Monday, June 16, 2008

Beyond plastic surgery: homebuilders index sags

Homebuilders wither
It's not just the sag in the NAHB index in June that weakens our knees. It's the fact that just as home affordability had risen, mortgage rates have shot up so strongly that housing is facing another huge hurdle at a time it hardly needs new challenges. The mortgage rate spreads to treasuries are holding in, but treasury yields have risen and pushed up mortgage rates undermining what had been a steady gain in house affordability as rates dropped and house prices cheapened as incomes grew. Affordability in April climbed back above its 10Yr average and to the top 30th percentile of its range. But since then, 30Yr mortgage rates are up by nearly 80bp. ARM rates are up by even more.

Needless to say this new shifting about is not going to be good for housing or for homebuilders. The set back in the NAHB index for June largely reflects activity that had predated much of the recent spike up up mortgage rates.

Banks dither
Banks are under pressure. They want to lend for real estate less than they did before things blew up their face. The sector is now so much more risky - even for 'good' borrowers. Still banks need to figure out where they do want to lend. Securitization is no longer a growth industry. LBOs are risky. There has been a pull-back from new and exotic ABS lending. Securities firms and banks are both being cautious. Banks don't as easily lend to one other either, implying that there has been some loss of interbank liquidity as well.

We are still trying to figure out what business banks and securities firms really want to be in. This remains an important issue for the economy. Where they decide to lend will be where growth can bloom. Where they cut back growth will be harder to get. Real estate is in the cut back zone and the commercial sector may be next on the block.


Anonymous said...

major plastic surgery, right?

re-constructive not just cosmetic.


Home builders are still in the tank.