D.R. Horton Sheds Some Light on the Massive Costs of Mortgage Rate Buydowns as a Hedge Went Awry. Stock Tanks

The plunge in mortgage rates in Nov and Dec blew up the hedge for the rate buydowns: surprise cost on top of the regular costs of buydowns.

By Wolf Richter for WOLF STREET.

Homebuilder stocks tanked on Tuesday after D.R. Horton’s earnings call, with D.R. Horton’s stock [DHI] down 9.2%. The sell-off came after the huge rally starting in early November driven by rate-cut mania on Wall Street that had sent folks dreaming of 3% mortgages or whatever (but the mania is fading a little, mortgage rates have risen 30 basis points since late December, to nearly 7%, according to the daily measure by Mortgage News Daily).

Part of the problem was that the gross profit margin on home-sales revenue dropped by 220 basis points from the prior quarter, to 22.9%, executives said during the earnings call with analysts.

About 100 basis points of that 220-basis-point drop in gross profit margin were due to an unexpected cost of mortgage-rate buydowns, on top of the regular costs of the buydowns: a $65 million mark-to-market charge for a hedge gone awry.

The remainder of the 220 basis-point drop in gross profit margin “was primarily due to an increase in incentive levels [the mortgage-rate buydowns] on homes closed during the quarter,” the company said during the earnings call (transcript via Seeking Alpha).

Mortgage-rate buydowns are the most successful incentive homebuilders have. In addition, D.R. Horton — like other builders — is building smaller homes with less expensive amenities, and the average closing price has continued to drop in Q4, it said. With payments lower for a new home than for an existing home, new home sales have held up, while existing home sales have collapsed.

But mortgage-rate buydowns are an expensive incentive in unexpected ways. The massive swing in mortgage rates during the quarter had caused its hedges on those buydowns to lose market value and essentially become useless when mortgage rates dropped. The hedges needed to be restructured, and it triggered the $65 million charge to cost of goods sold.

On top of that, D.R. Horton said it had increased the use of the buydowns during the quarter, that 70% of its deals were made with mortgage-rate buydowns, up from 60% in the prior quarter; and that 80% of the mortgages originated by its mortgage company, DHI Mortgage, were done with buydowns.

And instead of backing away from these buydowns to protect profit margins, they would continue to use them in order to stay “competitive to not only the new home market, but especially to the resale market,” they said. “The ability to have a lower monthly payment for same cost of home is advantageous. So we have no plan in the near-term to stop utilizing it even if we see rates shift down.” And that gave investors the willies all over again.

The hedge gone awry.

The $65 million charge for the hedge was the first time this problem occurred, they said. There had been minor fluctuations “either up or down,” but in Q4, given the significant volatility in rates during the quarter – mortgage rates moved up to 8% in November and then dropped sharply in December – those hedging positions had to be adjusted to reflect that. So it was an unusual situation this quarter.”

To hedge those buydowns, the company buys “forward commitment pools for the next few weeks of deliveries essentially,” they said. “We’re not going out very far, but it is a few weeks, and so that’s when we saw a very sudden sharp change in rates, that can present some exposure there,” CFO Bill Wheat said.

But when rates dropped sharply in November and December, those pools became useless because market rates dropped below where the pool was.

“And it was really a restructuring, so it could be used, not that we weren’t going to fulfill the pool. We just had to restructure it so it was usable,” VP of Investor Relations Jessica Hansen said.

“And then at the end of the quarter, we always have to mark-to-market the value,” Bill Wheat said.

Any more bad hedges hanging out there? “In terms of our position outstanding, we believe that it reflects the current market, and the valuation adjustment in the December quarter takes care of all of it,” Bill Wheat.

“We always have some hedging position outstanding. And so anytime there is a significant sudden change in rates, that can leave some exposure there, obviously,” he said.

“The opposite side of that is the benefits to the business. When rates drop, obviously, that improves affordability and improves our ability to sell at a price point in the core business.”

“And so, what this hedging position allows us to do is offer below market rates on a consistent basis on a broad basis across our business. And like we said, we try to manage that as best as we can, but in a period of significant sudden volatility, there can be some exposure to the position,” he said.

This massive swing in mortgage rates in the middle of the quarter was a “kind of a very unique dynamic that we have not experienced,” and “that’s what led to the mark-to-market adjustment being more severe than it has been in prior quarters,” said COO Michael Murray.

In terms of accounting for the mortgage-rate buydowns: “That $65 million mark-to-market is in cost of goods sold, whereas the cost of just “standard routine” rate buydowns goes “against revenue and flows through our ASP,” [average selling price], explained Jessica Hansen.

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  86 comments for “D.R. Horton Sheds Some Light on the Massive Costs of Mortgage Rate Buydowns as a Hedge Went Awry. Stock Tanks

  1. Joe says:

    Are they in the house building business or rate speculation business? Sounds like the latter.

    • Thomas Curtis says:

      Good point on the rate speculation.

      From the other side of the world China lowered its reserve ratio last night which drove copper and base metals in general up big this morning. Easing…. Support for asset prices including house, economies, stock markets, and inflation in general. On we go. Maybe we all have to be ‘rate speculators’ now?

      • joedidee says:

        at least here in Tucson, most sellers are offering up to $10k for buyers to buy down mortgage rate

      • J. Pow says:

        “The could have just decreased the price of house.”

        No, I want everyone to speculate with every asset that they have. Builders must hold on to houses to speculate in real estate rally. They should use leverage to fund their carrying costs and hedge mortgage rates. My dream is a world full of explosive Derivatives, so that they all keep begging for bailouts.


    • John H. says:


      When the central authority uses money production to command “the economy” and to counteract emergencies, we are ALL “in the rate speculation business.”

      Asset prices, consumer good prices, tax rates, and buy/sell decisions are all dictated by interest rates.

      It appears the power to manipulate rates is a bit like Tolkien’s Ring, which seemed so useful when the Hobbits discovered it. Not so much when wielded by a Sauron as part of his design to win dominion over Middle-earth.

      “One ring to rule them all.” Good literature mirrors life…

      • Brendan says:

        *sigh*, I sure miss Middle Earth. Maybe we should plan a vacation there…

      • Cas127 says:

        Zimbabwe Ben Bernanke and Sauron the Central Banker.

        And Yellen even looks like a Hobbit.

        (**A lot**)

        • Happy1 says:

          Ha ha! Yellen is Bilbo, Christine Lagarde is Gollum. Powell is Sauron and the Fed Central Bank committee are the Nazgul.

        • Gabby Cat says:

          I am here with popcorn for the LOTR fanfiction. ^.^

    • Bobber says:

      Yes. They were speculating. Or, perhaps they hedged against rate increases that would harm sales. With such business hedge in place, they would lose on the hedge if rates dropped but would gain revenue, in theory. Unfortunately, it appears rates dropped but they didn’t gain revenue. Sales only “held up”.

      Looks like home builder prospects are dimming, which could mean even more incentives in the future, perhaps outright price reductions.

      None of this is good for the existing home market. Not enough buyers can handle these prices.

    • Tom says:

      Anyone doing business at those scales has to pay attention to rates and most (all?) probably have interest rate hedges to buffer against this sort of things. Willing to bet your local bank/credit union/FI does the exact same thing if they’re in the mortgage business. You can’t have millions of dollars in the pipeline and not hedge against rate fluctuations.

      • Bobber says:

        Agree, they have to hedge, but it appears they are trying to attribute poor business performance to a hedge gone awry. It smells to me like the business performance went awry, due to decreasing demand in the market. Maybe the hedge performed as expected, but the underlying business did not.

        Why blame the hedges when the real problem is the business? Such obfuscations are typical in earnings calls.

    • Cas127 says:

      “Are they in the house building business or rate speculation business?”

      Everybody who buys or sells a house is in the rate speculation business.

      It is just that 98% don’t know it.

      (In brief…where rates are when you *buy* your house deeply affects its sale price and absolutely determines its monthly mtg payment.

      Where rates are when you *sell* your house deeply affects its sale price *because* it absolutely determines the *buyer’s* monthly mtg payment.

      ZIRP insanely drove up home prices (far, far in excess of wage increases).

      unZIRP made those grotesquely inflated home values unaffordable for 33% of market demand.

      Thus closed home sales have collapsed by 33%, to 1995 levels. (From 6 million down to 4 million nationally, out of 85 million existing homes).

      So far.)

      • Gary Yary says:

        ZIRP alongside the FED buying Trillion$ of MBS. Complete market manipulation. Crime of the century. I drink 40’s of Malt Liquor. What do I know. Shrinkflate me Forty and feel my wrath!

    • Steve says:

      Currently renting a Horton home built by illegals it’s a piece of

  2. GuessWhat says:

    “This massive swing in mortgage rates in the middle of the quarter was a kind of a very unique dynamic that we have not experienced.”

    Yeah, tell me about it. And when was the last time you had Uncle Sam spending an extra $2T a year to keep everything propped WAY UP?

    A good old recession will take care of your rate buydown problem . . . and more.

  3. The Bob who cried Wolf says:

    I’ve been noticing a good sized bump in sold prices across Nov, Dec, and Jan in our area and thought it seemed unusually high, even considering prices were on the rise last year. I hadn’t been paying close attention to rates but your point that folks were dreaming of three percent caught my eye and has me thinking this was a huge component of many of these recent sales and their eye popping dollar amounts. I’ve tended to be pretty bullish on RE but what happened with these sold prices even shocked me. Both attached and detached went up noticeable amounts. With the rates going back up do you expect things to cool off some?

    People are gonna start with the not in my area and RE cheerleader comments but anyone can go into the real estate sale sites and punch in a search for solds across the last three months and see for themselves.
    City of San Diego

    • Wolf Richter says:

      Existing home sales volume is still at collapsed levels. Selling homeowners don’t offer rate-buydowns, LOL. New-home sales have been holding up though.

      In San Diego, existing home sales are very much at collapsed levels. They fell another 5% in December from the already collapsed levels in Dec 2022 when they’d plunged by 52% yoy (C.A.R. data).

      • ChS says:

        “Selling homeowners don’t offer rate-buydowns, LOL.”

        Not directly, but sellers can provide cash back at closing that allows the home buyer to buy down the interest rate on their mortgage.

        • Depth Charge says:

          “Cash back at closing?” Sounds like bank fraud.

        • ChS says:

          The term is now used generically for financial incentives to the buyer to help close the deal. Another example is the seller paying for closing costs. The lender is fully aware.

        • Ross says:

          Why “cash back at closing” rather than lowering the price: preserves sales commission, preserves comps for Realtor(tm) other listings. All Realtors are crooks (IMHO)

        • ChS says:

          All that is true, but it can also be a better deal for the buyer with the cost of the rate buy down saving the buyer more money then the equivalent price reduction.

        • Pcskier says:

          Ross, you realize that $10k cash at closing instead of lowering the sales price by that amount is 300 bucks or less per side (listing agent and buyers agent). You really think cash contribution at close instead of lowering the price is a conspiracy by realtors to make another $300? Lol. Nor would realtors care about prices being 10k higher by encouraging cash at close vs prove lowering. The amounts are not that impactful.

      • The Bob who cried Wolf says:

        I wasn’t referring to sales volume but actual sold prices that seem to have gone up a lot in the last three months. Sales volume has increased some though as has inventory. Mainly, I was curious if you thought those spikes in prices could be driven by this hope that rates run back to zero.

      • Cas127 says:

        Nationally, closed SFH home sales in 2023 were off the peak by about 33% (from about 6 million sales down to 4 million sales…a level last seen in…1995).

        There are about 85 million SFH homes in the US (with about 55-60 million still having a mortgage – I think. So about 25-30 million SFH owned free and clear…so they can sell without having to pay off some huge sum to their lender…making them much less price sensitive on the sale side).

      • ru82 says:

        I have seen a couple of listings where an existing home seller has offered to buy down the rate.

        I am not sure who they can do that but I am guessing they are providing cash at closing to pay for points?

        Why not just drop the price? Maybe this can sucker in a buyer? If I was a buyer I would want the price reduced and use the current rates as I can always refinance later if rates do drop.

      • Blam 35 says:

        So wolf,

        As an intermittent texted, I’m always admiring of the community shorthand, it knows how to discuss your articles.

        That being said, is 65 mil charge material in a signicant way as they are bearing debt service cost on land & materials.

        So macro for them , does 2 yr buy down of rates a wise investment given their a volume home producer?

        • Wolf Richter says:

          Margin compression of 220 basis points (2.2 percentage points) quarter to quarter is very “material.” That was the ADDITIONAL cost of the mortgage rate downs, including the charge, compared to the prior quarter.

    • Depth Charge says:

      It’s the mix of homes selling. Only the wealthier people are buying now, and they can afford the better houses. So, more expensive houses are selling and the cheaper stuff is just sitting. That skews the median higher and gives a false impression of price health and the housing market in general.

      As Wolf has said, sales have COLLAPSED. In what fantasy world would COLLAPSED sales equal a healthy market and good news? Only those drinking the Jim Jones Flavor Aid could draw that conclusion.

    • jon says:

      In my area, SD, I see homes being priced at 100% more from what it was valued at in early 2020.
      So, in 4 years, SD saw an appreciation of 100%.

      As I wrote before, SD has become completely unlivable for young families and my neighborhood is getting older more and more with no young people able to move in.

      • Depth Charge says:

        It’s 2006 on steroids. Ask anybody but the wealthy if they could afford their house at current prices and the answer is “f*** no.” What the FED and .gov did to shelter prices is criminal. In fact, it’s diabolical.

  4. Malthus says:

    As a Canadian I have never heard of “buydowns” and I don’t think we have them in Canada as our mortgages usually have a maximum term of 5 years. Private lenders only write for a year or two. Amortization is usually 20 to 25 years and the borrower takes the risk of rates increasing after 5 years.
    Also most of our home builders are small and don’t get involved in financing except maybe during the permitting and construction phase.

    • joedidee says:

      if everyone had to refi every 5 years in merika
      there would be massive foreclosures every 5 years

    • Cole says:

      Canada has the most convoluted mortgage scheme I have ever seen. Why would anyone want to make a loan that won’t be fully paid off by the end of the term? 5 years comes along and a sudden change in credit score means the borrower can’t get another loan and now the original lender has to offload an asset.

      • Nick Kelly says:

        The term is when the rate changes. You do not have to get another loan. Had many mortgages with all kinds of terms.

      • MistBeADuck says:

        I think it’s more like a 5/1 ARM. Not a new loan but the rate adjusts after 5 years.

  5. John H. says:

    I assume DHI Mortgage packages their loans and sells them off to investors, at discounted prices.

    Or do they hold any of the mortgages they originated for longer-term investment?

    • Wolf Richter says:

      DHI Mortgage is like any mortgage bank; it sells most of its mortgages to government entities (Fannie Mae, Freddie Mac, the VA, etc.) to be securitized (into agency MBS), and nonconforming mortgages into private-label securitization.

      • John H. says:

        Thanks for the clarification.

        How and when does the discount that they must sell the under-market-rate paper hit Horton’s financials, and is there much company risk due to that if there is a market disruption (like rates retracing the dramatic Q4 bond rally)?

        Who ever said home-building at scale was easy!?

        • Einhal says:

          I haven’t read the earnings call, nor have I seen the deal documents, but I suspect that the mortgages, from Freddie’s perspective, are at “market” rates, and then there is a side agreement whereby Horton supplements the mortgage payment the buyer has to make, and use derivatives to hedge their risk.

          Sounds like they didn’t do it well, though.

  6. Gabriel says:

    Every now and then something happens in this world that finally makes sense. I have been scratching my head wondering how home builder stocks were increasing in a market of high interest rates. Toll Brothers went from $70 to over a $100 as mortgage rates were climbing. Is the world returning to normal?

    • Cole says:

      Because supply is still low. There are people still able to purchase. Some are enduring higher interest rates knowing rates will drop and they will refinance.

      • Einhal says:

        I love how people think it’s a forgone conclusion rates will drop. The Fed Funds rate may drop, sure, but that doesn’t mean that the market will immediately assume that the 10 year will return to 2% and thus the 30 year mortgage to 4%.

        It may stay above 6 for many years, in which case the whole housing market will need to be repriced.

        • Blake says:

          Exactly. Nobody really knows what’s going to happen here. But there’s this baked in idea that this is temporary, and I’ve heard a lot of people complain about their mortgage but how it’s okay because they will just ‘refinance once rates go back down’. If this turns out not to be temporary, and that narrative sticks, I agree that we should see a reprice or some serious wage growth, to balance things out.

          But, you and I also know that the FED could say to hell with price stability and just drop rates to get everyone excited again and keep wall street appeased, which seems to be their priority at times.

  7. Jim Miller says:

    What is the average term of these buydowns?

    • Wolf Richter says:

      It depends. Many are “permanent rate buydowns” for the duration of the mortgage. But the expectation is that those 5.9% bought-down mortgages are getting paid off and refinanced when rates drop below that.

      • Blam 35 says:

        Holy great Scots, full term rate subsidies, but smart because derivatives tend to be cheap until they aren’t

  8. Greedy Landlord says:

    It is interesting and weird to see that they are doing all these gimmicks and tricks instead of simply reducing their selling prices.

    • Anthony A. says:

      Price decreases are a no-no in real estate.

      • C says:

        Been waiting for the shoe to drop on this with these buydowns. Buying down 30 year mortgages is both risky and expensive. Was a matter of time and this will just continue to put downward pressure on prices

      • WB says:

        LOL! Simply using the term “price” implies that there is a mechanism for true price discovery.


        That hasn’t existed for quite some time. Blackrock and Statestreet simple CANNOT be allowed to have a depreciating real estate portfolio!

        YOU on the other hand, not so much.

      • Mark says:

        That would be too honest for corporate real estate predators . Harder to scam some young couple hoping to buy their first home …..

    • Rob says:

      “… instead of simply reducing their selling prices”

      Must maintain the illusion of price stability so as not to piss off recent buyers’ neighbors.

      That too will eventually fail, as all the mechanisms that created the bubble in the first place no longer exist. 6 years from peak to bottom last time, so settle in and enjoy the ride.

    • Wolf Richter says:

      They’re also cutting prices and building smaller houses… the average closing price keeps dropping from quarter to quarter, DHI folks said yesterday.

      • Debt-Free-Bubba says:

        Howdy Lone Wolf. Found it interesting that most youngins go crazy or do not understand the phrase ” Starter Home ” . Wait and see how many freak out at this term. HEE HEE

        • weeeeeeee says:

          Ah yes the starter home

          Held just long enough to pay a boatload of front-loaded interest, but not held too long to keep realtors out of business.

          Starter homes are a cash cow for bankers and realtors.

          I will continue renting, saving, moving around and trying out different neighborhoods, until I’m ready to build my forever home that I hold onto and pass to my kids

      • Gary says:

        Homes built in various economic times are easy to spot decades later; all that smaller, cheaper never goes away. The buyers have to hope in the future that there is someone poorer and more desperate than themselves to unload that rat trap on.

        • Nick Kelly says:

          My sis has a house built in 50’s I had a house built in 2001, admittedly to a tight budget. Hers much higher quality. Nice fir floors, and real plywood for roof sheathing and outer walls!
          I don’t about US but around here in Can, OSB is the norm in spec stuff. Shouldn’t be in code for roofing. .

      • Greedy Landlord says:

        I understand. But instead of expending their mental energy on financial markets, they could cut prices even more.

        Is there a law that the prices cannot be reduced after certain level? Why are the new car prices allowed to go down, though they might be better than previous ones, but not home prices? This is simply ridiculous.

    • Blake says:

      Isn’t it funny how non-intelligent we seem at times? It’s all about the monthly payment. Nobody has the ability to see the total cost of ownership at the end. But it just goes back to what they told you as a kid….nothing is free.

  9. WB says:

    Duh. Considering the extent to which The Fed and central banks around the world have been destroying pricing mechanisms, especially the cost of currency, we are all speculators and have been for quite some time.

    I am confident that risk will be fairly priced…


    In the meantime, hedge accordingly…

    • Depth Charge says:

      We haven’t had price discovery for 25 years now. I may be dead before it comes back.

      • Blam 35 says:

        DC, true that, I’ve watched the same, everything the fed & lack of Mark to market has prevented price discovery, as a conservative turned contrarian by circumstance is frustrating to say the least and an environment hard to invest in, I short , do ok every 2 years but get handed my lunch in meantime

  10. Notta Sheep says:

    I like the link you put in the article that redirects to the data on DR Horton stock and the financials of the company. Is this a new thing or have I always missed the links in past articles? I always study that kind of information before I buy or sell a stock. The financial information you provided is far more in depth than other sites I use for that kind of info. Good job Wolf.

  11. SDPhil says:

    They will play all the games they can to avoid lowering the price. Seems counterintuitive to sales goals but as they undercut resale, homeowners slowly start to realize their values are declining. Buyers have an easier time seeing the decline in prices and pullback more, the slow turning boat of real estate starts to sink.

    In 2006 we saw lots of homeowners sign a new construction contract thinking, we can buy a new house cheaper and then sell ours for (last years)top dollar! They never sold theirs, and never closed on the new construction. The builders ended up based on that sale, building another house and ended up with 2 unsold homes a year later. Then the homeowner who was made fully aware of how upside down they were tossed in the towel. Leaving 3 unsold houses, all from one household wanting a new home.

    • WB says:

      Leverage can be risky. Well past time to let people/corporations suffer real consequences for bad decisions/behavior…

      Screw em.

  12. Debt-Free-Bubba says:

    Howdy Folks. The long or short of all this???? Get out of debt and save some of your $ always . For every dollar earned, save some of it…….

  13. SpencerG says:

    “The ability to have a lower monthly payment for same cost of home is advantageous. So we have no plan in the near-term to stop utilizing it even if we see rates shift down.”

    You gotta admire executives who make a strategic decision… knowing their careers depend on the outcome.

  14. Keith H says:

    I’m missing something. Aren’t hedges supposed to go bad? It’s like a helmet or bulletproof jacket or a car’s crumple zone. You don’t want them to come out shiny and new after something goes bad. You want the important part to be protected.

  15. Glen says:

    Are most major builders linked to the equity market with shareholders? In my simplistic mind, building houses requires capital to obviously buy land, hire labor, build houses, etc and need enough profit to feed the next cycle but shouldn’t need a non producing equity class. This could obviously apply to more than just this business model. I do get in our system there are models that require massive capital input since the public sector mostly stays out of that.

    • WB says:

      You sir are an optimist. When you consider all the contracts and grants that are funded by NIH, NSF, USDA, EPA, DARPA, DOE, military contracts, etc. etc. etc. you realize very quickly that everyone is technically working for the government. A government that is 100% owned by the central bank and finance sector. Look at the growth of K-street since Nixon. exponential growth of firms BUYING your “representation”. This should have been blatantly clear to everyone in 2007/2008/2009. Not even trying to hide it anymore.

    • Wolf Richter says:

      The US has some huge national homebuilders that are traded on the stock market. D.R. Horton is the biggest. Then it has a gazillion regional and local builders.

      Some of them, including D.R. Horton, Lennar, and others, also build big multifamily projects (apartments and condos). Lennar is among the builders that are building thousands of apartments and condos at the old Naval Shipyards in San Francisco’s Hunters Point-Bayview, that includes a vast area of old industrial facilities and shipyards with nuclear contamination (from the Navy), cleanup-scandals, etc. that are being redeveloped. You can buy condos there already, brand new, move-in ready, from Lennar, $799,000 check is in the mail, LOL

      The publicly traded ones that I track in my index are:

      D.R. Horton [DHI]
      Lennar [LEN]
      PulteGroup [PHM]
      NVR [NVR]
      MDC Holdings [MDC] now getting bought by a Japanese homebuilder Sekisui
      Taylor Morrison Home Corp [TMHC]
      Meritage Homes Corp [MTH]
      KB Home [KBI]
      Century Communities [CCS]
      LGI Homes [LGIH]

      Chart shorts % change from a year ago. You can see the huge rate-cut-mania rally from Nov 1 through late December.

  16. SocalJim says:

    New home building should post good margins, so someone screwed up. For example, in Wellesley, MA, there are only 4 single family homes available for less than 3 million dollars. Just 4. That is incredible.

    There is a shortage of single family homes in well located suburbs. Keep building.

    • Wolf Richter says:

      “in Wellesley, MA, there are only 4 single family homes available for less than 3 million dollars.”

      1. That’s a small super-wealthy town (pop 30,000) where the median SFH price is $1.8 million. In a town of 30,000 people, there are NEVER hundreds of homes on the market. Get real!!!

      2. Plus 2 townhouses.

      3. Plus lots of condos, including new construction condos, because the town is part of Greater Boston, and density is being increased as everywhere near urban cores. They’re building condos in these places. You gotta go further out to buy a new house.

  17. NoBadCake says:

    All stocks are kinda tech stocks so asking for opinions on the following must be on topic. : )

    9.8 seems outlandish.

    Argus Market Digest, Tues. Jan. 23, 2024:
    “The proprietary sell/buy ratios from Vickers are bullish below 2.00, neutral between 2.00 and 2.50, and bearish above 2.50. Our concern kicks in when a ratio is above 5.00 on a sustained basis. Two weeks ago, the Nasdaq One-Week Sell/Buy Ratio was 7.05. Last week it was 7.06. This week, it rings in at 9.80. So we are now officially concerned.”

  18. Cas127 says:

    If carefully thought out and efficiently executed, helping borrowers blow themselves up (via excessive borrowing/absurd “asset” valuations) can be painless/profitable for lenders.

    So long as collateral values (especially longer term collateral values) don’t exceed the lenders’ down payment requirements for borrowers (20% for old style residential mtgs, 35% for commercial mortgages) then lenders can foreclose and re-sell the collateral without losing a dime.

    The borrower’s *entire down payment* can be zero’ed out before the lender loses a dime. The borrower’s down payment acts as a cushion against collateral valuation declines.

    • John H. says:


      That sounds vaguely like the residential mortgage backed security (RMBS) tranche game back in 2008, which added a sense of systemic insecurity to the overall financial system back in 2008.

      If I remember correctly, interest rate risk, duration risk, negative convexity, shifting risk aversion (run away mentality) all added to the price drops in RMBS that characterized the 2008 mortgage crisis. Then, too, the tranche of first losses was meant to protect the higher, more shielded tranches. Individual losses may have been forestalled, until the market for all RMBS became suspect and more or less illiquid.

      It didn’t help that many investors didn’t really understand what the hell they actually owned…

      At least that’s how I remember it.

      • Cas127 says:

        Agreed, it *does* sound exactly like tranching…except that until the mid-90’s explosion in mtg backed securities (MBS, mega BS?) and asset based securities (ABS) almost nobody had heard of tranching.

        But in its “your-down-payment-is-my-collateral-devaluation-insurance” form, it is essentially what kept bankers rich for, say, 1000+ years.

        Bankers don’t stay rich because they are stupid or reckless…I’m sure they have a *ton* of quiet, structural loan conditions that offload the maximum amount of outcome risk to the *borrower*….bankers don’t accept very much real risk at all for their “measly” 2%-3% spread on loans (from money more or less issued to them by the G…).

  19. SoCalBeachDude says:

    MW: US Treasury yields end at highest levels in at least 6 weeks after PMI data

  20. American Dream says:

    Always amazing how these huge corporations, massive hedge funds, and billionaire investors still have no idea where the markets are going and take out bad bet after bad bet.

  21. Cissy says:

    On the other side of the coin, when the loan are sold, if the prevailing market interest rates are lower than the interest rates of the loans, would DHI book a gain? DHI sells the mortgage loans within 1-2 months after closing. 1Q2024’s Gains on sale of mortgage loans and mortgage servicing rights was about $49million more than 1Q2023.

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