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alstry (< 20)

Price Cutting Creating MORE Forclosures??



June 03, 2008 – Comments (1)

We have been hearing about a uptick in recent weeks for existing home sales.  Most of it can be attributed to some agressive price cutting by banks trying to decrease the growing REO inventory.

The question is... will the recent aggressive action by the banks actually serve to increase the distressed inventory and not decrease it?  The logic is as follows:

Assume we are in a newer HB area where homes sold for $300K a couple years ago.  Further assume that most of the homes were sold in the last five years.  Now due to a variety of reasons such as mortgage resets, job loss, and more, the banks have accumlated a significant amount of inventory in this area.

So over the past six weeks, the banks really started cutting prices.....let's say to $200K.  When appraisers see a few foreclosures, they generally discount those and don't include them in the appraisal as a one off distressed sale.  But when most of the sales are distressed, that becomes the market.

So now, all of a sudden, the new market value of those homes suddenly drops to $200K.  The problem for those that must sell are now underwater.  As a result, if they can't sell their house to cover the mortgage obligation, it increases the likelihood of another distressed home coming to market.

So as the bank lowers prices, it forces more homeowners into a distressed situation further leading to more defaults and ultimately foreclosures.  As banks accumlate even more distressed inventory...................guess what happens to home prices as we move into the slower selling Fall/Winter season?

1 Comments – Post Your Own

#1) On June 03, 2008 at 6:19 AM, alstry (< 20) wrote:

Toll Update:

FY 2008 second-quarter net contracts (after cancellations) totaled 929 homes, or $496.5 million, which were lower by 44% in units and 58% in dollars than FY 2007's second-quarter results of 1,647 net contracts, or $1.17 billion.

As a result backlog is down 50%.

The effect of these cancellations, coupled with the factors above, was to reduce the average price of net contracts in FY 2008's second quarter to $534,000 per unit. This compared to $580,000 and $557,000, respectively, in FY 2008's first quarter and FY 2007's fourth quarter, and $710,000 in FY 2007's second quarter.

On a net basis, TOL's sales are now coming in at around $534K versus $710 last year.

Based on the relatively high backlog conversion, TOL did an excellent job liquidating specs this Spring selling season. 

Going forward, with 50% less backlog and much fewer specs, there is little chance of TOL meeting analysts' estimates for revenue declines of only 35%. 

With much lower backlog and less specs, coupled with the current trend for more expensive homes cancelling, it is more likely that TOL's revenues for next quarter will come in at least 55-60% below last year.

Do you think this could be a reason why Mr. Toll is worried about the downward spiral in home prices?

``We believe Congress should jump-start demand for new homes with an initiative that will bring buyers off the sidelines and into the market, and thereby stop the downward spiral of home prices."

Before Congress "jump-starts" the demand for new homes, do you think that existing home inventory needs to be cleared out first?

Again, until foreclosures slow, price declines will continue.  Prices should and will settle out when they reach affordible levels for buyers.  Plain and simple.

Instead of begging Congress to incentivize to build more homes, maybe Mr. Toll should just slow down for a while until balance comes back into the market.  Once that balance comes back, maybe existing homesellers will be able to sell their homes to buy a brand new shiny Toll home.

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