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NAR: Speculation Accounts for 40% of 2005 Home Sales


               
2006 Apr 5, 8:24am   16,019 views  153 comments

by HARM   follow (0)  

bidding war!

Second homes 40% of market
Updated 4/5/2006 3:10 AM
By Noelle Knox, USA TODAY

Americans snapping up second homes - as investments or vacation properties - accounted for four out of every 10 sales of existing homes last year, a record that helped drive the real estate market to new highs, according to a report being released today by the National Association of Realtors.

Nearly 28% of homes bought last year were for investment purposes, and an additional 12% were vacation homes, the figures show. Most of the buyers were baby boomers in their top earning years, looking toward retirement and hoping to build wealth or find a more desirable place to live.

This is up from 2004's already record-breaking 36% figure. This is a NATIONAL statistic, mind you, so we can safely assume that it is even higher along the Bubble coasts --probably much higher. On top of that juicy little tidbit, we get the following information from Ben Jones as to how exactly those Sub-prime issuers of IO/neg-am mortgages still manage to book all those "record profits" we keep hearing about:

Majority Of S&L Profits Neg-AM, ‘Non-Cash'

"A survey of top option-ARM lenders' 10-K filings by American Banker shows that much more data is now available, including figures on topics to which regulators and investors are paying close attention: deferred interest and related negative amortization.”

"All the leading lenders in this niche provided evidence that principal-balance growth on such loans surged last year as many borrowers made only minimum payments. In their 10-K filings released last month, Downey along with Washington Mutual Inc. led the pack in giving details about option ARMs.”

"Salient figures in the Downey 10-K: Ninety-seven percent of the $133 million of deferred interest outstanding came from loans with balances above the original principal amounts, and the company generated 62% of its profits from noncash income from deferred interest.”

Let me see if I get this straight: The big neg-am (aka "option-ARM") lenders are deriving close to TWO-THIRDS of their reported "profits" by booking "deferred interest" on negatively amortizing loans WITHOUT ACTUALLY RECEIVING A PENNY. They're just assuming they'll be receiving all that "deferred interest" (the extra interest that gets tacked on to the loan principal when homedebtors make the minimum payment), whenever Mr. & Mrs. Specuvestor decide to sell. And of course they'll definitely be able to sell for much more than they paid, so why wait til then? Why not just go ahead and book all that guaranteed "profit" right now?

Wow. And I thought the Feds were good at "creative accounting". 8O

(begin sarcasm) Pardon me, but where was all that evidence about housing prices & lender profits actually reflecting demand? I seem to have misplaced it. Maybe Juku/MP/JohnJacob/etc. has the data. Oh, sorry... I forgot --they don't actually USE data. (/end sarcasm)

Discuss, enjoy...
HARM

#housing

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1   Randy H   @   2006 Apr 5, 8:45am  

I'm much more concerned about the Ninety-seven percent of the $133 million of deferred interest outstanding came from loans with balances above the original principal amounts,

than the and the company generated 62% of its profits from noncash income from deferred interest.”

Noncash net-income is not uncommon for this industry, especially because of the complex GAAP rules surrounding interest expenses and deferrals. To make matters worse, this is an area where tax law diverges from GAAP so there is a whole tax-effect thing going on. I'd like to know how this falls out for EBT and EBITDA measures (but I'm too lazy to do it myself right now).

I wouldn't be surprised to see a FAS revising how revenue is booked for things like negative amortized loans or other instruments where the principal can rise higher than the original balance. The accounting numbers aren't capturing the risks of revenue collection. However, keep in mind that it may not be the fault of the companies which are reporting these numbers. It may be a direct failure of the convoluted GAAP rules everyone tries in vain to follow. The FASB has been on a revenue accounting obsession for many years now, and the rules are worse than a Goldberg machine.

2   revengeofaone   @   2006 Apr 5, 8:47am  

I do not understand all of the fancy numbers

3   HARM   @   2006 Apr 5, 8:56am  

It may be a direct failure of the convoluted GAAP rules everyone tries in vain to follow. The FASB has been on a revenue accounting obsession for many years now, and the rules are worse than a Goldberg machine.

Point taken. Of course, we can all look to our government's wonderful "Rube Goldberg Tax Code" for setting a fine example.

4   Peter P   @   2006 Apr 5, 9:02am  

This smells very much like the revenue-booking shenanigans we used to see in the dot.com days.

I have the same feeling.

“Everybody wins, heh heh, at least everybody who is in this room, what? Har har.”

Not even that, only "the smartest guys in the room". :)

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