| | | To: John Pitera who wrote (8090) | 8/10/2007 2:54:25 PM | | From: The Ox | 2 Recommendations of 13612 | | Another example of risk knowing no boundaries, on June 1, the Government of Pakistan issued a $750 million 6.875% of 6/1/2017 dollar denominated bond priced at par and rated B1/B+ at barely 200 basis points above the ten-year Treasury bond yield. The following week in the Los Angeles Times, the headline read, “Musharraf’s grip falters in Pakistan.” The second headline, “Dismay over U.S. support of general.” I guess the market believes the extra 200 basis points of yield spread is sufficient compensation for risk. I think not.
This may seem trivial with respect to the problems we face but I take at least one issue with this article.
Maybe Mr. Rodriguez didn't realize that at the time of the bond issuance (it is my understanding that) the Pakistani stock market was the #1 growing equity market in the world. Not that this can't change and change quickly but (like many Americans), I wonder if Mr. Rodriguez knew how strong the Pakistani market has been over the past few years or if he simply decided not to include it in this presentation. Whether or not the above tidbit "justifies" the yield spread on the issued bonds is very debatable. However, the underlying strength of the Pakistani market certainly had a lot to do with the ultimate pricing of the bonds.
finance.yahoo.com
I am not disputing what was written or the fact that risk tolerance was being tossed out like the proverbial "baby in the bathwater"! Its just very easy for people to unjustly spread fear; about things they know little about or they push only one side of a story as is the case above,imo. Taking circumstances out of context is simple. Coming to conclusions by going from A to C without referencing B happens all too often, especially when taking a Bear or Bull stance with respect to the markets. Not to mention the "Monday Morning Quarterback" hindsight that all too often gets presented by pundits talking up their positions.
Anyway... and on a different note, the posts on this thread have been terrific lately. I want to commend you for pointing out the potential pitfalls of the CDO sector well in advance of the current problems! Keep up the good work. | | Recommend | Keep | Reply | Mark as Last Read |
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| To: John Pitera who wrote (8090) | 8/10/2007 6:32:20 PM | | From: Hawkmoon | of 13612 | | Fed injecting Billions in liquidity (buying T-bills)...
biz.yahoo.com
The Fed added $19 billion in liquidity to the market Friday morning, then another $16 billion and, finally, $3 billion.
Federal Reserve policy makers "are trying to do everything they can short of cutting the federal funds rate" to try to calm the markets, said Ed Yardeni, president of Yardeni Research in Great Neck, N.Y.
But, he said, "I think they probably have to cut rates, and probably before their scheduled September meeting."
He noted that it was Fed rate cuts that calmed the market after the 1998 Russian debt crisis and the implosion of the hedge fund Long-Term Capital Management.
The Dow closed down 31.14, or 0.23 percent, at 13,239.54. On Thursday, the Dow fell 387 points and extended a series of triple-digit moves that began in late July.
Friday's moves were typical of the zigzag trading in the Dow since the index closed at a record 14,000.41 on July 19. The Dow is down about 761 points, or 5.4 percent, from its record close.
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| From: Davy Crockett | 8/11/2007 7:15:41 PM | | | 1 Recommendation of 13612 | | In a Spiraling Credit Crisis, Large Mortgages Grow Costly
By FLOYD NORRIS and ERIC DASH
Published: August 12, 2007
When an investment banker set out to buy a $1.5 million home on Long Island last month, his mortgage broker quoted an interest rate of 8 percent. Three days later, when the buyer said he would take the loan, the mortgage banker had bad news: the new rate was 13 percent.
“I have been in the business 20 years and I have never seen” such a big swing in interest rates, said the broker, Bob Moulton, president of the Americana Mortgage Group in Manhasset, N.Y.
“There is a lot of fear in the markets,” he added. “When there is fear, people have a tendency to overreact.”
The investment banker’s problem was that he was taking out a so-called jumbo mortgage — a loan greater than the $417,000 mortgage that can be sold to the federally chartered enterprises, Freddie Mac and Fannie Mae. The market for large mortgages has suddenly dried up.
For months after problems appeared in the subprime mortgage market — loans to customers with less-than-sterling credit — government officials and others voiced confidence that the problem could be contained to such loans. But now it has spread to other kinds of mortgages, and credit markets and stock markets around the world are showing the effects.
Those with poor credit, whether companies or individuals, are finding it much harder to borrow, if they can at all. It appears that many homeowners who want to refinance their mortgages — often because their old mortgages are about to require sharply higher monthly payments — will be unable to do so.
Some economists are trimming their growth outlook for the this year, fearing that businesses and consumers will curtail spending.
“In the last 60 days, we’ve seen a substantial reduction in mortgage availability,” said Robert Barbera, the chief economist of ITG, a brokerage firm. “That in turn suggests that home purchases will fall further. Rising home prices were the oil that greased the wheel of this engine of growth, and falling home prices are the sand in the gears that are causing it to grind to a halt.”
At the heart of the contagion problem is the combination of complexity and leverage. The securities that financed the rapid expansion of mortgage lending were hard to understand, and some of those who owned them had borrowed so much that even a small drop in value put pressure on them to raise cash.
“You find surprising linkages that you never would have expected,” said Richard Bookstaber, a former hedge fund manager and author of a new book, “A Demon of Our Own Design: Markets, Hedge Funds and the Perils of Financial Innovation.”
“What matters is who owns what, who is under pressure to sell, and what else do they own,” he said. People with mortgage securities found they could not sell them, and so they sold other things. “If you can’t sell what you want to sell,” he said, “you sell what you can sell.”
He recalled that the crisis that brought down the Long-Term Capital Management hedge fund in 1998 started with Russia’s default on some of its debt. Long-Term Capital had not invested in Russia’s bonds, but some of those who owned such bonds, and needed to raise cash, sold instruments that Long-Term Capital also owned, and on which it had borrowed a lot of money.
It appears that in this case, securities backed by subprime mortgages were owned by people who also owned securities backed by leveraged corporate loans. With the market for mortgage paper drying up, and a need to raise cash, they sold the corporate securities and that market began to suffer.
The Wall Street investment banker who wanted a jumbo mortgage had a good credit score, and is not a subprime borrower. But private mortgage securities are now hard to sell, leading to his problem. In the end, he was able to get a mortgage with a lower interest rate, but it will adjust in five years, possibly to a much higher level.
The size of the rate increase he faced is unusual. But all jumbo lenders have raised rates. Bankrate.com reports that conventional 30-year mortgages cost about 6.23 percent now, less than they did a few weeks ago, due to a decline in Treasury bond rates. But the average jumbo rate is now 6.94 percent. The spread between the two rates rose from less than a quarter of a percentage point to more than two-thirds of a point.
Jumbo mortgages are most important in areas with high home prices, most notably on the East and West coasts. “In California, it has shut down the purchase market,” said Jeff Jaye, a mortgage broker in the Bay area. “It has shut down the refi market.”
The problems with subprime mortgages erupted as home prices began to slip in some markets, making it harder to refinance mortgages. There were reports that a surprisingly large number of loans made in 2006 were defaulting only months after the loans were made.
Many of those mortgages had been financed by securities, highly rated by credit agencies, that suddenly seemed less secure than they had. Hedge funds that owned those securities, and had borrowed against them, were asked to put up more money to secure their loans.
Two Bear Stearns hedge funds were forced to liquidate, and investors lost everything. Investors shied away from buying new mortgage securities, and several lenders went out of business, unable to finance the mortgage loans they had promised to make.
With the credit gears clogged, there has been a sudden lust for cash at many levels of the financial system. Last week banks in Europe and the United States tried to borrow so much money that central banks had to step in to keep interest rates from rising.
“What I suspect is that there is a demand for credit by institutions that don’t want to sell the securities they own, because the bids are so low, and the banks are extending credit to them,” said William L. Silber, a professor of economics and finance at New York University and the author of the book “When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy.”
Fannie Mae and Freddie Mac, the government-sponsored enterprises, can still purchase mortgages and issue securities, guaranteeing that the underlying mortgages will not default. Those guarantees are still accepted by investors, and borrowers who meet their standards — meaning they can get so-called conforming mortgages — still can borrow. But those who want larger mortgages, or cannot make down payments, face a harder burden.
Homeowners with adjustable mortgages can refinance them at any time, so long as they qualify for a new loan, so some facing a payment increase may be able to wait it out and refinance later, if the market improves.
There have been sudden changes in the mortgage market before, but this one may be both more severe and more damaging than those in the past.
In past years most borrowers had 30-year mortgages with fixed rates. If such borrower kept his job, he usually could meet the monthly payments, even if the value of the home had declined so much that he could not et a new mortgage.
Now, however, many mortgages call for sharply rising monthly payments after a few years, and borrowers were given loans without regard to their ability to meet the higher payments. Lenders assumed the mortgage could be refinanced, and that rising home prices would assure repayment of the loan. It became common to offer homebuyers loans to finance the entire purchase price of a home.
In June, banking regulators ordered that adjustable-rate loans be given only to borrowers who could afford the rate at which it was likely to be reset, meaning that many borrowers would not qualify for refinancings even if their homes had not lost value. Such a rule three years ago might have prevented the crisis, Mr. Barbera said, but imposing it now may worsen the problem.
Investors made the mistake of assuming that housing prices would continue to rise, said Dwight M. Jaffee, a real estate finance professor at the University of California, Berkeley. “I can’t believe these sophisticated guys made this mistake,” he said. “But I would remind you that lots of investors bought dot-com stocks.”
He added, “When you are an investor, and everybody else is doing the same thing and making money, you often forget to ask the hard question.”
And that is how a problem that began with Wall Street excesses that provided easy credit to borrowers — and made it possible for people to pay more for homes — has now turned around and severely damaged the very housing market that it helped for so long.
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| To: Hawkmoon who wrote (8110) | 8/11/2007 7:42:49 PM | | From: John Pitera | of 13612 | | Market's Flaws Surface Complex Hedging Tactics Can't Trump Fear
By ALISTAIR MACDONALD, IAN MCDONALD, HENNY SENDER and CARRICK MOLLENKAMP
August 11, 2007; Page A2
The past week's turmoil in stock and bond markets brought to light a mounting array of stresses in the global financial system as it struggles to adjust to disruptions once thought isolated to the subprime-mortgage market.
The biggest immediate issue -- a jump in short-term interest rates as banks became unwilling to make cash readily available to borrowers -- was met Friday by the Federal Reserve and the European Central Bank flooding markets with billions of dollars. The moves were joined by central banks in Japan, Australia and elsewhere.
Other stresses are popping up, too, many of them related to trades that involve derivatives -- complex financial instruments whose value can be hard to determine -- and to the activities of hedge funds.
At Citigroup Inc.'s credit-derivatives trading desk in London, volume has been so huge in credit-default swaps -- in which traders make bets on the likelihood of companies defaulting on bonds or loans -- that Citi can't keep up with orders. In the U.S., stock prices have been behaving bizarrely, with the shares of companies with seemingly poor prospects rallying. At the same time, U.S. securities regulators are probing the balance sheets of some U.S. investment banks to check whether they have been accurately recording the values of some derivative holdings.
The central banks' actions were aimed at bringing order to the frazzled markets. They helped calm the U.S., but not Europe, where fears persist that banks are overexposed to U.S. subprime-mortgage debt. The Dow Jones Industrial Average fell 31.14 to 13239.54, while trading in a range of about 225 points during the session. Yields on U.S. Treasury bonds fell, as investors turned to government bonds for safety. The pan-European Dow Jones Stoxx 600 index dropped 3.1% to 362.7.
Much of the recent turmoil is the result of fear. As investors have shunned risk, trading in some markets has dried up. But also behind the assortment of market glitches and unusual trading are massive changes in the global financial system that have taken place in the past decade.
Investment in hedge funds has boomed. Because they invest across a wide range of asset classes and regions, and take on debt to make their investments, these funds can transmit problems broadly. Hard-to-value derivatives also have boomed, but haven't been severely tested as now. Investors are learning that activities often taken for granted in established arenas such as the stock market -- knowing the price of an investment, for example -- can go bonkers in the world of derivatives.
Commercial-paper markets became caught up in some of these trends during the past week. Commercial paper, a staple investment for money-market mutual funds, are short-term loans typically issued by highly rated companies for less than a year. The market -- $2 trillion in the U.S. and nearly $1 trillion in Europe -- is considered one of the most easily traded and safest corners of the financial markets outside of U.S. government bonds.
But interest rates on commercial paper have risen as far and as fast as they did after the shock of the Sept. 11, 2001, terror attacks.
Behind the surge: Banks that typically lend to each other in this market were withholding loans to preserve money in case they needed to back up affiliates. Some European banks were facing credit squeezes because their affiliates might be exposed to U.S. subprime mortgages, bankers and traders say.
The commercial-paper problems hit Europe particularly hard. Investors worried that some European banks were exposed to U.S. subprime mortgages, particularly after German bank IKB Deutsche Industriebank AG disclosed on July 30 that its profits would be hurt by subprime exposure.
"It shows that there are so many interconnections today between different parts of the market that otherwise seem so disparate," says Eric Jacobson, director of fixed-income strategies at Chicago research firm Morningstar Inc.
The credit-default swap market also is a source of some concern. Investors increasingly turn to this market to make bets on the fortunes of companies, and to hedge themselves against the risk of a default. In the past few weeks, volume in indexes that track these derivatives has more than tripled, according to data from Deutsche Bank. By contrast, the so-called cash market, where the loans and bonds of individual companies exchange hands, has become almost totally frozen.
After trading a credit-default swap -- which banks exchange with investors, hedge funds and other financial institutions -- banks need to input the trade details into their internal computer systems and confirm the terms between parties. In 2005, regulators demanded that banks clean up huge backlogs in documenting these trades in this booming market, and they have made solid progress toward doing so.
The Federal Reserve Bank of New York demanded that banks clean up these backlogs in part because it worried dealers could lose track of who owes what to whom. Officials also worried that a backlog of unconfirmed trades could be called into question in times of market stress.
But Citi's London credit-derivatives office hasn't been inputting terms fast enough to keep up with high trading volumes in at least one of its markets, according to people familiar with the matter. As a result, a backlog of unprocessed trades has built again, they said.
"Based on industry metrics, our credit derivatives trade-confirmation and settlement activity is very much in line with the rest of the industry. We have heard no complaints from our clients," a Citigroup spokesman said.
As demand for credit derivatives increases, the market has become subject to other strains. In the face of huge price swings and a growing aversion to risk, it has become more difficult to execute trades. That is what traders refer to as liquidity risk; it may mean both dealers and hedge funds that thought they could get out of positions or hedge those same positions may be left with large exposures.
Indexes that track this market have swung widely in recent weeks. The volume of trades some dealers are willing to buy and sell have shrunk drastically, both dealers and their hedge-fund clients say. Both sides add that there is also a huge gap between the prices buyers say they will pay and the prices sellers say they will take. That further discourages orders.
Meanwhile, the Securities and Exchange Commission is worried about how the market is handling another kind of derivative called collateralized-debt obligations.
Securities regulators are checking the books at top Wall Street brokerage firms and banks to make sure they aren't hiding losses in the subprime-mortgage meltdown, said people familiar with the inquiry. The SEC is looking into whether Wall Street brokers are using consistent methods to calculate the value of subprime-mortgage assets in their own inventories, as well as assets held for customers such as hedge funds, these same people said. The concern is that the firms may not be marking down their inventory as aggressively enough.
The broader problem for the market is that trading in many of these instruments is so sparse, it has become increasingly difficult for investors and investment banks to put an accurate value on them.
--Kate Haywood contributed to this articl | | Recommend | Keep | Reply | Mark as Last Read | Read Replies (1) |
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| To: Davy Crockett who wrote (8111) | 8/11/2007 8:08:04 PM | | From: John Pitera | of 13612 | | Instability in the ABCP is the new concern of week.......
Some corporates may risk wider spreads on ABCP hedging
Fri Aug 10, 2007 5:01PM EDT
By Karen Brettell
NEW YORK, Aug 10 (Reuters) - Credit default swaps on some companies that sell asset backed commercial paper (ABCP) may weaken if resistance by investors to take on new paper sparks hedging on the companies.
"Instability in the ABCP market is the new concern of the week," analysts at Barclays Capital said in a report.
Asset-backed commercial paper conduits are vehicles that issue short-term securities to investors in order to finance mortgage assets for originators until these assets are ready to be securitized. Banks typically provide liquidity facilities against the ABCP issuance.
"For specific credits, an interruption in commercial paper access would likely result in a technically driven widening of credit default swap spreads because the banks that have backstopped those commercial paper programs would probably want to hedge," Barclays said.
The inability to roll a commercial paper program could also lead an issuer to fund themselves with new debt in the corporate bond or loan markets, which could also send their default swap spreads wider.
However, "although they currently are facing high spreads, including a 20 basis point jump in yield on Thursday, broadly speaking, corporates have been able to roll their commercial paper during this recent period of credit dislocation," Barclays said.
Units of American Home Mortgage Investment Corp. (AHMIQ.PK: Quote, Profile, Research), which filed for bankruptcy on Monday, Luminent Mortgage Capital Inc. (LUM.N: Quote, Profile, Research) and hedge fund Aladdin Capital Management all exercised options this week that allow them to delay repaying commercial paper.
"The extensions are evidence of the liquidity issue here, investors have been backing away from the market and spreads on commercial paper are much higher than normal," said Everett Rutan, analyst at Moody's Investor Service in New York. "Investors are being extremely cautious."
"It's been an interesting week, the ability of commercial paper to roll is a concern and we are certainly looking at programs and their liquidity situation and their contingency plan," Rutan said.
In some cases, however, it is the lack of liquidity rather than a company's credit profile that is driving the need to delay payments.
"In most cases these are good assets so it's more of a liquidity issue than a credit issue," Rutan said.
Coca-Cola Enterprises Inc. (CCE.N: Quote, Profile, Research), Liz Claiborne Inc. (LIZ.N: Quote, Profile, Research) and Ryder System Inc. (R.N: Quote, Profile, Research) are among the sellers of commercial paper that may see their spreads come under pressure on illiquidity in the commercial paper market, according to the analysts at Barclays.
Coca-Cola may come to market at the same time as its minority owner Coca-Cola Co. (KO.N: Quote, Profile, Research), leading to oversupply of the credit, Barclays said. Liz Claiborne may be unattractive due to its "P-3" rating, the lowest short term commercial paper rating, while Ryder, which is fairly reliant on the paper, is suffering from mixed investor sentiment on the company, the bank said.
reuters.com
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| To: John Pitera who wrote (8112) | 8/11/2007 11:14:11 PM | | From: Jon Koplik | of 13612 | | Reuters -- Lessons For Today's Market In 1907 Panic ............................................
August 11, 2007
Lessons For Today's Market In 1907 Panic
By REUTERS
Filed at 9:40 a.m. ET
NEW YORK (Reuters) - The current upheaval in global markets has many on Wall Street drawing comparisons to turmoil seen in 1998, 1987 and even 1929, but a new book suggests investors should look back as far as 1907 for insight into the mechanisms that can trigger a crash.
"The Panic of 1907" (Wiley, $29.95) begins with the Park Avenue suicide of Charles Barney, a prominent New York banker. Barney was one of many casualties -- both individual and institutional -- of an attempt to corner the market in shares of United Copper Co., which brought a string of banks to the brink of collapse.
Authors Robert Bruner and Sean Carr illustrate the domino-effect of the panic, from the plunge in United Copper shares all the way to the bankruptcy threat for the city of New York. "The Panic of 1907" also paints a picture of the many conditions that made the economy vulnerable to such a brutal chain reaction.
Timed to coincide with the 100th anniversary of one of the worst financial meltdowns in U.S. history, the book's arrival on shelves in September is all the more fortuitous, since even mom-and-pop investors are now aware of the volatility that has gripped Wall Street over the past few weeks.
Some of the conditions that laid the ground for 1907 panic may look familiar to anyone who has read the business pages this year: a booming economy and unprecedented rash of corporate mergers and acquisitions and a profusion of "borrowers and creditors (who) overreach in their use of debt."
"Credit anorexia" set in once "bank directors awoke to the inadequacy of their capitalization relative to the credit risks they had taken," causing them to cut off the new loans available to their clients. Soon afterwards, long lines of panicked depositors were forming outside several banks waiting to withdraw their funds.
Bruner and Carr, both professors at the University of Virginia, identify seven elements that can converge to create a financial "perfect storm," no matter what the century. Key among them is some kind of real economic shock. In the case of 1907, one of the shocks was the San Francisco earthquake the year before.
If such a storm were to strike today, we wouldn't be able to identify the shock until after it hit, the authors point out. But one of the potential culprits they cite are the high amounts of leverage used by hedge funds and their tight relationships with major banks, which could make any losses ripple through the financial system.
In 1907, it was J. Pierpont Morgan who led the charge to stop the bleeding on Wall Street. Bruner and Carr credit the financial titan with putting his own firm's capital on the line to save smaller banks from collapse, compelling his counterparts to act as a collective to stave off contagion.
One hundred years later, Bruner and Carr pose the question, does today's rapid, automated style of trading leave any room for such a cooperative rescue effort, should such a panic occur again?
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| To: Jon Koplik who wrote (8114) | 8/12/2007 6:37:59 PM | | From: MulhollandDrive | 1 Recommendation of 13612 | | "Credit anorexia" set in once "bank directors awoke to the inadequacy of their capitalization relative to the credit risks they had taken," causing them to cut off the new loans available to their clients. Soon afterwards, long lines of panicked depositors were forming outside several banks waiting to withdraw their funds.
jon, i've been saying this for some time...."bank directors awoke to the INADEQUACY of their capitalization relative to the credit risks'
lenders are correctly assessing the underlying asset values and are finding them overvalued....
the game of hot potato has come to an end...
as long as lenders were able to find buyers of the debt, they were willing to make unbelievably risky loans
call it the game of hot potato, musical chairs or just wile e. coyote realizing he is in mid air, i'm guessing that added 'liguidity' still won't make the horse drink
i had a friend who was presented with an investment of buying into a fund that purchased 'highly securitized' (meaning loan to value of 70%) loans.....i pointed out to him, well, yah....for NOW....but what happens if the underlying securities (the RE) goes down 20%? suddenly that secure loan to value rate disappears....it was tempting, he was being offered a low double digit return, but he turned it down....
i would love it if he would contact the seller of the investment to see just where it is right now | | Recommend | Keep | Reply | Mark as Last Read | Read Replies (1) |
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| To: John Pitera who wrote (8094) | 8/12/2007 9:51:07 PM | | From: sammy™ -_- | of 13612 | | Arrived in the Yucatán Peninsula, stage north to Tucson, Az...
John Pitera, the European Plunge Protection Team will be busy for awhile, after BNP Paribas, France’s largest bank, which said that ...the complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly, regardless of their quality or credit rating... Keep watching the headlines and you’ll see story after story about sub-prime & hedge-fund flameouts. And if you keep a running tally on the loss totals as they’re announced, you’ll soon become very worried about the staggering dollar figures that are mounting on your little scratch pad... I’d expect a similar intervention here in the U.S. financial markets
In the 20s, the U.S. was a power on the rise & net exporters and a creditor nation. Our current status is the opposite on all three counts. The jobs that were created here at home from the industrial revolution are in significant part being created overseas during this tech revolution. Foreign demand for U.S. manufactured goods is concentrated with a relatively small number of capital good companies and commodities. The growth in jobs from the real estate boom has largely run its course and is beginning to contract, as is the wealth effect.
The U.S. is continuing to spend well beyond its means while the dollar is beginning to lose its status as the world's reserve currency. Euros are increasingly being used to trade in crude and our creditors are diversifying away from the dollar. An extended 5th wave in the U.S. seems hardly likely under these circumstances
The positives for the market is world wide liquidity, helping to fuel the private equity boom for the alternate counts for primary wave 5. Hot real estate money is coming back to the stock market and baby boomers are stepping up their retirement savings investments
However, these positive fundamental factors seem unlikely to overcome our deeper structural problems and support an extended 5th wave into late in the decade. The wild card is China and the emerging markets. In 1921, the U.S. & British markets registered important corrective lows. The U.S. market made an eight year hyperbolic run into the 1929 blow off while Britain only managed to reach its previous high of the 1900, as the industrials was being passed to the U.S. Similarly, as the U.S. passes the industrials to China, it is more likely that if any stock market extends hyperbolically into the 9th or 10th year of the decade, it will be China...
Good Read: Tyson Hummel, Major, USAF, Air Command and Staff College, Air University, Maxwell Air Force Base, Montgomery, Alabama...
Is the Science of Socionomics Able to Portend a Change in the United States’ Economic Might?
socionomics.org
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® maxima enim patientia virtus
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| To: MulhollandDrive who wrote (8115) | 8/14/2007 12:39:05 PM | | From: John Pitera | of 13612 | | Blood in the water" in Florida property market
Tue Aug 14, 2007 10:10AM EDT
By Tom Brown
CAPE CORAL, Florida (Reuters) - Phone books that were delivered but never opened rot away next to empty driveways and overgrown lawns, telltale signs that once-booming southwest Florida is now the center of the U.S. housing storm.
Until two years ago, middle-class retirees vied with property speculators for houses and apartments in Cape Coral, a town near Fort Myers on Florida's sun-drenched Gulf Coast. Now almost every other house on some of its streets has a for-sale sign outside.
With a bloated inventory of unsold homes and a growing number of homeowners forced by mortgage delinquencies to sell -- thanks to the subprime crisis and ensuing credit crunch -- southwest Florida's once warm clime for property has turned stone-cold.
Linda Setterlund, 61, owns a pristine three-bedroom, two-bath, Cape Coral house that has been on the market for about a year.
At a reduced asking price of $183,900, she said the house had been priced to match what she and her husband owed on it, after moving in three years ago with a 30-year fixed mortgage.
Setterlund said she and her husband had decided to leave the area to join family in Tennessee, but their decision was also prompted by growing real estate taxes and skyrocketing homeowner insurance rates after an active 2005 hurricane season.
"They're saying that we're heading for a recession but I think we're past that," said Setterlund, referring to the housing glut and its effect across much of south Florida. "I think we're headed more into a depression."
Setterlund and other local residents, many of them retirees from the Midwest, complained of low wages in the Fort Myers area, where leading employers include the Publix supermarket chain and the school board.
There was a nearly 27-month supply of existing single-family homes on the Fort Myers market last month compared to a three-month supply at the height of the local boom in housing in August 2005, according to Denny Grimes, a top real estate agent in Fort Myers.
At the same time, more than 40 percent of single-family homes were listed at prices below $250,000 versus just 18 percent at the market peak.
"There's a lot of blood in the water and there's a lot more to come," Grimes said.
OVERSUPPLY IN "WORST" MARKET
Making things worse, Grimes said builders were still churning out new housing units at big discounts in and around Fort Myers, where many investors bought houses during the recent boom market without ever considering the long-term cost of holding properties.
Fort Myers "is by far the worst housing market that we're in," J. Larry Sorsby, executive vice president and chief financial officer of home builder Hovnanian Enterprises Inc., told Reuters.
Hovnanian bought the largest home builder in the Fort Myers in August 2005 just as sales in the city were starting to dry up.
"They were the last one aboard the Titanic," Grimes said.
Ever the realtor, Grimes said now may be the time for buyers to seek opportunity in adversity, since Fort Myers housing prices have fallen back to levels where they could already offer buyers the potential deal of a "lifetime."
"The best time to buy is when the sellers fear tomorrow is worse than today," said Grimes.
While business is slow for Grimes and other real estate agents, it has been booming lately for Jonas Elliott, a so-called "short sell" specialist at Southwest Florida Home Buyer Services in Fort Myers.
Elliott specializes in buying properties from banks or other lenders that are at a risk of foreclosure, usually at a large discount, and then "flipping" them at a profit.
"In this particular county I have about five years of good business," Elliott said.
"I'm so inundated with properties I couldn't tell you," he added. "We have a ton of inventory, a ton of new properties coming into inventory."
Noting that losses on local properties had hardly been limited to medium-income retirees or "snowbirds," traditional residents of towns like Fort Myers escaping the harsh winters of the U.S. Midwest and Northeast, Elliott said one current customer of his was about to swallow a $1.5 million loss on four properties he could no longer afford to finance.
"That's a hefty sum of change," said Elliott. |
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