Well, here we are on Friday again and I’m trying to figure out how to summarize all that’s been happening in the mortgage and financial worlds. I could write a book about it, but I won’t (at least not today….)
So, here goes:
The week started out with Wachovia (the 4th largest bank in the country) announcing that they were getting out of wholesale lending. That started a lot of people wondering how bad things were at Wachovia because Indymac announced that on a Monday and by Friday they were shut down. On Tuesday, Wachovia announced that they lost a LOT of money ($8.9 billion to be exact) in the 2nd quarter. But guess what, their CEO stood up and said, “I’m confident that we’re going to be fine,” and their stock went up.
Then we move on to our dear friends at Washington Mutual and they only announced a loss of $5.9 billion and announced that they were going to initiate cost cutting measures that will save them $1 billion. Oh and their CEO stood up and said, “We aren’t going to need to raise any more money.” And their stock went up.
In the interest of full disclosure, Fifth Third announced our earnings (losses) for the quarter. Compared to these two, we did quite well, but we didn’t do as good as we’d like. We came in down $202 million for the quarter. But our CEO stood up and said, “We’ve made adjustments, we’ve raised additional money and we’ll be fine.” Guess what our stock did? Yep, it went up.
Existing Home Sales came in lower than expectations. If you’ve been reading this for a while, you know my feelings on the year over year comparisons. We’ve moved into a new market and comparing last year to this year is like comparing me to Tiger Woods. There is no comparison because we aren’t even on the same playing field.
Weekly unemployment claims came in higher than expected.
National City came out and announced a huge loss for the 2nd quarter – $1.78 billion. Their CEO stood up and said (Well, you get the picture……)
Washington Mutual had to make a second statement this week that said, “We really are okay! Honest! We’re healthy! Everything’s fine!” The market didn’t quite believe them and at the writing of this, their stock is down over 30% this week alone.
Durable good orders came out better than expected, but if you read the story behind the story at www.straighttalkaboutmortgages.com you’ll see that it’s not as good as it sounds.
New Home Sales came out down but not as bad as the market expected.
The House of Representatives passed the Fannie Freddie Bailout bill. Now it’s off to the Senate. Rumor has it that they’ll pass it but some of the people in the House are pushing Bush for a veto.
Oil prices have drifted down quite nicely this week.
Consumer Confidence came in surprisingly higher – do you think it was because the price of gas started
with a $3 rather than a $4?
Where does that leave us? I’m going to quote John Augustine, a senior investment advisor at Fifth Third Investment Advisors because he summed it up quite nicely:
We now need better news in at least two of the below three areas to help support the recent Financial-led rebound in stocks –
-
lower crude oil (…happening)
-
better US housing market news (…not happening)
-
calmer credit market (…not happening – credit spreads widening again with and continued concern about US loan losses).
I’ll leave you with a couple of thoughts:
1. If it sounds too good to be true, it probably is. If it sounds too good to be true that bank stocks are going up in light of all of the losses, it probably is.
2. If someone says we’re at the bottom, good luck in believing that. We’ve got a lot of inventory to work through and a lot of loan losses to sort out.
3. Something really interesting has happened – the spread between conforming and jumbo mortgages has all but disappeared. Why? Because of the problems that Fannie and Freddie are in and the pending bailout.
I’ll continue to keep in touch, let me know how I can be of help.
Thanks!
Tom Vanderwell
Quote of the week: When asked how to solve the housing crisis, Bill Gross, from PIMCO, replied: “One of the wisest men I know has this serious but admittedly impractical solution: have the government buy one million new/unoccupied homes, blow them up, and then start all over again. Absent that, he’s not quite sure what to do, nor am I.”
David Shafer says:
As usual a stellar report. But, there is one issue, the rules of real estate have not been suspended. By example, I give two New Hampshire neighbors who recently sold their Massachusett homes. Both for asking, one in two days and the other in 42 days. And a land developer I invest in has an agreement for a project in the Boston area where custom homes will be built in the $700,000-$1.2M range. He just finished a similiar project. The rules? There is a limited amount of dirt. All real estate is local. People are always looking to live in nicer area’s and nicer homes. Financially sound folks can always get loans (although admittedly it is tougher now and becoming more expensive). Real estate is a long-term investment. And, most people don’t want to have a landlord if they can help it.
I will add that banks have been making profits for over a thousand years, and will continue. A small percentage of banks will fail every year, mostly from mismanagement. And when the stock market gets overly emotional (like now), that usually means the end of the latest trend!
July 25, 2008 — 12:18 pm
Genuine Chris Johnson says:
David- I’d say the BEGINNING of the end of the latest trend.
July 25, 2008 — 12:44 pm
Sean Purcell says:
Tom,
As usual, your report is well written, incisive, interesting and most definitely looking at a glass that is half empty. (Actually, it often sounds like your glass is not only half empty… but containing the wrong drink!)
All kidding aside, David nailed it pretty well above. Here in San Diego (Bob’s upcoming comment not withstanding 🙂 ), I am seeing an increase in purchase business for myself as well as the many agents I talk to on a regular basis. There also seems to be some price stablization going on, as well as a noticeable drop in inventory. All in all a light at the end of the tunnel. Now the question is: what’s after this particular tunnel?
As for the banks, my guess is you will see Wachovia survive because they are a BANK, in the real sense of the word:conservative. They will reign in the stuff they should not have gotten involved with and weather the storm. On the other hand, I and many others have been calling WaMu’s demise for a while now. Don’t expect them to make it.
PS
You keep banging the Fannie/Freddie bailout drum but I have yet to see it. My guess? They’ll never touch the Fed credit line.
July 25, 2008 — 3:04 pm
Bob says:
“blow them up”
I smell a “Lethal Weapon 5” plot here.
July 25, 2008 — 3:11 pm
Tom Vanderwell says:
David and Sean,
You are absolutely right, all real estate is local. When I’m writing about the financial side of things, I’m looking at the national trends. So I guess you could say, “Your mileage may vary” in terms of what you see vs. what others see.
I also agree with David that the rules of real estate have been modified but not suspended. That’s why in a previous post this week, I said that for those who can (as you describe them sound) should buy a new home.
They aren’t making any new dirt, but I kid you not, there are currently 153 months worth of vacant lot inventory for sale in the county that I live in.
Sean – you make an interesting comment about me drinking the wrong drink – it is definitely not Koolaid. I think part of my viewpoint on these issues comes from my spending almost 20 years working the role of a financial counselor. By virtue of that, I feel I need to take a more rational, reasoned, analytical approach and therefore, I err on the side of being more cautious when I’m talking about the financial side of buying a home. I’d rather lose a deal every now and then compared to having someone swear at me every month when they write out their mortgage payment check. Does that explain it a bit? I think the other thing that factors into it is that I live in Michigan. ’nuff said? 🙂
I agree with your assessment of Washington Mutual and Wachovia. My mortgage is with WaMu. If they go under, I’ll write about my experiences with that mess…..
Thanks guys!
Tom
July 25, 2008 — 7:52 pm
Tom Vanderwell says:
Bawld Guy! Calling Bawld Guy?
“blow them up”
I smell a “Lethal Weapon 5″ plot here.
Is that the movie ending you were talking about?
🙂
Tom
July 25, 2008 — 7:54 pm
Gayla says:
No kool aid for you! Thank you for your honest assessment. We are currently looking for a home to buy, and the reality about our housing market gives me much more confidence than the lalalanothingbutblueskies BS that I hear on a daily basis.
July 26, 2008 — 4:54 am