By RYAN TAYLOR

Just when you thought the market for new homes couldn’t get any worse, it did.

The National Association of Home Builders (NAHB)/Wells Fargo January builder sentiment index dropped to 8 from 9. While the homebuilders were setting records for new home sales in 2005 and 2006, they’re now setting records for the lowest confidence on record, as 8 breaks last month’s record low of 9.

The homebuilders are very clear on what needs to happen to bring back their confidence and revive the market for new homes (Hint: It has nothing to do with building homes that people want to live in for the right price.)

“Conditions in the nation’s housing market aren’t getting any better, and they aren’t going to get any better until the federal government takes substantial action to encourage qualified buyers to get back in the market.” NAHB Chairman Sandy Dunn said.

One of the biggest reasons we are in this housing crisis is that builders put millions of buyers in homes they couldn’t afford. Through questionable relationships and kickbacks, builders partnered with lenders to encourage buyers to stretch beyond their means. This common practice during the boom created a massive over-supply of homes which has yet to be worked through.

As a result, homebuilders are left with basically two choices – 1) offer homes at prices that are reflective of the current market conditions or 2) do not sell any homes and plead for Uncle Sam to help them.

Needless to say, they’re not going for option number one because it will put most of them out of business. Furthermore, the NAHB seems delusional on why people are not buying their homes.

“Qualified buyers are clearly in the wings but they’re looking for a significant signal from the federal government that now is the time to return to the market” NAHB Chief Economist David Crowe said.

This statement makes the assumption that qualified buyers are not in the new home market because the government needs to give them some kind of divine signal to know when to buy. As an alternative explanation, I think qualified buyers are not buying new homes because they’re far away from job centers, listed above market and were built by companies that frequently stop work on projects halfway through– existing residents be damned.

Until one of the major publicly traded home builders goes out of business, we are not near the bottom in the housing cycle.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Foreclosure: It’s not just for those “subprime” people anymore.

Besieged by collapsing home prices and frightened banks scrounging for cash, even the real-estate industry’s brightest stars are finding there’s no place to hide. According to the New York Times, small and mid-size homebuilders who thrived during the housing boom are seeing credit lines pulled even before they miss a payment.

Banks like JPMorgan (JPM) and GMAC, the financing arm of General Motors (GM), loaned builders hundreds of billions of dollars — even as the housing market began to falter — to buy up vacant land. Now that demand for new homes has plunged (and buyers in some areas can pick up previously constructed homes for less than it costs to build a new one), builders’ ability to turn a profit has been effectively eliminated.

It’s estimated that over 20% of the nation’s homebuilders have closed their doors, even as big builders like D.R. Horton (DHI), Lennar (LEN) and Toll Brothers (TOL) limp along, bleeding cash and fighting for survival.

Lenders, for their part, are scrambling to mitigate risk.

Collateral, the term used to describe the assets against which loans are given out, protects lenders in the event of borrower default. As the value of collateral rises, banks become better protected since their loans are now backed up by a more valuable asset. In a downturn, however, falling collateral values means risk increases with each passing day.

In response, banks may ask borrowers to send in cash to make up for the lost value of their investment. These margin calls, as they’re known, can quickly force small firms into insolvency.

Such was the case for Brown Family Communities, a well-known builder in the Phoenix area. The Times reports the firm’s lender, JPMorgan, demanded millions in cash for land on the outskirts of town that had fallen in value. Brown balked, since he was yet to miss a payment and had been a longstanding client of the bank with an impeccable record. Ultimately, Brown lost the property and closed his doors, complaining “The real estate market is gone.”

Other builders have suffered a similar fate, proving that despite extensive government-led efforts to minimize losses from investments gone awry, the fundamental tenets of capitalism remain intact.

Bad investments should yield losses, period. Savvy new buyers, able to handle the risk inherent in buying distressed properties, can make bets that have the potential to reap huge rewards. This cycle of profits and losses fuels economic expansion. By forestalling losses, intervention delays recovery.

The speculative buying of vacant desert land on the edges of the Phoenix city limits in 2005 and 2006 certainly qualifies as a poor use of borrowed money. That builders are being asked for cash to cover banks’ potential losses should be seen as nothing more than prudent lending – something builders and other real-estate investors spent the boom years conveniently forgetting.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Is it a buyer’s market?

Ask most real-estate professionals the above question, and the response will almost certainly be an emphatic “Yes!”

After all, they quickly explain, inventory levels are at all-time highs, sellers are desperate to get out from under their rapidly depreciating homes, and mortgage rates are at historic lows. What more could buyers ask for?

How about not losing their shirts, for starters.

The traditional definition of a buyer’s market is one where supply outstrips demand, pushing down prices: Buyers have the upper hand. As the bull market begins to wane, however, buyers lose their enthusiasm and become concerned about price. The market cools down and buyers shy away, forcing sellers to make concessions and lower prices. This, in turn, creates an environment where buyers can shop around, be picky, and patiently waiting for their dream house to come on the market.

As demand returns, sellers start upping their list prices, refusing to pay for closing costs and holding out for a better offer. Buyers, fearful they might miss out on the next boom, bid up asking prices and ask for fewer concessions. Now that sellers have the upper hand, the market favors sellers as prices move upward. Such is the cyclical nature of real estate.

This story has played out for decades as real estate plodded along, homebuilders like DR Horton (DHI), KB Homes (KBH) and Toll Brothers (TOL) supplied the market with new construction and home prices marched steadily upward, outpacing inflation by the narrowest of margins. A little more than 10 years ago, however, that relationship started to come unglued.

The recent housing bubble turned the prevailing view of real estate on its head. Homes, long viewed as the most stable of all assets, became a speculative tool for even the most unsophisticated investor. The mania, fueled by lax monetary policy and Wall Street alchemy, helped contributed to the financial crisis currently gripping our country. As property values have careened back to earth, real estate assets of all kinds have become toxic.

Nevertheless, the National Association of Realtors (or NAR) and its dedicated minions have tirelessly peddled their lies that ours is a buyer’s market. Let’s take a quick jaunt back in time to some recent headlines and where that traditional assessment of a buyer’s market got us:

Las Vegas: It’s Definitely a Buyer’s Market
USA Today: July 5, 2006
“Real estate looks like one of the biggest gambles in Las Vegas.”

How true. Property values in Vegas have fallen 33% since summer 2006. Not to be outdone by their peers at USA Today, ABC ran this piece just weeks later:

Take Advantage of Real Estate’s Buyer’s Market
ABC News: July 31, 2006

“The National Association of Realtors said that the number of homes for sale has reached new heights, which is good news for buyers. After years of a seller’s market, it’s finally a buyer’s paradise in Phoenix, AZ.”

Anyone who bought in that “buyer’s paradise” in Phoenix has seen their home’s value fall by more than 30%.

The point isn’t to criticize realtors for arguing it’s a buyer’s market: After all, one should expect nothing less from a group whose entire existence is based on convincing buyers it’s a great time to buy - irrespective of the truth. Just ask Gary Keller, whose new book, Shift: How Top Real Estate Agents Tackle Tough Times, advises agents to “find every way possible to overcome the media-driven real-estate malaise.”

The traditional definition of a buyer’s market needs a bit of a makeover. A more sensible definition is a market where buyers have ample opportunity to make good investments. To be sure, a home is more than just an investment; it’s a place to raise one’s family, to grow old, to spend time with loved ones. However, as far too many American families have learned in the past three years, homes can become a debilitating burden if bought at the wrong price.

In today’s market, there certainly exist attractive investment opportunities. But to label the market as a whole as one where buyers should be rushing out in search of the American Dream is borderline lunacy. Throughout much of the country, home prices are still too high: Real incomes don’t support prevailing property values, even after the historic declines we’ve already seen. Supply, despite remaining at record levels, is likely to remain so for the foreseeable future. Home prices are undergoing a much-needed correction, and will continue to do so until fundamental demand catches up with supply.

This isn’t to say every home on the market is overpriced, or that every buyer in the past 36 months has gotten a raw deal. There are deals to be had if one knows where and how to look - and, most importantly if the purchase makes good financial sense. To borrow a theme from Toddo, “financial staying power” should be at the forefront of any prospective buyer’s mind.

So ignore the hype, both good and bad. As often is the case, not until the most ardent bulls turn in their horns will the bears return to hibernation. So, as soon as realtors concede it may not be a buyer’s market after all, voila! A bottom we will have.

By RYAN TAYLOR

It’s still a lousy time to be selling new homes.

The National Association of Home Builders, or NAHB, shared its sentiment index for December, which remained at a record low of 9. The index is based on 426 residential developers nationwide; a reading below 50 reflects negative sentiment. In addition to the general index number, confidence levels for current sales dropped to 8 from a reading of 9 last month. The six-month sales forecast dropped from 18 to 16. To say confidence remains extremely low is a bit of an understatement.

The NAHB sentiment index number is an important gauge of the health of the overall market. In many of the hardest hit areas of the country, there remains a glut of housing supply - particularly new construction. Homebuilders are aggressively cutting prices, which is adding to existing downward pressure on prices caused by foreclosures. Since new homes are often more desirable than existing homes, watch any strength in homebuilder sentiment as a prelude to possible strength in the broader market.

While many prognosticators are starting to believe we’re moving into a bottoming phase in the housing market, the chief economist of the NAHB, David Crowe, remains unconvinced:

“We have seen no improvement over the past month in terms of sales conditions for new homes. In fact, certain factors have gotten progressively worse, not the least of which is the job market, where massive layoffs are having a devastating effect on consumer confidence.”

The sobering reality of the housing market is that its recovery has been postponed due to the global recession and the resulting job losses. Despite aggressive moves by the Treasury Department and Federal Reserve to lower interest rates and spur demand, people without jobs simply do not buy houses.

By RYAN TAYLOR

Hardly anyone, it appears, is interested in buying a new house.

The commerce department reported this morning sales of new single family homes decreased by 5.3% in October to a seasonally adjusted annual pace of 433,000. That’s the lowest level since 1991. Sales are down a whopping 40.1% from October 2007 and the total housing supply reached 11.1 months. Most economists consider 6-7 months of supply to be healthy.

The news was not much better for new home values: Prices fell 12.2% to an average price of $272,300, down from $310,000 in October of last year. The month-over-month drop was particularly dramatic, down from $283,700 in September - that’s almost 5% in a single month.

In contrast, the median price fell to just $218,000, down from $234,300 last year. This gap between average and median prices indicates that more cheap homes are selling than expensive ones. Recent data show distressed properties make up almost half of current transactions, as investors try to snap up foreclosures at fire sale prices.

Meanwhile, higher priced homes are sitting on the market. Jumbo loans are increasingly  tough to get and many sellers are unrealistic about asking prices.

While activity nationwide fell steeply, regional data were mixed:

• Northeast: +22.6%
• Midwest: +6%
• South: -6%
• West: -18%

There are a few things that can be derived from these numbers.

First of all, markets that experienced the greatest appreciation from 2002-2005 are continuing to experience significant declines in new home sales. Florida, California, Arizona and Nevada were the boom states for many of the homebuilders at the peak of the market and they are now the most depressed areas.

Since the boom in the new home market was fueled by investors and speculators, homebuilders kept on building. Lax mortgage requirements created a seemingly neverending supply of buyers. Now that demand has dried up due to tighter credit markets and falling prices, builders are left sitting on huge inventories of homes as well as vacant land. Land was cheapest in the exurbs, well outside town, and job losses and a weakening economy are particularly damaging to these fringe developments.

Supply is out of control in the South and the West, but the Northeast and Midwest are experiencing strong buying activity as prices return to more affordable levels. Some areas, like Bloomington, Indiana and Lubbock, Texas are even seeing home prices rise.

Qualified and willing buyers have many homes to choose from right now. Few are opting to live far away from job centers, especially when those markets are the most distressed.

Despite slick marketing campaigns, giveaways and slashed prices, any prospective buyer still faces the very real risk of losing money on a new home starting the day you move in. This is a risk few should be willing to take with the roof over their family’s head.

By ANDREW JEFFERY

For as bad as things are in the housing market, it’s remarkable that none of the country’s big homebuilders have gone bust. The industry’s resilience is a testament to how much money the firms raked in during the boom.

Just ask guys in charge.

The Wall Street Journal reports many homebuilder CEOs socked away such obscene amounts of cash over the past 5 years that they out-earned their Wall Street counterparts. As profits soared, Toll Brothers (TOL) CEO Robert Toll and his brother Bruce together took home $773 million, while Dwight Schar, chairman of Virginia-based NVR (NVR) earned more than $625 million from stock sales.

By contrast, vilified Countrywide CEO Angelo Mozilo earned a mere $471 million during the same period.

Sitting on huge — but dwindling — stockpiles of cash, big builders like DR Horton (DHI), Lennar (LEN) and Ryland Homes (RYL) have thus far ridden out the bloodletting. According to JPMorgan analyst Michael Rehaut, these 3 may yet see positive cash flow in 2009.

Their smaller rivals, however, may not be so lucky.

Rehaut predicts that Pulte Home (PHM) and KB Home (KBH) could see negative cash flow next year - and some analysts believe 2009 could finally be the year that weaker hands start to fold. Credit protection for Hovnanian (HOV), Standard Pacific (SPF) and Beazer Home (BZH) is trading like the companies’ failure is a foregone conclusion.

Meanwhile, one key characteristic of market bottoms is notably absent: Consolidation.

Just as strong American banks have swallowed up the weak, no meaningful housing market bottom will be found until homebuilders begin to feast on one another.

Let’s face it: We don’t need 10 different multi-billion dollar companies churning out indistinguishable cookie-cutter ”mansions” on tiny lots in cramped subdivisions miles from the nearest grocery store. We’ve got our hands full already, thank you very much.

Yesterday, the Commerce Department said October housing starts registered the lowest reading since 1959. Since just 4 of the 10 builders mentioned in this article existed 50 years ago, it looks like 6 are pretty much dispensable.

By RYAN TAYLOR

Home builders aren’t feeling very confident. And for good reason.

The National Association of Home Builders shared their sentiment index for November Tuesday and the reading was the lowest since they began keeping track. The index dropped 5 points from 14 in October to 9 this month - a 10 point drop from a year earlier. The index is based on a survey of 422 residential developers nationwide and a reading under 50 is viewed as negative sentiment.

Unlike many other data points provided by various real estate trade associations, the NAHB index has been significantly more accurate in conveying the general direction of the market. With a confidence number of 9, there’s no way to sugar coat what’s going in the marketplace.

Home values continue to trend down and nobody feels the pain more than the homebuilders, whose top line is tied directly to how much they can sell homes for. Their business has come to a grinding halt and we believe there will be no sustainable bottom in the housing market until the industry consolidates. Their sentiment reinforces our view point: There’s just not enough business for tens of nationwide homebuilders, each building effectively the same product.

NAHB Chairman Sandy Dunn told Bloomberg, “We are in a crisis situation, tremendous economic uncertainties have driven consumers from the housing market, and it’s going to take some major incentives to bring them back.” Indeed.

The NAHB also provided an index for expected sales over the next six months, which remained at 19. While this number reflects negative sentiment, it is markedly more positive than the overall sentiment, largely because many homebuilders still believe the government ongoing financial market bailout will successfully unfreeze the credit markets. Again, the NAHB index gives an indication of the overall market sentiment as most market participants are hoping the near future will be brighter than today.

Frankly, the homebuilder sentiment cannot get much lower than it is right now. However, this doen’t mean it will rise any time soon. When it does, a sustained trend based on fundamentals - not bailouts - will be required to indicate a true bottom to the housing market. Given the vast amount of uncertainty still plaguing the market, its unlikely a meaningful improvement will be seen in the next six months.

The bottom in housing is still a ways off.

This post first appeared on Minyanville.

Some say the definition of insanity is trying the same thing over and over again, expecting a different result. By that measure, voters should load up on straitjackets this November and drag everyone in Washington off to the nuthouse.

Despite overwhelming evidence that we’re in the middle of a debt crisis, regulators insist they’re wrestling a liquidity crunch. And all the while, a cancer continues to eat away at the guts of the economy: The housing market. Only when it stabilizes will the financial system and, by extension, the economy - recover.

And yet, despite this widely recognized fact, the recent $700 bailout package contains little support for struggling homeowners. Even the $250 billion being dumped into banks will have only a minor effect on property values.

Smothered under the weight of falling home prices and tight credit conditions, consumers are reining in spending, as evidenced by yesterday’s bleak retail sales data. The economy is following the housing market into the abyss.

Since last summer, Washington’s tactic has been to encourage loan modifications through HOPE NOW and Project Lifeline and to widen the scope of government-backed loan programs via the Federal Housing Administration, Fannie Mae (FNM) and Freddie Mac (FRE).

As noted in the Wall Street Journal and discussed ad nauseum here at Cirios, these measures are woefully inadequate to stem the continued decline in housing prices.

As property values fall, over-leveraged borrowers find themselves underwater, or owing more on a house than it’s worth. In order to sell, the homeowner must come up with the difference between the sales price and the balance of their mortgage. For most, this is cash that simply doesn’t exist.

As a result, homes sit on the market for months, further pressuring home values. Despite the insistence by some real-estate agents that this is a buyer’s market, it most certainly is not. Until bloated inventories fall, home prices will continue to slide, making buying a home a dangerous proposition in the vast majority of the country.

Meanwhile, politicians continue to bang their heads against the proverbial wall, backing programs simply that do not work with the scope and efficiency that’s needed. Loan modifications, opening up mortgage guidelines and providing tax breaks so homebuilders like Centex (CTX), Pulte Homes (PHM) and KB Homes (KBH) can sell more overpriced houses may help a select few, but they do little to address the root of the problem.

Until taxpayer funds are appropriated to absorb negative equity, price discovery in the housing market will be a long, agonizing process.

This post first appeared on Minyanville.

That glitzy McMansion you’ve always wanted may finally be within reach.

Or not.

If nearly 3 years of home price declines, historically low interest rates and a relentless media barrage of half-truths from the National Association of Realtors haven’t been able to stabilize home prices, it’s doubtful a gimmicky used-car-style sales event will do the trick.

Coldwell Banker, one of the nation’s largest real-estate brokerages, launched a nationwide campaign last Friday to boost the flagging housing market. The 10-day sales event aims to close the gap between buyers and sellers by offering up to a 10% discount on listed homes for, you guessed it, 10 days.

This selling bonanza was hatched in response to a recent survey of over 3000 of the firm’s real estate agents, which found that a majority feel listing prices are too high to attract buyers. The survey also showed almost 80% of the agents believe more appropriately priced homes are garnering more attention; apparently, you need a license to know people like to pay less for a house, not more.

Coldwell Banker’s president and CEO, Jim Gillespie, is confident the housing market may finally be nearing a bottom. He told our friends at Marketwatch: “Despite the difficult headlines regarding our overall economy, the residential real estate market has been showing several positive signs over recent months that could be signaling a tipping point.”

It’s unclear whether continuing price declines, historically high levels of inventory, tightening lending requirements or frozen credit markets are the “positive signs” he’s referring to.

Gillespie also believes the unprecedented sales event will encourage buyers to jump back into the market: “Because of higher inventory, buyers have more homes to choose from and they can take advantage of near historically low interest rates and affordability levels that are the best they have been in years.”

Yes, affordability levels are the best they have been in years: Much better than when the only way to get into a house was to lie about your income and take out an Option ARM with a 1% teaser rate.

About this time last year, homebuilder Hovnanian (HOV) tried a nationwide fire sale to flush out its bloated inventory. More recently, Lennar (LEN), Centex (CTX), and DR Horton (DHI) tried a similar approach with both land and homes - to no avail. The fundamental forces pushing housing prices down will persist, regardless of futile ploys aimed at tricking buyers into paying more than they should for homes.

To be clear: Being negative on the housing market isn’t exactly a contrarian position. Therefore, anyone claiming it’s a great time to buy – like Coldwell Banker and tens of thousands of real estate professionals around the country — clearly have their own reasons for doing so.

Real estate agents get paid to close transactions; whether their client receives (or pays) a fair price is a non-issue.

Commission expenses are borne by sellers, typically to the tune of 6% of the sale price. In California, where the median home price is still over $350,000, that’s $20,000 out of the pocket of someone who’s already seen his home’s value evaporate before his eyes.

The selling agent usually splits the commission with the buyer’s agent, a pay structure that gives both sides an incentive to not only focus exclusively on closing deals, but also to sell homes for as much as possible.

Coldwell Banker correctly asserts that many sellers have unrealistic expectations about their homes’ final selling price, and as a result keep asking for prices too high for too long. Their cute little sales event, however, is aimed more at earning commissions for their struggling agents than advancing true price discovery in the troubled housing market. If the firm truly had the best interests of homeowners in mind, agents would volunteer to take a pay cut to ease their troubled clients’ burden.

Gillespie, Coldwell’s CEO, claims the event will “help move the US real estate market in the right direction.” He’s right - home prices must continue to fall. Simple economics, the interplay between supply and demand, is driving most markets, as tens of homes sit on the market for every one qualified buyer. Until this overhead supply is worked through, prices will remain under pressure.

In some of the most depressed areas – Las Vegas, the California Central Valley, Florida and Phoenix – homes have reached or surpassed traditional levels of affordability. Unfortunately, there’s more to buying a home than just being able to make the monthly payments. With down payment requirements returning to pre-bubble levels, low interest rates are almost a moot point.

There just isn’t any economic rationale for buying if home values keep sliding.

Even if a borrower can afford the monthly payments, home price declines wipe out the tax benefits of writing off mortgage payments and risk putting the new homeowner in the paralyzing position of owing more than his home is worth. Buying a home today is almost like buying a new car: You’re upside-down as soon as you’re handed the keys.

Until there’s real, verifiable evidence that home prices have stabilized, buying a home remains a dangerous financial proposition. This is true in every market, not just the ones that make the headlines for mind-boggling foreclosure rates.

Renting is still the far more fiscally responsible option. Staring into the teeth of a recession, families should be making choices in the best interest of their financial security, not for bragging rights at cocktail parties.