Thursday, January 25, 2007

D'oh !!

Existing home sales plummet in 2006

WASHINGTON - Sales of existing homes fell in December, closing out a year in which demand for homes slumped by the largest amount in 17 years.

The National Association of Realtors reported that sales of existing homes were down 0.8 percent last month, a bigger decline than had been expected. For the year, sales fell by 8.4 percent, the biggest annual decline since 1989, when existing home sales fell by 14.8 percent.

The sales figure underscored the sharp contraction that is going on in the once high-flying housing market, which before last year had set sales records for five straight years.

Even with the sharp drop in sales last year, the median price of an existing home sold in 2006 managed to rise a slight 1.1 percent. But that was far below the double-digit gains during the boom years. The median home price had risen by 12.4 percent in 2005.

After a five-year boom, housing slowed significantly last year, which has caused ripple effects throughout the economy with rising job layoffs in construction and other housing-related industries.

But economists said they believe the low point for housing has been reached and they are forecasting a slow rebound in 2007. Because of that optimism, analysts don't believe the slump in housing will drag the overall economy into a recession...

The slump in housing may or may not drag the overall economy into a recession, but anyone who claims that there will be a slow rebound in housing in 2007 is delusional - or has a vested interest in keeping homebuyers reaching for their checkbooks. The past five years has featured the greatest national boom market in American housing since 1890, although during that time there have been some regional manias, in California and Florida for instance, that were more absurd.
It will take many years to work through the excesses.

The 1.1% rise in the median price of existing homes was less than the rate of inflation for '06, and much less than the increase in average earnings for American workers, so in real terms we had markedly slowing volume, and falling prices.

Also, in '07 and '08 there will be approximately $ 3 trillion worth of Adjustable Rate Mortgages resetting to higher interest rates, and many of them can reset every six months, until they hit their ceilings. Many people who currently have ARMs got them because it was the only way that they could afford to make mortgage payments on their homes, since the initial interest rate was low. Over the past few years, such people have been able to continually roll over their debt into new, low-rate loans, backed by the market appreciation of their homes.
No more.

There are going to be millions of households faced with 25% - 50% higher mortgage payments, no option to re-fi, and no buyers for their home at a price that would pay off their existing home loan.
Even when such people avoid foreclosure and bankruptcy, they're going to be reducing spending on non-essentials, and consumer spending has been the engine of economic growth since '00.

Ford posts worst loss in its history
By TOM KRISHER, AP Business Writer

DEARBORN, Mich. - Ford Motor Co. lost $5.8 billion in the fourth quarter amid slumping sales and huge restructuring costs, pushing the automaker's deficit for the year to $12.7 billion, the largest in its 103-year history, [...] which represented a loss of $4,380 on each car or truck it sold in 2006. [...]

Dearborn-based Ford predicted more losses for this year and in 2008, but said its restructuring plan is on track to return to profitability in 2009. [...]

The company, which lost $6 billion on North American operations alone, said it expects to burn up $10 billion in cash to run its business through 2009 and spend another $7 billion to invest in new products. [...]

Ford mortgaged its assets to borrow up to $23.4 billion to pay for the restructuring and to cover losses expected until 2009. About 38,000 hourly workers have signed up for buyout or early retirement offers, and Ford plans to cut its white-collar work force by 14,000 with buyouts and early retirements.

Chief Financial Officer Don Leclair said Ford expects favorable results from its automotive business in 2007.

But because of interest on its debt "total automotive results are expected to be worse in 2007 than in 2006," he said.

Leclair said the company finished 2006 with $33.9 billion in cash available for its automotive operations, including $12 billion that it borrowed in December...

Ford shares rose on this news, natch. "Greater fools" indeed.


Blogger Duck said...

Can't you stay optimistic until after I sell my house?

January 25, 2007 2:30 PM  
Blogger Hey Skipper said...

Can't you stay optimistic until after I sell my house?

January 27, 2007 8:04 AM  
Anonymous Anonymous said...

O: Even you you, having predicted 15 of the last 2 recessions, this seems a little extreme. We past the point where the results at Ford Motor are, all by themselves, of major consequence to the economy. The really important American car makers, Toyota and Honda, are doing very nicely, thank you, and even GM claims that it was profitable last quarter.

January 27, 2007 8:28 PM  
Blogger Oroborous said...

As far as I can recall, I've only ever forecast ONE recession, and we don't yet know how accurate that call was.

I did predict, over at BrosJudd in '05 and last year, that the housing boom, particularly in California, Boston, and Florida, could not continue. Results ?

Voila: Nationally, home sales peaked in '05, and '06 was especially brutal for anyone trying to sell in So. Florida.

So unless '07 is a banner year for real estate, I'd say that my record so far is 1-0.

The Ford results are not, all by themselves, of major consequence, but they aren't particular to this one company: They're illustrative of the state of all of the Detroit-based auto manufacturing in America, and to some extent of the entire manufacturing sector in America.

DaimlerChrysler is suffering almost as much as is Ford, and although GM may claim to have made a profit in one quarter, they're also permanently cutting 30% of their workforce - hardly the action of a growing company, or even one that expects demand to pick up sometime in the future.

January 28, 2007 4:34 AM  

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