New Century Crushed by Bad Debt… New U.S. Home Sales Plummet

It’s the bleak mid-winter here in Paris. Snow lies all around.

From the news, the markets are jelled with cold too. The Dow has barely moved. Not a dollar…or a bond…is stirring.

But what still won’t keep quiet is the creaking, crunching sound of the U.S. housing market. It is sliding – like a glacier – down.

Yesterday came word that New Century Financial Corp. (NYSE: NEW) – America’s second largest provider of sub-prime mortgages – is having a rough time of it. When its mortgages go bad, it has to buy them back. Predictably, it now discovers that it did not set aside enough money to do that. So, when investors got wind of this situation yesterday, they took down the stock by more than one-third.

Which must have been a bad day for the insiders and large shareholders. They should have unloaded that stock on the unsuspecting public long ago. Perhaps they did.

“Refinancing gets tougher,” says the Wall Street Journal.

“Lenders battered by late payers,” adds the Associated Press.

Who would have thought that lending money to people who could not afford to pay it back would lead to problems? Life is just full of surprises, isn’t it?

According to the Mortgage Lender Implode-o-Meter, 20 lenders have gone kaput since December 2006.

Meanwhile, the Toll Brothers Inc. (NYSE: TOL) stepped up to the microphone, too. They said their orders for the first quarter of this year have plunged 33%. Revenue is off 19%.

And now we have Desert Storm Three. Phoenix, as hot as it is, seems hard hit by the icy winds from residential neighborhoods caving in. Pulte (NYSE: PHM) lost money in the last quarter of ’06, largely because of weakness in the desert. Sales in 2006 in the Phoenix area fell 26% over the year before. Locally based builder, Fulton Homes, said its closings were cut in half last year.

And behind it all trot the real estate agents, brokers, and granite counter-top installers. They, too, are astonished by this sudden turnabout. Realtors are said to be giving up after the average agent earned 20% less in ’06 than in ’05. Prices weren’t much lower in most cases, but there were fewer sales…and less commission.

And what’s this? One of the biggest financial firms – Merrill Lynch (NYSE: MER), a company that has boomed with the global liquidity boom – is now warning its customers to watch out. A global liquidity inflation is inevitably followed by a global liquidity deflation, says Merrill, warning its customers to take cover.

Merrill sees higher interest rates, possibly sooner than most expect.

“Fed official: rates may rise,” says a headline from the Philadelphia Enquirer.

We don’t put much stake in such headlines. But there must come a time when lenders get nervous and yields rise. That is when you will have wished you had cocked your head up and seen our Crash Alert flag flying over the Markets and Money headquarters…or paid attention when Merrill Lynch told you to head for high ground.

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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