,000s last summer and it didn’t sell. We now have it at $164,900. We have not even had a showing in 10 days.”

The lesson from those two scenarios is simple, he said: “The super-rich do not have any problems. The little guys are worried about their jobs and seem to be suffering.”

Ed Jalowsky, principal of Classic Advantage Realty, said 50 percent of the homes priced less than $300,000 in his office are either in foreclosure or facing foreclosure.

Despite the glut of unsold homes, the average price of a single-family home rose to $318,949 in April, compared with $313,339 in March and $303,152 a year earlier.

And the median, or middle, price was $250,000, up from $247,500 in March and $241,687 last year.

Prices are up because of the mix of homes being sold and because the Metrolist data overstates the sale prices to an unknown extent. That’s because it doesn’t adjust the sale prices for seller incentives, such as down payment assistance, according to real estate agents.

Read that last sentence carefully. It is something that I have talked about many times. “Sales prices are overstated” by an “unknown percent”. That is especially true in places like Florida where Centex is knocking off $100,000 or more on $400,000 house. So you see it is not just Florida, but Denver, Boston, and California. Rising median prices at this point are a mirage at best and in many places a blatant distortion of the truth, sometimes by as much as 20%.

What’s Dwindling / What’s Not

  • Dwindling Speculators
  • Dwindling Jobs
  • Dwindling Home Prices
  • Rising Inventories
  • Rising Foreclosures
  • Rising Interest Rates

Mike Shedlock / Mish/