New-home sales jump 8.1 percent to record level; orders for big-ticket goods rise

JEANNINE AVERSA, Associated Press Writer
Wednesday, June 26, 2002
©2002 Associated Press

New-home sales shot up 8.1 percent in May, the biggest advance in six months, as low mortgage rates motivated buyers.

The larger-than-expected increase pushed up sales of new single-family homes to a seasonally adjusted annual rate of 1.03 million, a record monthly level, the Commerce Department reported Wednesday.

Separately, the nation's factories, hardest hit by last year's recession, saw fresh signs of improvement in May, with orders for costly manufactured goods rising 0.6 percent, the department said in another report.

The advance in durable-goods orders -- items expected to last at last three years -- came after a 0.4 percent increase in April.

Unlike manufacturing, the housing market was one of the economy's few bright spots during the slump, in large part because of low mortgage rates. Low rates are continuing to keep the housing sector healthy.

Another factor motivating buyers: Solid appreciation in housing values, which offers people an attractive investment, especially as the stock market has been weak, economists say.

Economists were predicting new-homes sales in May would rise by 0.5 percent to a rate of 920,000. The 8.1 percent increase was the largest since November.

On Tuesday, the National Association of Realtors reported that sales of previously owned homes dipped by 0.3 percent in May, but still racked up the fourth-highest monthly level on record: a rate of 5.75 million units.

In May, the average rate on a 30-year fixed-rate mortgages was 6.81 percent, down from 6.99 percent in April and well below the 7.15 percent rate in May 2001, according to Freddie Mac, the mortgage company. Last week, rates on 30-year mortgages fell to 6.63 percent, the lowest in five months, Freddie Mac reported.

By region, sales of new homes in May jumped 26.4 percent in the Northeast to a seasonally adjusted annual rate of 67,000. In the South, sales rose 10.6 percent to a rate of 482,000, and in the West, they went up 4.3 percent to a rate of 289,000. Sales in the Midwest increased 2.7 percent to a rate of 190,000.

New-home sales went up by 3.9 percent in April, according to revised figures. That was considerably stronger than the 1 percent rise previously reported.

In the manufacturing report, the 0.6 percent increase in new orders to factories in May was the largest since a 1.7 percent advance in February. It marked the fifth increase in the last six months.

The latest snapshot of manufacturing activity clearly shows an economic sector on the mend after being mired in a long slump during which hundreds of thousands of jobs were cut as production was throttled back.

But Wednesday's report and other manufacturing data suggest the factory sector isn't going gangbusters. That partly reflects the fact that businesses, worried about the staying power of the national economic recovery, are reluctant to make big commitments, including investments in new plants and equipment, a key ingredient for a sustained rebound.

Shipments, a good barometer of current demand, were flat in May, following a 3.4 percent jump in April.

Factories reported that new orders for fabricated metal products rose 2.4 percent in May, on top of a 1 percent rise the previous month.

Orders for primary metals -- including steel, went up 0.9 percent, down from a strong 6.3 percent increase.

For computers and electronic products, orders rose 1 percent in May, compared with a 2.9 percent increase the month before.

There were some weak spots. Orders for cars fell 2 percent in May, following a 12.1 percent jump. Orders for electrical equipment and household appliances declined by 2.1 percent, down from a 10.3 percent advance. And, orders for machinery dipped 0.4 percent, following a 4.5 percent increase.

"Translation: "As mortgage lenders foolishly bent rules to make loans to ever more marginally qualified buyers."

"The wave of foreclosures that will start in a year or so is going to be breathtaking."

You are exactly right. They raised the income/debt ratio ceilings. People are going to get hurt bad by all this. Whats worst.. is prices of homes have greatly been inflated. So someone buying a 300,000 dollar house, that was worth 250,000 last year, that was worth only 170,000 4 years ago, is going to be in BIG TROUBLE when this bubble bursts!!! It is going to get ugly.

Some experts predict the stock market will start to recover in October of this year or the first of next year. You will see the Real Estate bubble burst when that happens. Everyone admits this is a bubble.. and it will blow up. Just "when" is uncertain. But it won't be long. Wages cannot support the real estate price increases. Wages have not kept up with the INFLATION of home prices!! Simple math. It just amazes us that anyone is buying under these conditions. I'm going to try to post an article that was just in our paper today, regarding California housing prices!

FRegards!

Fannie Mae Enron?

Risky investments, fishy accounting, big campaign contributions: Sound familiar?

Tuesday, March 19, 2002 12:01 a.m. EST

(Editor's note: This editorial originally appeared in The Wall Street Journal, Feb. 20.)

We were reading President Bush's budget the other day (we know, get a life), when we came across an unusual mention of our all-time favorite companies--Fannie Mae and Freddie Mac. What we found is a tale we think taxpayers and investors should want to hear.

It seems that Fan and Fred, two "government-sponsored enterprises" that hold the majority of all home mortgages in the U.S., have been growing their debt at an annual rate of 25%. They now have about $2.6 trillion in debt outstanding, a big number in any case, but really big considering that taxpayers are on the hook for it. The budgeteers also expressed some anxiety about Fan and Fred's increasing dependence on derivatives.

Hmmm. Where have we heard this before? The more we've since looked at Fan and Fred the more they look like poorly run hedge funds: lots of leverage and snarkily hedged risk. The word Enron ring any bells?

Last year, Fan's debt/equity ratio was about 60 to 1, more than five times the average for commercial banks. Moreover, as mortgage lenders, Fannie's equity can hardly be said to be well-diversified. Risk thus becomes a critical question. Fan and Fred face two kinds of risk: credit risk from the possibility that mortgage holders will default, and interest-rate risk from the possibility that mortgage holders will prepay, leaving Fan and Fred on the wrong side of the spread, that is, lending at low rates and borrowing at high rates. Of course, giant risk won't lead to giant problems if it's properly hedged.

But Fan and Fred's risk management looks to be rather frisky. Take insurance. Some credit risk can be reduced by buying insurance against default. But lately the siblings have been cutting back on insurance, leaving them with greater exposure to default. Self-insurance may not be a dumb strategy in good economic times, but in a sharp downturn it can look pretty stupid.

As for interest-rate risk, Fan and Fred hedge with a giant and complex program using all manner of derivatives. At the end of 2000, their combined derivative position was valued at $780 billion. Even scarier, these hedges are only as good as the counterparties' ability to pay up. But Fan and Fred don't disclose the identity of their parties, so investors have no idea how much risk comes from possible counterparty failure. (By the way, last year Fan's derivative strategy went, um, somewhat amiss and she had to write down shareholder equity by $7.4 billion.)

Fan and Fred also pool mortgages and then sell those securities--that is, they retain the credit risk since they guarantee the soundness of the mortgages and buyers assume the interest-rate risk. But Fan and Fred have recently been buying back their own securities; each now holds 30% of all mortgage-backed securities outstanding. Simply put, they are reassuming interest-rate risk. Not necessarily a terminal practice when interest rates are stable, but dangerous if rates turn volatile.

Shaking in your boots yet? Well, there are even more parallels with Enron. Fan and Fred's financial disclosure is terrible. They are not required to file financial statements with the SEC. The New York Stock Exchange requires that they report to shareholders, but they keep disclosure and clarity to a minimum. Their financial statements are audited, for whatever that's worth. Last year Fan paid KPMG $2 million in audit fees and $6.6 million in consulting fees. Fred's auditor is Arthur Andersen; last year, Fred paid $1.1 million for auditing and more than $8 million for consulting. Fan and Fred do have a federal regulator. It's the Office of Federal Housing Enterprise Oversight, and in 1992 it was required by Congress to produce a risk-based capital rule for Fan and Fred. Essentially OFHEO had to figure out how much capital they needed to survive a period of financial stress. Nine years later, last September, OFHEO finally published a rule that took some 600 pages to explain and that everybody found opaque. Informed suspicion is that the proposed standard is below that of other financial institutions and less than the capital that Fan and Fred currently maintain.

Then there's the matter of political influence. During the 1999-2000 election cycle, Fan spread around $1.6 million and Fred $2.4 million, giving to both parties about equally. The total of $4 million is almost double what Enron spent. And finally, there's Wall Street. Just as stock analysts sold the stuffing out of Enron's stock without having a clue about the true condition of the company, they are madly selling Fan and Fred despite the fact they can't possibly know what's what.

We aren't trying to scare readers here, and perhaps all of these concerns will come to nothing. So far during this recession, the housing market has held up well, knock on wood. Then again, unlike Enron, where only shareholders got taken to the cleaners, in the case of Fannie and Freddie taxpayers will take any bath. Maybe this time Congress should hold hearings before things go wrong.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.