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Wednesday, January 24, 2007 12:56 AM

Small Business Optimism & the Housing Recovery

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On January 22nd the Chicago Tribune reported Small businesses profess optimism.

The Wells Fargo/Gallup fourth-quarter survey of small-business owners finds them the most optimistic in four years.

"While many economists are forecasting a weaker economic environment for 2007, small- business owners are, according to the results, expressing no signs of an economic downturn," said Scott Anderson, senior economist for the San Francisco bank.

"These optimistic findings indicate expectations for a rebound in activity this year, as the forces that have been inhibiting growth prospects, such as rising energy prices and interest rates and stagnant wage growth, reverse course."

The index set a record high of 114, up four points from the third quarter.

The quarterly index is calculated based on a nationwide survey of about 600 small-business owners conducted by the Gallup Organization and sponsored by Wells Fargo & Co.
That is interesting because the National Federation of Independent Business, the nation's leading small-business advocacy association suggests otherwise. On January 9th the Northern Trust reported on the NFIB Small Business Optimism Index.
The survey results from the small business sector are not encouraging. The Small Business Optimism Index fell to 96.5 in December, putting the annual average at 98.9, the lowest since the 2001 average of 98.4 when the economy was in a recession.

The pessimistic outlook of small businesses is visible in their response to capital expenditure plans. The Capital Expenditure Index fell to 26.0 in December, the lowest since August 2005.

The index tracking employment plans of small businesses dropped to 10.0, the lowest since March 2005. The main implication from the survey is that small businesses do not expect robust economic conditions in the near term.

One of those surveys is monstrously wrong and here's my take: If small businesses are really expanding now just as the economy is slowing, they are likely to regret it quickly unless their business is bankruptcy or foreclosure related.

Rose Mortgage Corp

Yet another lender bit the dust today.
RMC - Rose Mortgage Corp

The Housing Recovery Coffin

Three more nails were put into the "Housing is Recovering" coffin today, by WCI, DHI, and DuPont.

DuPont Sees '07 Buffeted By Housing, Auto Slowing
On Tuesday, the country's second-largest chemicals maker threw some cold water on growing optimism that the housing market has started to rebound.

Headwinds from U.S. housing and automotive markets "turned out to be stronger than expected" during the fourth quarter, as customers reduced their inventory levels to adjust to a decline in housing starts, Chief Financial Officer Jeffrey Keefer told investors in a separate call.

The company forecast drags from lower activity in U.S. housing and automotive production continuing this year, as new residential housing demand falls in the first half from the year-ago period and sluggish auto output cuts into first-quarter earnings.
In a stunning achievement WCI reported More Cancellations Than Orders for the entire 4th quarter. Nicely done WCI.
"Results for the fourth quarter will be below prior expectations due to a higher level of defaults than expected in both our Traditional Homebuilding and Tower Homebuilding operations, longer tower construction cycles, and the recording of significant impairments and write-offs," said Jerry Starkey, President and CEO of WCI Communities.

The company expected to close 621 traditional homes in the fourth quarter and actually closed 434 at an average price of approximately $760,000 while recording 187 defaults. Preliminary combined tower and traditional gross new orders totaled 261 for the fourth quarter but were offset by a combined total of 270 tower defaults and traditional home cancellations and defaults.

D.R. Horton Inc. (DHI) Chief Executive Don Tomnitz believes the housing industry is still in the "early stages" of its slowdown.
"Most downturns are longer and deeper (than people expect), and we are not seeing anything on the horizon to change that opinion," Tomnitz said during a conference call Tuesday to discuss the company's fiscal first-quarter earnings.

Tomnitz, who has weathered through three other housing downturns in the past 23 years prior to this one, said he expects the housing sector to remain "challenging" through at least fiscal 2007.

He said he expects it will take two to three quarters before the sector "bottoms out." After that, he said, he doesn't see a sharp rebound. "We're not expecting any rapid improvement" after that, he said. "It will be flat to slightly up in 2008."

The CEO's comments come as D.R. Horton reported a 65% earnings decline and took land-related writedowns of $77.7 million in the company's fiscal first quarter that ended Dec. 31.
A Surefire Investment

The St. Petersburg Times is reporting Loan deals on shaky ground.
Construction Compliance Inc. promised surefire investment homes with no money down. St. Petersburg's CCI would build houses on scattered lots from Hernando to Lee counties. Customers could resell them for a profit without spending a dime.

But the housing downturn has a way of spoiling best-laid plans. Not only has CCI ceased construction on scores of homes, but customers also have been left with half-built shells on which subcontractors are demanding payment.

The banking world is also feeling the shock. Bradenton's Coast Financial Holdings Inc., parent of Coast Bank, announced Friday that 482 mortgage loans made through a single builder were at risk. The bank didn't specify CCI in its filings; however, buyers and their attorneys have since confirmed its identity.

Within hours of the announcement, Coast's stock had plunged, closing down 28 percent Monday. If CCI collapses, individual borrowers have an obligation to meet their mortgage payments, though Coast suggested that some might default in light of the no-money-down deals they were promised.
Well toss another "surefire" investment scheme on the ash heap of history. This mess is really just beginning to unravel. More lenders are going to go bust and borrowers are going to be on the hook for unfinished condo towers and homes. A monument to the stupidity of it all is likely to be be half finished condo towers blighting Miami and other cities for years to come.

Mike Shedlock / Mish

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