Thursday, September 13, 2007

CFC The Home Developer's White Knight

A couple of weeks ago 4 banks went to the discount window and borrowed 2 billion. Then B of A bought a preferred stake in Countrywide Financial for a coincidental amount of 2 billion. Now we hear that CFC has been advanced 12 billion and the discount window shows that banks took out another 8 Billion. The two may or may not be related, but it does raise an eyebrow or two.

Then, there is this guy out there with a real deep tan or a very bad case of jaundice waving a flag at CFC and yelling, "Come finance a loan with us." Here is an eye opener quote from KB Homes financial report:

KB Home operates through its 49%-owned subsidiary, Kaufman & Broad S.A. (KBSA), which also develops commercial and residential projects, such as condominium complexes. It also offers mortgage services through Countrywide KB Home Loans, its 50%-owned joint venture with Countrywide Financial Corporation. Through its wholly owned financial services subsidiary, KB Home Mortgage Company, KB Home provides title, insurance and escrow coordination services to its domestic homebuyers.

Several other home builders use CFC. So what happens here? The builders are going to sell new houses at below market price everywhere. Just try to sell an old house. Why not buy a brand new one? “What color granite counter top do you want in the kitchen?” says the builder (AKA Spider) to the buyer (AKA Fly). Sign right here Sir.

Did you see anyone last year waving a flag saying, "I have 12 billion to loan?" The phrase, “Fog a mirror,” was the only pre-qualifier you needed for a loan that I can remember. Now, there is a confidence issue. Can we get the suckers to line up and buy just like yesterday? Probably not. CFC is going to sell new homes. There is no market for used homes at these prices here in San Diego.

What happens next? The "stickiness" (greed and stubbornness) of the homeowners selling, will allow the builder to sell his constructed units below "home owner retail" (cost plus Realtor fees). His markup is probably 100K to 300K depending on the size of the house. The builder has room to deal, the home owner doesn't in most cases.

The thing not readily apparent, is that CFC and the home builders understand the time line delay, the home owner doesn't even have a clue. By the time the home owner is convinced his house has dropped 50K, the data is already 3 months stale. On top of that there is the wish "The market will come back."

Have no fear Congress will save us, once they realize that Fanny-Mae is not the hooker with the big boobs that they were jumping on last night.


Anonymous said...

Jim, do you still feel the same about the "triple witching" this friday, as you did last month? I guess what I`m trying to say is, could this still be bad?

Jim in San Marcos said...

Hi Anon 2:01

I would think that the release of bank data figures by the big four this week will have more of an effect on the market.

What Bernanke did at the last double witching was kind of like blowing up a paper bag and popping it while the bomb squad is defusing a bomb, a real Joker.

I would expect the stock market to resume rocket mode--we are close to absurdity, another rate drop should get everyone playing.

Anonymous said...

On the day the Down hit 14K, I moved my 401K into treasuries (earning a solid, albeit low 1.8%). I realize that any "rocketing" of the stock market will be shortlived, but is it likely to start Friday or today (assuming Bernanke lowers the rate)? I'm only asking for general thoughts, I won't hold you to it. Thanks!

Anonymous said...

Jim, I`m in the same boat as Anon 5:12, and would also appreciate any thoughts you may have on it. Should we sit tight, or jump back in and try to ride this thing up? Like Anon 5:12, I`m just trying to pick your brain, not hold you to anything. Thanks!

Jim in San Marcos said...

Hi Anon 5:12 and 9:46

Cash is King. The stock market isn't a rational place to be in right now. Every fool in town is in the market, and they could be making money. If you compare stock dividends to stocks as you compared rents to housing prices, it glares out at you as a bubble.

It's kind of like the enemy marching toward you. You wait to see "The whites of their eyes before you shoot," the reason being you only have one shot make it count.

So waiting is a stock strategy, but it doesn't feel natural, go figure.

Anonymous said...

So the Fed cut rates today. I have a fixed-rate mortgage, I pay off my credit cards monthly, and I have a savings account. With lightning speed, the bank dropped the savings account interest rate from 5.05% to 4.55%. Faster than I could transfer it to a CD. So this rate cut is already hurting me financially (not counting retirement which I won't see for 30 years).

Aside from throwing a bone to the Wall Street titans (who got us in this mess) and their leveraged buyouts, will the rate cut have any positive effect on relatively responsible citizens like myself?

Jim in San Marcos said...

Anon 8:15

The Fed dropped the rate and people are over reacting to the event.The Feds action is on par with the your next door neighbor passing gas (You can't even smell it).

They lowered the rate, go try and get a loan a half point lower than yesterday. You just won't be able to qualify.

I don't see any positive effect to the rate decrease, it just stimulates inflation.

The smart play seems to be borrow from the banks and invest. But I think that what we perceive as inflation could turn to deflation very quickly, and then it could become difficult to pay back what was borrowed.

Anonymous said...

Will the 50/50 cut have any effect on "curing" the current housing mess that we are in? If not, then it still looks like our economy is in trouble, do you agree? This is Anon 9:46 Thanks!

Jim in San Marcos said...

Hi Anon 9:46

The rate cut won't save the housing market. But that is the cause of the rate cut.

The world is facing a contraction of the money supply. When that million dollar house gets marked to market at say 100K, 900K of money disappears from the world money supply.

This action gives the bank more breathing room.

Anonymous said... Jim, the Telegraph says that the Saudis might be trying to unpeg with the dollar, any comment? Could this be huge?

Anonymous said...
Here it is in tinyurl.

Jim in San Marcos said...

Anonn 2;24

Its hard to say. switching from one currency to another doesn't change things much. If they did stop investing in treasury's, I would expect that if they commanded enough volume, their withdrawal would mean an increase in T-Bill rates.

The Arabs are peculiar players, bank interest is not something that they are concerned with. Charging interest is against their religion.

how this plays out in the real world has never really been fully explained.