Sunday, August 27, 2006

Some honesty, and wishful thinking, from Glenn Hubbard.

Fed helped fuel own inflation headache: Hubbard
White House's former top economic adviser calls high inflation 'a present danger' to the U.S. economy.
August 26 2006: 3:49 PM EDT

JACKSON HOLE, Wyo. (Reuters) -- The Federal Reserve must act to head off high inflation that is "a present danger" to the U.S. economy, the White House's former top economic adviser said on Saturday, as he blamed the central bank for failing to act aggressively enough so far.

Glenn Hubbard, now dean of Columbia University's Graduate School of Business, said the threat of high inflation partly reflects the central bank's leisurely two-year string of "measured" rate increases.

"I do believe policy had been too accommodative for too long. And now the question is, How do we deal with the current situation?" Hubbard told Reuters on the sidelines of the Kansas City Fed's annual Jackson Hole retreat.

Hubbard was chairman of President George W. Bush's Council of Economic Advisers from 2001 to 2003. He was mentioned as a candidate to replace Alan Greenspan as Fed chairman, the job ultimately given to Ben Bernanke.

The policy-setting Federal Open Market Committee used 17 consecutive one-quarter percentage point rate hikes between June 2004 and June 2006 to raise benchmark interest rates to the current 5.25 percent from a low of 1 percent.

The U.S. central bank, under Bernanke's leadership since February, "still has enormous credibility with the public," which is helping to keep inflation expectations contained, Hubbard said.

But at this point, with economic growth being cut by a turndown in the housing market and the spillover effects of high energy prices, the Fed's job has become harder, he said.

"It is easier to tighten into strength than it is to tighten into weakness when you had a policy that was that accommodative," Hubbard said.

"It is a very difficult moment for the Fed to achieve both the desired fall in inflation and the soft landing in the real economy at the same time. It's easy to do one or the other; it's a little more difficult to do both."

Hubbard said the U.S. economy faced head winds from housing and energy, but seemed poised for a "soft landing" after years of solid growth.

"I still expect the economy to be able to grow in the 2.5 to possibly the 3 percent range by the time we get into next year," he said.

One risk to that outlook would be weakness in the capital goods sector at a time business spending has been seen as likely to pick up the slack as consumer spending softens, Hubbard said.

Something more certain is there likely will be limited relief from high energy prices, he said, because of strong growth in large emerging economies, decent growth in the United States and other industrial economies, and supply restrictions in many parts of the world.

"It's hard to see a lot of weakness in energy prices over the next year."

The Debt Generation! (Press of Atlantic City)

Debtors on Borrowed Time
By JOHN FROONJIAN Special Reports Unit, (609) 272-7273
Published: Tuesday, August 22, 2006
Debt is becoming the American way of life.

Forty years ago, hardly anyone had charge cards. Mortgages financed homes, not vacations. Today, we borrow to buy groceries and fill our tanks. We borrow to go to college, to eat at McDonald's, to run our government. Credit offers clog our mailboxes. One credit industry estimate says there are four credit cards in circulation for every American. The average U.S. household has more than 11.

Average credit card debt has more than doubled since 1994. Consumer debt is at a record $2.2 trillion - not including home mortgages. Last year, Americans spent more than they took home. That had not happened since the Great Depression.

People are over-extended at a time of rising interest rates and incomes falling behind the cost of living. Bankruptcy lawyers, analysts and credit counselors are seeing more families in credit trouble. And they believe a lot more are going to get hurt.

Some people are borrowing to make ends meet. Russell Graves, who runs Consumer Credit and Budget Counseling in Marmora, Cape May County, said more low- to middle-income families are calling for help.

But increasingly, credit is financing a high lifestyle: luxury cars, mammoth SUVs, plasma TVs and ever-larger houses. Baby boomers want it all. They see credit as a way to have it.
Bill Wenz, 73, a Galloway Township retiree, winces when he hears what his grown children pay on their mortgages. After marrying in 1953, he and his wife lived in an attic apartment in Norfolk, Va. - "Oh, it was so hot," he recalled - until they could afford a down payment on a home.
"This generation wants everything right away: the house, the car, the air conditioning," he said.
Jeanette Gmitter, of Consumer Credit Counseling Service of South Jersey, remembered one client who had $80,000 of debt. "He said to me, 'Doesn't everybody?'"
In "Hamlet," Shakespeare's Lord Polonius said, "Neither a borrower nor a lender be." Today's consumer philosophy is closer to the 1980s bumper sticker: "He who dies with the most toys wins." Polonius would be laughed out of the home electronics superstore.
Money marketing
The credit card come-ons arrive in bulk at the Camden County mail processing plant. The envelopes, crammed into plastic and cardboard trays, stack 6 feet high on pallets carried by forklifts. Postal workers deliver the credit-card applications across southern New Jersey. Often the shipments arrive twice in a day.
"The banks and companies send them out thousands at a time," said Michael Behringer, a Post Office spokesman.
Nationwide, 5 billion applications went out last year. Many households receive several per week, along with mortgage refinancing and other credit offers. The mailings are so pervasive, even the son of an aide to U.S. Sen. Robert Menendez, D-N.J., received a credit card offer. The child is 2.
Eric Clayman, a bankruptcy attorney with offices in Atlantic City, marvels at the sophisticated marketing used by companies.
You're a bowler? Apply for the Bowling Platinum Mastercard. You like Philadelphia football? Show your true colors by using the Eagles Extra Points card. There are specialty cards for movie buffs, e-Bay users, L.L. Bean customers.
"These cards line up with your interests, your sports team, your favorite hobby," Clayman said. "The companies push that more than they explain what 19.9 percent compounded interest does."
Clayman has seen the effects of debt: bankruptcies, lost homes, emotional stress. His firm, Clayman and Jenkins, handles more bankruptcy cases than most others in New Jersey - a state where bankruptcies have soared 80 percent over the last decade. Nearly 50,000 were filed in the state last year.
"I've had a couple clients with $200,000 in credit card debt. And they have not accumulated a lot of assets," Clayman said.
How does that happen?
Clayman and Gmitter said problems start when people make only the minimum payment required on their bills. Almost all of their debt carries over, and they are charged interest on it. If they make only minimum payments for a while, they pay interest on that interest. They make little headway on the original charge and end up paying more than twice as much in interest. If the person keeps charging new items, the debt only grows.
But it gets worse.
If a payment is missed or late, an extra fee is charged. And the company raises the interest rate, sometimes as high as 30 percent.
But it gets worse.
A company might raise your interest rate even if you pay on time but miss a payment on a different credit card.
"It's called universal default," Gmitter said. "You can fall behind on one card. If another company pulls your credit report and sees that, they feel they can raise their interest rate.
"It starts a downward spiral," she said.
Nobody wants to talk about his or her failed finances. Debt may be the last bastion of shame in America. Counselors and lawyers asked numerous clients to be interviewed for this story. All refused. But credit-card horror stories fill Internet message boards, where the indebted can commiserate anonymously.
One woman on the Shopping Addicts Support board confessed: "While I make reasonably good money, I have absolutely no savings at all. In fact, I have accrued over $100,000 in debt in credit cards and school loans, from small purchases (in) $200-$300 shopping sprees."
"Jeni" said she opened credit accounts behind her husband's back. She charged $40,000 within three years.
Her problem with credit cards, she wrote, was that "when I would use them, I would not think of that as actually spending money. For some reason in my head, I couldn't relate that I would have to eventually pay that money back.", a credit-card industry Web site, says average debt per card-holding household more than doubled from $4,300 in 1994 to $9,300 in 2004. Most families' debt is much lower, the Federal Reserve says. But that high average suggests the families who do get into trouble are carrying huge debt.
And debt of only $2,000 to $3,000 can still hurt low- and middle-income families. Their debt is increasing; it grew 10 percent from 2001 to 2004. Meanwhile, median income declined 1 percent when adjusted for inflation during those years. Add soaring fuel prices to the mix, and it's no wonder Gmitter sees counseling clients come in frantic over debts of $3,000.
New federal rules require cardholders to pay at least 1 percent of their debt principal each month. The result: higher minimum payments.
"That requirement has caused a lot of people to pick up the phone and say, 'Help!'" said Graves of the Marmora counseling agency.
"Just in the last month, I've gotten more calls asking about bankruptcy," Atlantic City attorney Edward Thompson said. "People can't afford to pay their minimums."
Gmitter's counseling agency, with offices in Egg Harbor Township and Absecon, negotiates with lenders to lower interest rates and helps debtors create payment plans.
Clayman said credit card debts could be wiped out if a debtor declares bankruptcy. Record numbers of bankruptcies were filed last year. Debtors rushed to beat a new federal law that made it tougher to wipe out such debt.
But some homeowners can't escape credit card debt because they have turned it into mortgage debt. They took out home equity loans to pay off creditors. That's happened a lot. Nearly one-third of equity loans in 2004 went to pay off debt, according to the Federal Reserve.
Shifting credit debt to mortgage payments usually lowers the interest rate. It allows interest to be deducted on income tax returns. Still, draining equity out of a family's main asset may be a sign of credit problems. It's especially troubling if a family runs up its credit cards again.
Clayman and other attorneys say there are fewer bankruptcies when housing prices are high and interest rates are low. Higher equity helps manage debt.
Unfortunately, the lawyers look at mortgage and interest trends, and predict that more families' finances are living on borrowed time.
Home sweet home
Some buyers could not afford a big down payment in the roaring housing market of recent years. The mortgage industry created no-equity loans. The buyer keeps payments low by paying only interest until he sells the house at a profit. Some buyers took loans with "negative equity." They borrowed more than the house is worth.
Lenders also provided adjustable-rate mortgages, which start with a low interest rate that changes according to market trends. Seventeen percent of adjustable mortgages sold in 2004 and 2005 offered a starter rate of 2 percent or less.
Two problems have developed. Housing prices have started declining. And the Federal Reserve keeps raising interest rates to fight inflation.
Higher interest rates will affect millions of adjustable-rate mortgages. Rates are expected to increase on a quarter of all outstanding U.S. mortgages either this year or next, according to
Many recent buyers' adjustable mortgage payments could double.
Christopher Cagan, research director for First American Real Estate Solutions, studied the possible impact of rising interest rates. An increase from 1 percent to a 6 percent market rate could rocket a monthly payment from $965 to $1,800.
Even if it took a few years for rates to rise that high, Cagan said, many people would lose their homes. If a homeowner holds no equity and his house has lost value, he would make nothing if he sold it.
Cagan's report estimated that one in eight adjustable mortgages sold in the last two years could default. About 5 million households nationwide and $300 billion in loans could be affected.
"The safety net of home equity is not going to be there," attorney Clayman said. "The number of bankruptcy filings over the next couple of years will probably go up."
Nationwide, the number of foreclosures is running one-third higher than a year ago, according to
Cagan concluded that while individuals and families would suffer, the defaults would not hurt the $10 trillion-per-year U.S. economy. But one New Jersey economist, A. Gary Shilling, fears the damage could be significant.
Shilling studied 44 boom-and-bust housing cycles occurring in 18 countries since 1970. Inflation-adjusted prices rose an average 28 percent in the five years before a housing bubble burst. Home prices fell 22 percent in the five years afterward.
If housing values dropped 20 percent or more, Shilling said, "there's no question we could have a serious recession in the United States. Then it could spread globally. U.S. consumers are supporting the world.
"If the consumer pulls in his horns after he's been on a spending and borrowing binge for the last 20 years, the effects could be pretty dramatic.
"This is heavy duty stuff," Shilling said. "I think this huge debt level is going to be a serious problem."
Don't blame consumers too much for their spending habits. They're following the lead of their Uncle Sam.
The federal government has spent more than it has taken in all but four years since 1969. The U.S. public debt was less than $1 trillion in 1981. It was $8.4 trillion at the end of May. Foreign governments and investors own nearly one-quarter of America's public debt.
The red ink has seeped down to the state level. The debt of all state governments has increased by an average 11 percent in each of the last three years. New Jersey is third in state debt, having borrowed for years to finance highways, build schools and plug holes in the state budget. New Jersey taxpayers are directly responsible for $28.6 billion in debt, according to a Moody's Investors Service report.
New Jersey economist Allen Grommett of Cambridge Consumer Credit Index said government and consumer debt are linked. When government runs a deficit, more money becomes available. Consumer spending does stimulate the economy, Grommett said.
But just as the government has spent its surplus, consumers are dipping into savings. In the 1970s, Americans saved $1 of every $10 they earned. In recent years, that number has dropped to about 30 cents. Last year, the savings rate was negative 0.5 percent. That means Americans spent 0.5 percent more than they earned.
Half of all U.S. workers have less than $25,000 in their 401Ks, including 40 percent of workers age 55 and older.
Analysts distinguish between debt that grows in value and spending that doesn't. On a personal level, buying a house that appreciates or getting an education that helps your career are valuable investments.
On the other hand, if government borrows to buy "fuel and bombs, once it's spent, it's spent," Grommett said.
"There's no real long-term benefit to the economy. When it's spent on education and research, there is a long-term return. We need to get our one-time expenditures under control."
Having it all
When Bill Wenz was a young man, he wanted to finance a TV purchase. But credit was hard to obtain. His parents wouldn't co-sign a loan. Wenz couldn't provide a credit reference the store wanted.
"I showed them my checkbook and said that I could pay for that TV," he said.
Wenz, who is on the homeowner board at the Four Seasons at Smithville development in Galloway Township, recently discussed credit's role in society with other board members. They agreed: Times have changed.
"We were lucky if we had one TV in our house," Wenz said. "Now, they have one in every room."
Jerry Hauselt, 67, said he faced difficult choices while raising five children. Once there was enough money to either pay for insurance or buy one child a bicycle. His solution: Work a second job.
"That's the biggest difference," said Tony Annacone, 61. "Today they do both and go into debt."
Annacone said he believes baby boomers want their kids to have it all. "Unfortunately, this generation is racking up a lot of debt to do that," he said.
That is what author Shira Boss found when she researched her new book, "Green With Envy: Why Keeping Up with the Joneses Is Keeping Us in Debt."
"There was an attitude shift about raising children after World War II," Boss said. "Children became the center of the universe. It became about giving children everything.
"And this (debt) was the way we get everything," she said.
As baby boomers grew more comfortable with credit, they started using it to subsidize their lifestyle, she said. They charged restaurant meals, furnishings, clothes. News reports last year said some people cashed equity out of their homes to pay for big-screen TVs and vacations. The trend spreads because of social pressure, Boss said.
"We see the things people have, and we feel we need to have them. So we charge it," she said.
Bankruptcy lawyer Bruno Bellucci, of Linwood, agreed. He said medical problems or divorce drive many of his clients into debt. But he has seen people go broke trying to live the high life.
"We see stuff on TV and we want it," he said.
Boss said one difference from past generations is that people now accept large debt more casually, and some even expect to live in debt. For her book, Boss chronicled a well-to-do suburban family who bought a big house in a gated community, joined a country club and spent on lavish vacations. Their lifestyle was built on debt. They had $100,000 in credit card charges. They paid the debt down to $40,000, then ran their cards back up to $100,000 before heading into bankruptcy.
"I think the response should be: I can't believe people are such idiots," Boss said. "But nobody else seems to think that.
"People say to me, 'I can relate to that.'"
Al, a computer programmer in suburban Philadelphia, said his parents gave him whatever he wanted when he was growing up. "I was pretty spoiled as a kid." He got his first credit card while in college in 1978. Soon he owed $3,000.
"I would go to my parents' house. After dinner, I would well up the tears, say I couldn't pay my bills. And Dad would write me a check."
The pattern continued on and off for years. Al, who didn't want his last name identified, realized his spending was like an addiction when he began to steal from his father.
In 1993, Al's family began caring for his father after a stroke had partially paralyzed him. Al managed his father's finances. He filled out a credit application in his father's name - but didn't tell him. Soon he was purchasing computer equipment and meals with that card. Eight months later, Al's wife opened her father-in-law's credit card bill by mistake.
"She saw $4,000 in charges," Al said. "She asked how my father could charge that much while sitting in his bedroom all day."
Al's wife convinced him to attend Debtors Anonymous, a 12-step, faith-based program that helps people with spending compulsions. Today, Al is a trustee of Debtors Anonymous of Southeastern Pennsylvania and New Jersey. He repaid his father. He no longer uses credit cards. He saves out of every paycheck and pays cash for everything he buys. Al keeps reserves for emergencies.
"I saw a guy open his wallet and he had 15 credit cards. They were probably all maxed out. That's why he needs 15," Al said. "You're living to pay off your creditors. That's not a life."
Get out of debt
Al said he could not have gotten debt-free without Debtors Anonymous and help from a "higher power." There are many counseling groups, debt relief programs and Web sites that help debtors. But it's a case of buyer beware.
On May 15, the Internal Revenue Service said an audit of 63 credit-counseling companies showed that 41 of them existed mainly to profit off debtors. The IRS said it would revoke the unidentified groups' tax-exempt status.
Jeannette Gmitter said debtors looking for help should go to nonprofit agencies with counselors certified by the National Foundation for Credit Counseling. They should beware of companies that charge high fees.
U.S. Sen. Robert Menendez has proposed federal legislation to rein in credit card practices after hearing of college students becoming overwhelmed with debt and consumers being treated unfairly.
His proposals would:
* Ban random credit card solicitations to people younger than 21
* Prohibit companies from raising interest rates when a customer misses a payment to an unrelated account
* Require companies to use the postmarked date to determine when a bill payment is late
* And establish a financial literacy program in schools.
Graves, of the Marmora counseling agency, said education is needed because most schools don't teach money management. Graves said a grant from Chase and Bank of America has allowed his agency to offer financial literacy seminars in high schools, but few are signing up.
"I explain to students that the real permanent record for their life is not their high school transcript or SAT score," Graves said. "It's their credit score."
One exception is Ocean City High School, where all freshmen are now required to take a semester of financial literacy.
Al, of Debtors Anonymous, agreed that debt should be discussed, not treated as a dirty little secret.
"People will talk about their alcoholism. They will talk about their sex lives, their gambling. But they will never talk about their money problems," he said. "They're afraid people will think they're weak."
Shira Boss said Americans should talk more about the social reasons we overuse credit, and not envy those with more than us. But she admitted that even though writing her book clued her in to the dangers of debt, the lure of materialism can be strong.
She and her husband were shopping for a TV. Boss couldn't understand how people were able to afford thousands of dollars for a set. She asked her husband, "Why are we the only ones shopping in the picture tube aisle?"

Friday, August 25, 2006

Another gem from Stephen Roach

Five and a half years ago the equity bubble popped. Within six months, the US economy went into mild recession, and the global economy was quick to follow. Today, America’s housing bubble is finally bursting. Is the die cast for another bubble-induced downturn in the US and global economy?

All asset bubbles are alike. Sure, there are obvious differences between equities -- a financial asset -- and homes -- a tangible asset. But to me, the Shiller definition says it all: A bubble is an outgrowth of powerful amplification mechanisms -- both real and psychological -- which create an unsustainable condition whereby “… price increases beget further price increases” (see Robert Shiller’s Irrational Exuberance, second edition, Princeton University Press, 2005). The rise and fall of the US housing market fits the Shiller script to a tee. House price appreciation surged to a 27-year high in 2005, and as of the first quarter of 2006, prices were still rising by 20% or higher in 53 metropolitan areas across the United States. Both pricing and demand were feeding on each other through classic Shiller-like amplification mechanisms.

As always, the upside of a speculative bubble lasts for longer than you think. But when it finally goes, it invariably unwinds with greater force than widely expected. That seems to be the way the chips are now falling in the US housing market. Demand for homes is falling like a stone and inventories of unsold dwellings are ballooning -- up 40% for existing homes and 22% for new homes in the 12 months ending July. These are the classic quantity adjustments that set the stage for price destruction -- the endgame of any asset bubble. So far, home values just seem to be leveling off at still lofty price points. As the bid-offer gap widens in an excess inventory and rising interest rate climate, price declines will come as they always do. This bubble is not different.

Construction activity is the last shoe to fall in a housing downturn. Due to sunk fixed costs of land and property acquisition by developers, homebuilding typically continues into the inventory overhang phase of the cycle. Such is the case today -- with residential construction activity still holding at relatively high levels through mid-2006. However, once this last gasp of project completions runs its course, the construction downturn should gather force. Given the magnitude of the current inventory overhang, the downside of the building cycle could be both deep and prolonged -- lasting possibly a couple of years and entailing peak-to-trough declines of at least 25%. For a sector that boosted US real GDP growth by about 0.5 percentage point per annum over the past three years, it is now poised to subtract about one percentage point per annum over the next couple of years -- a swing of 1.5 percentage points off the overall US growth rate.

Of course, the construction impact is only part of the story. There is also the wealth effect from the housing bubble to consider. Since the dawn of the Asset Economy in 1995, growth in real disposable personal income accounted for only about 85% of the cumulative growth in personal consumption expenditures. The balance came from wealth effects of a seemingly endless string of asset bubbles -- first equities, then property. The property-based wealth effect became especially important in driving consumer demand in recent years. Over the 2004-05 period, real personal consumption grew at a 3.7% average annual rate -- more than 50% faster than the 2.4% average annual gains in real disposable personal income over the same period. The gap between household incomes and spending is traceable to the extraction of equity from an increasingly frothy housing market. According to Federal Reserve estimates, mortgage equity withdrawal exceeded $700 billion (annualized) in the first half of 2006 -- more than enough to provide an “extra” stimulus to consumer demand as well as to provide a substitute for income-based saving. In the frothy house price climate of the past five years, the property-based wealth effect probably boosted growth in total consumer demand by at least 0.5 percentage point per year. In a stable to falling home price climate, that impetus could fade quickly to zero -- and possibly go into negative territory if saving-strapped American households elect to start saving out of labor income again.

All in all, a post-housing bubble shakeout could entail a haircut of at least two percentage points off the overall US GDP growth rate -- 1.5 percentage points via the construction effect and another 0.5 percentage point from the wealth effect. The overall impact could even be larger if households elect to rebuild income-based saving balances -- hardly unusual in light of the looming retirement of some 77 million baby-boomers. The repercussions of multiplier effects through construction-related hiring shortfalls could also compound the problem. For a US economy that has been growing at a 3.2% average annual rate over the past three years, a two percentage point haircut does not guarantee a recession. But it certainly could end up being a close-enough call that might trigger a recession scare in financial markets. The hope, of course, is for the exquisitely well-timed handoff -- a seamless transition from asset-dependent consumption to other sectors, such as capex and net exports. I remain suspicious of such claims of built-in resilience. If the US consumer slows, the demand expectations that typically drive capital spending will also weaken. So, too, will the growth dynamic of America’s export-led trading partners -- thereby undermining support for US exports, as well. In short, for a wealth-dependent US economy, the bursting of another major asset bubble is likely to be a very big deal.

It is also likely to be a big deal for an unbalanced global economy. In 2000, when the equity bubble burst, the gap between current account surpluses and deficits was less than 4% of world GDP. This year, as the housing bubble bursts, that same gap is likely to be around 6% of world GDP. The disparity between current account surpluses and deficits -- and the added point that the US accounts for about 70% of all the deficits in the world -- underscores the increased dependence of the rest of the world on the US. For that reason, alone, a bursting of the property bubble poses equally serious risks for America’s key trading partners and for the rest of an increasingly integrated global economy.

Ironically, at just the moment when it has become evident that the US housing bubble has burst, the key architects of this sad state of affairs -- America's central bankers -- are cavorting at their annual retreat in Jackson Hole, Wyoming. Denial has long been deep at this Fed love-fest. A year ago at this same conference, considerable adulation was heaped on the post-bubble legacy of the Greenspan Fed -- namely, that the US central bank was correct in dealing with the equity bubble after the fact (see Alan Blinder and Ricardo Reis, “Understanding the Greenspan Standard” available at This, of course, is consistent with Greenspan’s own self-professed verdict of vindication for the Fed’s post-bubble clean-up strategy (see his January 3, 2004 speech, “Risk and Uncertainty in Monetary Policy”) as well as a similar argument presented at an earlier Jackson Hole gathering by then Princeton professor Ben Bernanke (see the 1999 paper by Ben Bernanke and Mark Gertler, “Monetary Policy and Asset Price Volatility”). Missing in this self-serving depiction is an assessment of the consequences of aggressive post-bubble monetary easing tactics. The injection of excess liquidity is key in that regard -- sufficient in the current instance for one bubble to beget the next. In that important respect, the housing bubble was a direct outgrowth of the Fed's post-equity bubble defense strategy. And now the US, as well as a US-centric world economy, must come to grips with what its central bank has wrought -- yet another post-bubble shakeout.

Wednesday, August 09, 2006

Strangest downturn in 40 years according to Toll Brothers.

NEW YORK ( -- Homebuilder Toll Brothers said the current slump in residential construction is unlike any it has seen in 40 years as it became the latest to warn of a glut in new homes for sale and a slowdown in the closely watched real estate market.

The builder of luxury homes also reported weaker than expected preliminary results for the just completed quarter and cut its outlook for the homes it will sell in the current period. Toll Brothers (Charts) shares fell 4 percent in premarket trading.

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The housing and homebuilding markets have helped drive the national economy during the past few years. Any downturns in these critical sectors could add to the problems of an already unsteady situation.

In a statement, company chairman Robert Toll warned there is a glut of supply of homes for sale in the market, as the building boom of recent years seems to be turning into a bust.

The slowdown "is the first downturn in the forty years since we entered the business that was not precipitated by high interest rates, a weak economy, job losses or other macroeconomic factors," Toll said in his statement.

"Instead, it seems to be the result of an oversupply of inventory and a decline in confidence," he added. "Speculative buyers who spurred demand in 2004 and 2005 are now sellers; builders that built speculative homes must now move their specs; and nervous buyers are canceling contracts for homes already under construction."

Markets where the company recorded big increases in cancellation rates included Orlando, Northern California, Palm Springs, Las Vegas and Phoenix.

The company's reported homebuilding revenues were approximately $1.53 billion in the quarter ending July 31, compared to the record of $1.54 billion a year earlier. Analysts surveyed by earnings tracker First Call had been forecasting a 7 percent increase in overall revenue at the company.

The Pennsylvania-based builder said it expects to deliver 2,500 to 2,800 homes in the current quarter, a cut of at least 14 percent from its previous guidance of 2,900 to 3,300. And the company announced signed contracts in the just completed quarter plunged 45 percent to $1.05 billion from a record of $1.92 billion a year earlier.

The company said it is not under as much pressure as many builders to cut prices because it builds relatively few homes on spec. But Toll said that much of the supply of finished and near-finished product is being marketed using advertised price reductions and increased sales incentives, which in turn is leading many potential buyers to delay their purchase decisions as they wonder about the direction of home prices.

But Toll said the company believes that, as there is a cutback in supply by builders, the housing market should be able get back on the growth track of recent years.

"With many potential buyers on the sidelines right now, we believe there is growing pent-up demand that will come into the market once buyer sentiment improves."

Toll said on a conference call Wednesday afternoon that he expects the slump to last at least through the end of the year, however, adding it could drag on for another two.

"But the market isn't dead," Toll said. "It's concerned with the direction of home prices and if it has reached the bottom. You might argue that this is the best time to buy a home, with comparatively low mortgage rates and incentives. It's very hard to pick a bottom and anyone who tries will probably have a problem."

Toll named some once previously hot markets as underperformers lately.

Florida has been fair or poor, for the most part, not an unexpected assessment during the summertime. Other down markets were Las Vegas and Reno, Chicago, Minnesota and the Maryland shore.

Stronger markets he named were Hoboken, Delaware, Colorado and Phoenix.


It's amazing that even with very low interst rates, the housing market is tanking. It's no wonder that the bond guys believe the fed will be cutting rates soon. However, it seems that inflationary pressures are building and the fed may have to continue to raise rates some more to maintain the appearence of being inflation fighters.