Credit Card Brains

Last night I spoke with a land developer. He just purchased improved land in SoCal (update: Inland Empire) for $0.15 on the dollar from a homebuilder (builder’s total cost). The deal closed Friday. The purchase price was less than half the cost of just the improvements (grading, streets, etc)!

The deal has no leverage, and the buyers are hoping to sell in 3 to 5 years to another homebuilder. They can wait much longer if necessary. The other details (like buyer and seller) are confidential.

This is an important step. The homebuilders are finally starting to liquidate surplus land at prices that are attractive to “vulture funds”, and this potential inventory is also being removed from the market.

I expect to see many similar deals this year as the homebuilders, and their lenders, struggle to survive.

From Bloomberg: Clear Channel, Bain, Lee Sue Banks Over Buyout Plan

Clear Channel Communications Inc., Bain Capital LLC and Thomas H. Lee Partners LP sued banks financing the $19.5 billion buyout of Clear Channel to force them to honor funding commitments.
…
The banks stand to lose at least $2.7 billion because loan prices have fallen since they agreed to finance the transaction last year.

The banks have about 2.7 billion reasons to find a way out of this deal.

If you’re anything like my friends, many of you are closet “The Hills” fans. While I’m always intrigued by the girly drama on the show (who doesn’t love a good LC/Heidi “confrontation”), I can’t help but wonder sometimes who these girls actually are and where their money comes from. Most 20-somethings I know can barely afford their rent. I think it’s safe to say that for some viewers, the show is a type of escapism… the chance to spend 30 minutes in the lives of beautiful people who are blissfully unburdened by finances and don’t mind living off mom and dad.


But an article in today’s Wall Street Journal profiles LC and claims her life isn’t as effortless as it looks. There apparently is actual work involved in selling Lauren as a brand beyond the MTV market. While she may have several advantages to propel her above 99.5 percent of 20-somethings, turns out she’s just another gal trying to make a name for herself.

You can enjoy the article here.

And props once again to the Wall Street Journal online, which continues to entice young women to become financially savvy by luring us in with stories about our favorite subjects. It may be a transparent tactic, but I really like that the Journal is showing interest in the younger generation. And it’s a welcome respite from reading about LC in UsWeekly and on Perez!

PS - Chicago is MISERABLE today. There is actually snow on the ground. It’s wet, cold and dark here. At least we’re all saving money during this LOOOOOOOONG winter. Everyone’s too groggy, crabby and down on the weather to go out.

From Bloomberg: Fremont Ordered by FDIC to Find Buyer; Curbs Imposed

Fremont General Corp., the former subprime lender that raised doubt about its survival earlier this month, was ordered by federal regulators to raise new funds or find a buyer within 60 days.

It was just a little over a year ago that I posted a memo about lending changes at Fremont. Looking back now, that memo seems somewhat subdued, but it was very significant at the time - that memo marked the beginning of the subprime implosion and the start of tighter lending standards.

Based on the new FDIC order that memo probably also marked the beginning of the end of Fremont.

Today’s concerning news round-up for 20-somethings follows…

Student lenders can’t offer loans right now (crap). The Wall Street Journal says, “The wave of student lenders backing out of giving federally backed student loans is growing.”

The Journal also notes that “Woes in condo market build as new supply floods cities,” and that “Chicago Fed data suggests a recession.” (Hmm… should we consult the hemlines on this one? My skirt is below the knee this morning, for what it’s worth.)

For what it’s worth, there is some good news… the NY Times reports that exisiting home sales rose slightly in February, prompted by rate changes. (Though prices have fallen.)

The Times also cautions the regular folks not to freak out about all the financial drama in the news lately … apparently we shouldn’t do anything impulsive because our collective decisions will only get worse if prompted by what we see on the news. Instead, the author is urging a thoughtful review of our spending and saving habits. (That’s never a bad thing.)

According to the Census Bureau report, New Home Sales in February were at a seasonally adjusted annual rate of 590 thousand. Sales for January were revised up to 601 thousand.

Click on Graph for larger image.

Sales of new one-family houses in February 2008 were at a seasonally adjusted annual rate of 590,000 … This is 1.8 percent below the revised January rate of 601,000 and is 29.8 percent below the February 2007 estimate of 840,000.



The seasonally adjusted estimate of new houses for sale at the end of February was 471,000.

Inventory numbers from the Census Bureau do not include cancellations - and cancellations are once again at record levels. Actual New Home inventories are probably much higher than reported - my estimate is about 100K higher.

Still, the 471,000 units of inventory is below the levels of the last year, and it appears that even including cancellations, inventory is now falling.


This represents a supply of 9.8 months at the current sales rate.

This is another weak report for New Home sales, and I’ll have some analysis later today on New Home Sales.

Some of you have wondered from time to time what all the employment casualties of the credit and housing busts are going to do next.

This ought to keep you up at night:

NEW YORK (CNNMoney.com) — When Heidi Sadowsky quit the finance sector, she abandoned a job market on the verge of collapse for one that may be air-tight: nursing.

“I was never happy in my life in finance,” said Sadowsky, 39, a former liaison for institutional investors and money managers at Citibank and Invesco. “I always felt like a square peg in a round hole. I decided I had to get out of this business. I was never cut out for this.”

Inspired by the compassion of nurses who cared for her terminally ill father, Sadowsky took up training last year at New York University’s College of Nursing. Since she already had an undergraduate degree, she was accepted into the nursing school’s accelerated 15-month bachelors program and she expects to graduate in May. . . .

Sadowsky picked the right time to switch careers. The finance sector has shed 124,000 jobs since the beginning of 2007, according to the Department of Labor, including 22,000 jobs in the first two months of this year. Major firms like Bear Stearns (BSC, Fortune 500), Merrill Lynch (MRL) and Sadowsky’s old employer Citigroup (C, Fortune 500) have been hard-hit by the subprime collapse, and analysts expect up to 30,000 more job cuts in finance by the end of the year.

Meanwhile, hospitals, clinics and nursing schools are scrambling to fill vacant positions for nurses and teaching staff. The Department of Labor estimates the number of vacancies for registered nurses will expand to 800,000 in 2020, from its 2005 tally of 125,000.

I can pretty much vouch for the fact that having an undergraduate business degree and years of experience in finance qualifies you to give other people heart attacks. But is it really the kind of experience that should let you cram nursing school into 15 months?

“Tradition holds that a guy’s going to be a doctor, and the female is going to be a nurse,” Neville Lewis, 40, an NYU nursing student who is married to an RN.

Like Sadowsky, Lewis abandoned finance to take up nursing. Since he already had a bachelor’s, he qualified for NYU’s accelerated 15-month program. Lewis said he majored in political science and mass communications at Midwestern State University in Texas, and then embarked on a 15-year career in the bond and IPO sector at the investment firms Equiserve (now Computershare) and Fidelity Investments.

“I kind of fell into finance after graduation,” said Lewis, who had felt the lucrative pull of the finance sector. “You make a lot of money, but do you enjoy it? I was not happy.”

After getting laid off from Equiserve in 2002, Lewis took a job at Fidelity and considered going back to school to pursue tax law. But he changed his mind, quit Fidelity in 2007, and started at NYU’s nursing school in January, 2008. He expects to graduate in 2009.

“I felt like I could accomplish more by working to heal people, then by helping people fight over money,” he said. And as he watched his former sector collapse, Lewis realized that altruism wasn’t the only motive to get into nursing.

“Seeing what’s happening now, I have no regrets in leaving finance,” he said. “People are always going to be sick. We live in an aging society.”

For more, see my earlier post: February Existing Home Sales

Click on graph for larger image.

The first graph shows the inventory by month since 2002.

There are two key points: During the boom years (2002 through mid-way 2005), inventory levels stayed fairly steady. During the bust years, the inventory level has increased to a new record level for each month.

February 2008 was no exception. Even though inventories decreased slightly from January, inventory is at an all time record high for February.

With the coming Spring selling season, the question is: Will inventory levels keep setting new records, or will inventories hold steady (or even decline)?

The second graph shows the normalized seasonal inventory pattern for the last few years. The data is normalized to the ending level of the previous year = 100.

Note: the NAR doesn’t seasonally adjust inventory.

This shows that the inventory level usually increases through July, with some noise. The next few months will tell us if inventory is stabilizing, or if the decline in February was just noise.

And finally, here is a repeat from earlier this morning. This is a graph of Not Seasonally Adjusted existing home sales for 2005 through 2008.

I’m repeating this graph so emphasize that February is typically one of the least important months of the year for existing home sales. Small changes in actual Not Seasonally Adjusted sales (due to weather, leap year, or other factors) can have a significant impact on the headline Seasonally Adjusted numbers.

The data for March will be much more important since that is the beginning of the Spring selling season.

From the Financial Times: US can learn from Japan’s crisis

The US should inject public funds into its financial system, which is undergoing a worse crisis than that experienced by Japan during its non-performing loan crisis, according to Japan’s financial services minister.

“It is essential [for the US] to understand that given Japan’s lesson, public fund injection [into the financial sector] is unavoidable,” Yoshimi Watanabe told the Financial Times.
…
The remarks are the first public expression of concern by a Japanese cabinet minister that the impact of the current financial market turmoil could be much more serious than Japan’s experience during its “lost decade” of abnormally slow economic growth in the 1990s.

All through the ’90s U.S. policy makers offered unsolicited advice to Japan, so turnaround is probably fair play. Still, given Japan’s “lost decade”, it isn’t very comforting receiving advice from Japan.

Note: I’m not an expert on Japan, but I believe that the Japanese real estate bubble was much larger (relative to their economy) than the U.S. bubble. Here are some numbers I found (If anyone has better data, please let me know):

At the market’s peak in 1991, all the land in Japan, a country the size of California, was worth about $18 trillion …

Japan’s GDP (in dollars) was about $3.5 trillion in ‘91, so the value of all real estate was about 5 times GDP.

Using the Fed’s Flow of Funds report, the value of U.S. real estate at the end of 2007 was:
Households and Nonprofit Organizations, $22.5 trillion
Nonfinancial Corporate Business, $8.8 trillion
Noncorporate Business, $7.3 trillion

For a total of $38.6 trillion. GDP in 2007 was $13.8 trillion, so value of U.S. real estate was about 2.8 times GDP (maybe slightly higher at the peak).

There are many other differences between Japan’s asset bubble of the early ’90s, and the current U.S. asset bubble - but it does appear that Japan’s bubble was significantly larger (relative to their economy).

From San Francisco Business Times: Wells Fargo CEO says he’s open to conducting a Fed-assisted acquisition

Wells Fargo CEO John Stumpf said the financial crisis is presenting the bank with more acquisition opportunities.

“I would not be averse to a Fed-assisted transaction,” Stumpf said in a recent interview with the San Francisco Business Times. “Fixer-uppers don’t bother us.”

The article mentions National City Bank as a possible acquisition.

Note: for some reason I picture Tanta’s Mortgage Pig feeding at the public trough.