Friday, February 27, 2009

A lost decade for stocks

The intra-day low on the S&P 500 so far today was 734.52. That's lower than the intra-day low (742.61) on December 5, 1996—the day Alan Greenspan gave his famous "irrational exuberance" speech. The closing price that day was 744.38. If it doesn't happen today, we will likely close below that level within the next week or so.

From that day until today, you would have been better off investing in short-term Treasury bonds.

Update: The S&P 500 ended the day at 735.09, lower than when Alan Greenspan warned of a possible stock market bubble over 12 years ago.

Depression hurts

The Treasury Department's "stress test" of large banks looks at how they would do under two economic scenarios, a "baseline" scenario and an "adverse" scenario. The baseline scenario assumes a 2.0% GDP decline this year, while the adverse scenario assumes a 3.3% GDP decline this year. With the adverse scenario in mind, today's GDP news is a bit disheartening:
GDP fell at a 6.2% seasonally adjusted annualized pace in the final three months of 2008, revised from the initial estimate of a 3.8% drop, the Commerce Department reported. It was the worst decline in GDP since a 6.4% decrease in the first quarter of 1982.

By the way, the adverse scenario assumes a 22% decline in housing prices this year, followed by a 7% decline next year.

The Fannie hits the fan

Fannie Mae is in serious financial trouble. Luckily, that's the taxpayers' problem now.
Hammered by the ailing housing market, mortgage finance giant Fannie Mae said Thursday it would tap its lifeline from the Treasury Department after reporting $58.7 billion in losses for 2008.

The company, a crucial source of funding for mortgage lenders, said it would draw down $15.2 billion of its $200 billion federal line of credit. In return, the government will receive preferred shares.

And it gave a dour view of the housing market — saying it expects peak-to-trough price declines to be in the 33% to 46% range, up from the 27% to 32% range it gave in the previous quarter. For 2009, it predicts home values will drop 12 to 18%.

For the fourth quarter, Fannie Mae reported $25.2 billion in losses, or $4.47 per share. The results mark the sixth straight quarter of losses, though slightly narrower than it reported in the third quarter. A year ago, Fannie Mae reported $3.6 billion in losses.

The company, which was taken over by the government in September along with Freddie Mac, attributed the losses to soaring defaults. ... The value of non-performing loans were $119.2 billion at year-end, compared with $63.6 billion on Sept. 30 and $27.2 billion at the end of 2007.
Fannie Mae, Freddie Mac, and AIG should simply be shut down. (Or, at least broken up.) Of course politicians won't let that happen because Fannie and Freddie are the only reasons anyone in America can get a low interest mortgage.

New home sales plummet

Shocker! New home sales are down:
Sales of newly constructed homes fell 10% in January, sinking to the lowest level on record, according to a government report released Thursday.

The U.S. Census Bureau reported that new home sales fell to a seasonally adjusted annual rate of 309,000 in January from a revised 344,000 in December. It was the lowest level since the Census Bureau began keeping records in 1963. ...

The report also showed that the median sales price of new houses sold in January was $201,000, down 15% from $232,400 a year ago.

Obama to cut mortgage interest deduction for high-income households

From yesterday's Wall Street Journal:
President Barack Obama on Thursday will propose $634 billion in new taxes on upper-income Americans and cuts in government spending over the next decade to pay for his promised health-care expansion. ...

The tax increases would raise an estimated $318 billion over 10 years by reducing the value of such longstanding deductions as mortgage interest and charitable contributions for people in the highest tax brackets. Households paying income taxes at the 33% and 35% rates can currently claim deductions at those rates. Under the Obama proposal, they could deduct only 28% of the value of those payments.

The changes would be phased in gradually over the next few years. For the 2009 tax year, the 33% tax bracket starts with couples with taxable earnings of $208,850, when adjusted for personal exemptions and various deductible expenses. A taxpayer in the top bracket paying $1,000 of mortgage interest, for example, would see a tax break worth $350 reduced to $280.
It sounds like a good time for the wealthy to cut back on their charitable contributions.

Thursday, February 26, 2009

Many baby-boomers are underwater on their homes

The Center for Economic and Policy Research reports the poor state of Americans nearing retirement:
According to a report released Wednesday, the real estate market bust and stock market declines have carved a huge chunk out of the assets of baby boomers, the largest age cohort in U.S. history.

So much home equity has been lost that should boomers need to sell their homes, 30% of those aged 45 to 54 would owe money at closing, according to "The Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble," a report released by the Center for Economic and Policy Research, a Washington, D.C.-based, non-partisan think tank. About 18% of boomers aged 55 to 64 are underwater and would have to bring money to the table.

The CEPR also found that people who were renting homes in 2004 will have more wealth in 2009 than those who were owners. That's true for all five wealth groups the study analyzed, from the poorest to the wealthiest.

"The collapse of the housing bubble, which led to the current recession, has already destroyed almost $6 trillion dollars in housing wealth for homeowners," said report co-author Dean Baker. "This reality is compounded by the recent collapse of the stock market. Many baby boomers will only have Social Security and Medicare to rely on in their retirement."

Boomers between 45 and 54 have lost 45% of their median net worth, leaving them with just $80,000 in net worth, including home equity, according to the report.

Older boomers have fared marginally better. Those between 55 and 64 have lost 38% of their net worth, leaving them with $140,000. But this group is rapidly nearing retirement age and they have few working years left to make up the losses.

CNBC's Diana Olick is hopelessly clueless about the housing bubble

Diana Olick covers the housing beat for CNBC. Once upon a time she seemed to do a good job, but she is gradually appearing more and more clueless:
Prices are now at levels not seen since 2003, essentially giving back all the gains of the housing boom.
The housing boom did not begin in 2003. Instead, it began about five years earlier, around 1997-1998. By 2001, we were in mild bubble territory. The housing market still has a lot to fall before it gets back to historically normal valuations.

January existing home sales decline

Existing home sales fell 5.3% month-over-month:
The National Association of Realtors said Wednesday that existing home sales dropped 5.3% last month, to a seasonally adjusted annual rate of 4.49 million units from a rate of 4.74 million in December.

January sales were the lowest since July 1997, and were far below the consensus estimate of 4.79 million units, according to a survey of economists compiled by ...

The national median existing-home price was $170,300 in January, down nearly 15% from last year when the median price was $199,800. ...

Existing home sales unexpectedly rose in December as rock-bottom prices attracted some buyers in certain distressed markets. That led some analysts to speculate that the housing market was nearing its bottom after months of weak sales and falling prices.

But January's figures suggested otherwise, notes Weiss Research analyst Mike Larson.

"Another false dawn? That's what December looks like, considering the dismal performance of the existing home market last month," Larson wrote in a research report.

While tight credit and waning consumer confidence continue to depress home sales, the biggest challenge facing the housing market is unemployment, Larson said.

"If Americans are worried they won't have a job next month, next quarter, or next year, you've got a real problem," he said. "It doesn't matter if mortgage rates are 3% or 8%. People just aren't going to buy many houses."
According to the Realtors' press release, the January year-over-year decline was 7.1%. The Northeast had the biggest decline in sales, both YoY and MoM, while the West had the biggest decline in prices.

Wednesday, February 25, 2009

Home prices still plunging

The downward decline in the S&P/Case-Shiller National Home Price Index is accellerating:
The S&P Case-Shiller National Home Price Index reported that prices sank a record 18.2% during the last three months of 2008, compared with the same period in 2007. ...

"The broad downturn in the residential real estate market continues," said David Blitzer, chairman of the Index Committee at Standard & Poor's, in a statement. "There are very few, if any, pockets of turnaround that one can see in the data."

All 20 metro areas in the 20-city index recorded declines, with home prices falling more than 20% in eight of those cities. National home prices have dropped 26.7% since they peaked during the second quarter of 2006. ...

The decline does not seem to be slowing — just the opposite. The average home price dropped 2.5% between November and December in the 20 top metro areas. That was a larger increase than the 2.3% drop a month earlier.

"The deterioration in U.S. home prices continues apace, with the rate of decline picking up steam late last year," said Mike Larson, an analyst with Weiss Research. "Rising foreclosure activity is putting pressure on prices, as lenders are increasingly pursuing a 'take what we can get' selling strategy."

Karl Case, the Wellesley economist who, with Yale economist Robert Shiller, co-developed the index, pointed out during a news conference following the index's release that the markets experiencing the steepest falls also enjoyed the biggest run-ups during the boom. ...

The index statistics do not contain a lot of good news for the future, according to Case.
Don't worry. The housing bottom is right around the corner, just as it has been for the past three years.

Tuesday, February 24, 2009

How Robert Shiller measured housing prices back to 1890

The S&P/Case-Shiller Home Price Index only tracks housing prices back to 1987, and the OFHEO House Price Index only tracks housing prices back to 1975. This raises an interesting question: How the heck did Robert Shiller manage to measure home prices all the way back to 1890 in his famous graph?

Here's how he did it:
Until recently, the only long time series of house prices for the United States had been compiled by Shiller (2005). Shiller constructs this series by splining together available house price data from 1890–1934 from Grebler, Blank, and Winnick (1956), the home-purchase component of the CPI-U from 1953–1975, the OFHEO from 1975–1987, and the Case-Shiller-Weiss index from 1987–2005. To fill in the gap, Shiller constructs an index of house prices from 1934 to 1953 by compiling data on the sales price of houses from five major cities based on newspaper advertisements. These data, after adjusting for consumer price inflation, show almost no trend increase in house prices until about 1997, leading Shiller and others to conclude that the boom to house prices from 1998–2006 is historically anomalous.

Monday, February 23, 2009

Details of the $8,000 homebuyer tax credit

The stimulus package recently signed by President Obama has a $8,000 tax credit for "first-time" home buyers. This means taxpayers are paying for part of your house, even though they don't get to live in your house. (Sounds fair, right?)

Here are the details of the tax credit:
First-time buyers can claim a credit worth $8,000 — or 10% of the home's value, whichever is less — on their 2008 or 2009 taxes.

A big plus is that the credit is refundable, meaning tax filers see a refund of the full $8,000 even if their total tax bill — the amount of witholding they paid during the year plus anything extra they had to pony up when they filed their returns — was less than that amount. ...

To qualify for the credit, the purchase must be made between Jan. 1, 2009 and Nov. 30, 2009. Buyers may not have owned a home for the past three years to qualify as "first time" buyer. They must also live in the house for at least three years, or they will be obligated to pay back the credit.

Additionally, there are income restrictions: To qualify, buyers must make less than $75,000 for singles or $150,000 for couples. (Higher-income buyers may receive a partial credit.)

Applying for the credit will be easy - or at least as easy as doing your income taxes. Just claim it on your return. No other forms or papers have to be filed. Taxpayers who have already completed their returns can file amended returns for 2008 to claim the credit.
Home prices are still declining. By my estimate, the median U.S. home is $50,000 overpriced, so this credit will reduce the loss you experience over the next few years, but not eliminate it.

Sunday, February 22, 2009

Why mark-to-market accounting is flawed

Mark-to-market accounting is at the heart of the current financial crisis. Some banks are currently in financial trouble based on mark-to-market accounting, but not based on traditional accrual accounting.

Worthwhile Canadian Initiative explains how mark-to-market accounting is flawed:
The wisdom of MTM [mark to market] accounting has been debated before and since its original implementation. On the one hand, it “shines a light” on developing asset value problems. On the other, it has the potential to exaggerate volatility in reported earnings, in some cases unnecessarily. As a simple example, a 5 year fixed rate loan or bond that matures in tact may exhibit substantial MTM volatility throughout its lifetime. But such volatility accumulates to zero net effect by the time the bond matures. ...

A relevant and connected analogy exists in the household sector. The housing boom was based on easy credit and an implied belief in MTM accounting for houses, otherwise known as the ATM effect. Current house prices, however inflated, were the basis for many hundreds of billions of dollars of mortgage equity withdrawals (MEW). Those who bet on housing MTM as an indicator of sustainable price appreciation behaved accordingly. So did mortgage lenders. Those who restrained from using MTM as a mental accounting of a sustained trajectory of personal wealth, and who considered such MTM information with more restraint, probably checked their behaviour more wisely in terms of allowing for risk. In order words, behaviour was a function of how households viewed the effect of housing MTM on their personal balance sheets and longer term capital positions. Those who resisted incorporating full MTM into their own capital evaluations were probably more restrained in MEW transactions and related spending. Those who acted aggressively on their housing MTM profile overextended their balance sheets and spent the money from their MEW proceeds.
If mark-to-market accounting can overstate an asset's value during a bubble, it can understate its value during a panic. For international banks, which have some or all of their assets subject to mark-to-market accounting, the difference between accrual accounting and mark-to-market accounting can be the difference between solvency and insolvency.

Saturday, February 21, 2009

Shiller: Difficult to predict when "biggest bubble in history" will hit bottom

Yale University economist Robert Shiller thinks the outlook for housing is hazy:
It is very difficult to predict when U.S. housing prices will hit bottom because the economy is deteriorating so quickly, economist Robert Shiller, co-creator of the S&P/Case Shiller index, told Reuters on Friday.

The housing market is experiencing its worst downturn in modern history. On a national basis, homes have lost about a quarter of their value, and economists foresee at least an additional 10 percent decline.

What the future holds depends on what sort of traction government programs gain to help stem foreclosures, Shiller said.

"It's hard to predict this market because we've just been through the biggest bubble in history and it's at the time of the worst financial crisis since the Great Depression," he said in an interview with Reuters television.

Shiller noted that prices have been falling quite rapidly every month, adding, "That has a good chance of continuing."

Friday, February 20, 2009

Leading economic indicators suggest possible (weak) recovery ahead

Finally, some good news for the economy:
Economic weakness will continue through this year, though the recession's intensity could ease over the next few months, the Conference Board said Thursday.

For the second consecutive month, the index of leading economic indicators rose, gaining 0.4% in January, following a downwardly revised 0.2% in December.

"The second half of 2009 may see a period of anemic growth," said Ken Goldstein, economist at the Conference Board. "In fact, a return to robust growth may not occur until well into 2010, even if the long climb starts a few months from now."

The recent gains are due, in part, to the Federal Reserve's huge injections of cash into the money supply. Despite the rise in January, widespread weakness remains as the troubled job and housing markets continue to take their toll.

Some of the index's estimates may be too optimistic, and could be downwardly revised, wrote Ian Shepherdson, chief U.S. economist with High Frequency Economics, in a research note.

"In short, we see no real improvement here despite the rise in the headline," Shepherdson wrote.
The way I see it, a weak recovery is ideal. The economy as a whole stops tanking, but the economy is weak enough that housing prices are likely to continue declining.

Michelle Malkin defends renters (again)

I usually dislike Michelle Malkin, but she is one of the few people in either political party standing up for renters. Here she questions the wisdom of President Obama's bailout of irresponsible homeowners:
How is this fair to renters and home owners who had the foresight to take on loans they could afford? ...

Why is it government’s role to take my money to fund someone else’s property value preservation?
Unlike the Republicans in Congress, she has been consistent in opposing the bailout of irresponsible homeowners.

Many people say we should feel sorry for irresponsible homeowners facing foreclosure. I was kicked out of my home during the upside of the bubble so my apartment building could be converted to condos, so I have no sympathy for people getting kicked out of their homes because they bought more house than they could afford. Why should we have a double standard?

WSJ no fan of Obama plan

The Wall Street Journal criticizes President Obama's plan to bail out irresponsible homeowners:
President Obama yesterday announced his plan to prevent home foreclosures, saying he wanted to be "very clear about what this plan will not do: It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans . . . And it will not reward folks who bought homes they knew from the beginning they would never be able to afford."

We really do wish he were right. In fact, the details released yesterday suggest the President's plan will do all of the above. The plan will help some struggling homeowners. But by investing in failure, the Administration will also prolong the housing downturn and make financing a home purchase more difficult for future borrowers. Meanwhile, the plan isn't likely to slow the continuing decline in housing prices. ...

Mr. Obama's mortgage plan is his third big economic rescue proposal in a month, and perhaps someone in the White House has noticed that financial markets haven't exactly cheered. Yesterday's end-of-day wrap from UBS put it this way: "Obama Speaks, Market Listens, Sells Off."

Thursday, February 19, 2009

CNBC's Rick Santelli rants against Obama's bailout of irresponsible homeowners

Rick Santelli: "How many of you people want to pay for your neighbor's mortgage, that has an extra bathroom, and can't pay their bills? Raise your hand!"

Update: CNBC is conducting an online poll based on this video. You can vote here.

Housing starts fall to new record low

Housing starts have fallen to a new record low:
Initial construction of U.S. homes fell to the lowest level on record in January, according to a government report released Wednesday.

Starts fell to a seasonally adjusted annual rate of 466,000 in January, according to the Commerce Department. That's the lowest level since the government started keeping records in 1959.

The rate was down 16.8% from December's revised reading of 547,000, and 56.2% lower than January 2008. ...

January marked the fourth consecutive month in which housing starts fell to a new record low. Starts have fallen nearly 80% from their peak of 2.3 million in January 2006. ...

"Building activity is all dried up," said Larson. "Some of it is voluntary cutbacks, because the inventory is excessive. But there are also involuntary cutbacks, as lenders are cutting off funding for developers."
Having the lowest number of housing starts on record is worse than it sounds, because in 1959 the U.S. only had a population of 177.8 million compared to 303.8 million today.

Diana Olick on the housing correction

From her CNBC blog:
As I've always said, some people can be helped, and the government can throw a lot of money at the problem, but in the end this will have to be a painful correction where many borrowers lose their homes, many more lose home equity and prices bottom when they simply become too attractive for new buyers to stay away.

Wednesday, February 18, 2009

Downtown Chicago New Condo Sales Turn Negative

In the last 10 years dozens of large condo buildings have been constucted in downtown Chicago. During the boom years these condos sold well.
In the 4th quarter of 2008, sales of new condos in downtown Chicago turned negative as many sales contracts were cancelled. Now, there is obviously a glut.

And in the fourth quarter, the number of residential sales was a negative 250 units.

How can that be?

The numbers are drawn from an annual survey that Appraisal Research Counselors reported Tuesday. They are the worst results anybody can recall for the reports, which the company has compiled in quarterly updates since 1997.

Overall, 592 condos sold in central Chicago during 2008, the survey found. The result was abysmal for a market that has generated annual sales of 4,000 to 8,000 units.

The condo market in downtown Chicago has collapsed compared to 2005 or 2006. Prices are falling and will continue to fall during 2009.

A cool trick to delay foreclosure

I'm no fan of people who bought more house than they could afford, hoping they could get rich quick through real estate. However, I do feel sorry for the people losing their homes because they lost their job, as is common in non-bubble areas like Ohio. So, I got a kick out of this:
Kathy Lovelace lost her job and was about to lose her house, too. But then she made a seemingly simple request of the bank: Show me the original mortgage paperwork.

And just like that, the foreclosure proceedings came to a standstill.

Lovelace and other homeowners around the country are managing to stave off foreclosure by employing a strategy that goes to the heart of the whole nationwide mess.

During the real estate frenzy of the past decade, mortgages were sold and resold, bundled into securities and peddled to investors. In many cases, the original note signed by the homeowner was lost, stored away in a distant warehouse or destroyed.

Persuading a judge to compel production of hard-to-find or nonexistent documents can, at the very least, delay foreclosure, buying the homeowner some time and turning up the pressure on the lender to renegotiate the mortgage. ...

Chris Hoyer, a Tampa lawyer whose Consumer Warning Network Web site offers the free court documents Lovelace used to file her request, has played a major role in promoting the produce-the-note strategy. ...

A University of Iowa study last year suggested that companies servicing mortgages are often negligent when it comes to producing the documentation to support foreclosure. In the study of more than 1,700 bankruptcy cases stemming from home foreclosures, the original note was missing more than 40 percent of the time, and other pieces of required documentation also were routinely left out. ...

April Charney, head of foreclosure defense for Jacksonville Area Legal Aid in Florida, said the strategy has been so successful for her that she now travels around the country to train other lawyers in how to use it. She said she has gotten cases delayed for years by demanding that lenders produce paperwork they cannot find.

Tuesday, February 17, 2009

Tonight on PBS: Inside the meltdown

Tonight at 9 PM on most PBS stations (including WETA), FRONTLINE: Inside the Meltdown.

FRONTLINE investigates the causes of the worst economic crisis in 70 years and how the government responded. The film chronicles the inside stories of the Bear Stearns deal, Lehman Brothers’ collapse, the propping up of insurance giant AIG, and the $700 billion bailout. Inside the Meltdown examines what Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke didn’t see, couldn’t stop and haven’t been able to fix.

Graph: United States unemployment rate since 1948

Here is a better graph than Saturday's, straight from the St. Louis Fed, the U.S. unemployment rate since 1948. (A similar BLS graph is available here.) Click on the graph to see it full size.

Again, worst recession since the Great Depression? Not! —At least not yet.

So the press is kicking and screaming, and scaring everyone by saying "worst since the Great Depression," yet look where we are today. I count four recessions with higher unemployment rates than the current one.

The press has to make its "worst since the Great Depression" claims based on economic forecasts, but economic forecasting is notoriously unreliable. Furthermore, actual economic forecasts expect the unemployment rate to reach 9%, which is still lower than the early 1980s recession. So, their "worst since the Great Depression" claims are not based on current data, nor on actual economic forecasts, but rather on fear mongering.

Now, based on current valuations, I expect housing prices to continue falling for several more years. Since housing is the cause of our current recession, this may well turn out to be the longest recession since the Great Depression. And, yes, unemployment rates could exceed those of the early 1980s. However, the U.S. government is enacting an $800 billion stimulus package plus a bank bailout, in an attempt to weaken the link between falling housing prices and rising unemployment.

Monday, February 16, 2009

Time Magazine Names David Lereah as Part of '25 People to Blame for the Financial Crisis'

Time Magazine Names David Lereah as Part of '25 People to Blame for the Financial Crisis.' The page on Lereah is here.

When the chief economist at the National Association of Realtors, an industry trade group, tells you the housing market is going to keep on chugging forever, you listen with a grain of salt. But Lereah, who held the position through early 2007, did more than issue rosy forecasts. He regularly trumpeted the infallibility of housing as an investment in interviews, on TV and in his 2005 book, Are You Missing the Real Estate Boom?. Lereah says he grew concerned about the direction of the market in 2006, but consider his January 2007 statement: "It appears we have established a bottom."
Nice. Well put. He definitely deserves blame for the current financial crisis. It would have been much better if the mainstream media had shined the light of scrutiny on David Lereah back during the height of the bubble when he was cheer leading the bubble and then later denying the bust.

This recession's chain of economic events

Click on the image to see it full size.

Here is a little diagram I drew to point out the chain of events that is occurring in our current recession. I marked "falling housing prices" as being caused by the free market to emphasize that it is the natural result of high housing prices. However, in reality every item along the chain is being caused by the free market. The actions in red represent the federal government's attempts to weaken the link between falling housing prices and rising unemployment.

Many people may be tempted to try to prop up high housing prices, and that is what the economic stimulus package's $8000 tax credit is attempting to do. However, last year's $7500 tax credit failed to have a noticeable effect. At best, attempting to prop up high housing prices in the near term will only make the decline last longer, which in turn will make the recession last longer. President Obama should realize that it is in his own interest to let housing prices correct as fast as possible, so prices are no longer falling when he runs for re-election in 2012.

Sunday, February 15, 2009

Our economic crisis: Worse than Japan?

The Economist doesn't share my optimism:
Today’s mess in America is as big as Japan’s—and in some ways harder to fix.

This crisis, like most others in rich countries, emerged from a property bubble and a credit boom. The scale of the bubble—a doubling of house prices in five years—was about as big in America’s ten largest cities as it was in Japan’s metropolises. But nationwide, house prices rose further in America and Britain than they did in Japan (see first chart). ...

What is worse, today’s bust is not just about banking. America faces twin financial crashes (as, to a lesser degree, do other Anglo-Saxon countries): one in the regulated banking sector and a simultaneous collapse of the “shadow banking system”, the universe of hedge funds and investment banks responsible for much of the recent securitisation boom as well as for the sharp rise in financial leverage.

Add all this together and the ease with which American policymakers dismiss Japan’s experience is probably misplaced. Japan’s outcome—a decade in which growth averaged 1% a year and gross government debt rose by 80 percentage points of GDP—was not one to be proud of. But given the magnitude of today’s mess, it may soon seem not that bad after all.
The full article has a lot more.

Saturday, February 14, 2009

Worst recession since the Great Depression? Not!

This graph shows unemployment claims (%) since 1971:

Could this become the worst recession since the Great Depression? It's possible, but right now we're not even close.


Friday, February 13, 2009

NAR: Q4 home prices down 12.4% YoY

The National Association of Realtors says fourth quarter home prices were down 12.4% year-over-year:
Home prices fell 12.4% during the fourth quarter of 2008, the largest year-over-year decline since the National Association of Realtors began keeping comprehensive records in 1979.

The median price for a U.S. home sold during the fourth quarter of 2008 fell to $180,100, down from $205,700 during the last quarter of 2007. ...

Distressed properties, the foreclosures and short sales that have flooded the market, accounted for 45% of all deals. That has driven sales volume up in Nevada, California and other states hit hard by foreclosures, but these heavily discounted homes have also pushed median prices down.

Hey Obama, subsidize my rent, too!

Barack Obama wants to subsidize irresponsible homeowners:
The Obama administration is looking at subsidizing the mortgage payments of struggling borrowers before they default, according to sources familiar with the discussions.

If it comes to pass, the program would blaze a new trail in the federal government's foreclosure prevention initiatives. Until now, the efforts have focused on helping those already behind in their payments through interest-rate reductions and other loan modifications. The Bush administration had not committed any money to helping borrowers.

Obama, however, has pledged to spend at least $50 billion to help borrowers in trouble. Treasury Secretary Tim Geithner said Tuesday that the administration would release its plan within a few weeks. He and Housing Secretary Shaun Donovan have been meeting with banks, housing advocates and trade organizations this week to listen to their foreclosure prevention proposals.

Details remain scarce, but at this point the subsidy plan entails having struggling homeowners take an affordability test and undergo a re-appraisal to see if they are eligible. The subsidy would allow servicers to adjust the loan terms without having the mortgage's investors take a loss, which should make them more open to the loan modification.

Assisting borrowers before they default would help stop the wave of foreclosures, which are estimated to top two million this year. That, in turn, will help stabilize home prices.

"This will help put a floor on home values," said one person familiar with the negotiations.

Thursday, February 12, 2009

Tonight at 8 PM on CNBC: House of Cards

Tonight at 8 PM ET on CNBC: House of Cards.
CNBC correspondent David Faber investigates the origins of the global economic crisis, with first person accounts from home buyers, mortgage brokers, investment bankers and investors — most of whom let greed blind them, leading to the greatest financial collapse since the Great Depression.

Government deserves much blame for the financial crisis

Stanford University economics professor John Taylor says the government bears a lot of responsibility for the housing bubble and the resulting financial crisis.
My research shows that government actions and interventions — not any inherent failure or instability of the private economy — caused, prolonged and dramatically worsened the crisis.

The classic explanation of financial crises is that they are caused by excesses — frequently monetary excesses — which lead to a boom and an inevitable bust. This crisis was no different: A housing boom followed by a bust led to defaults, the implosion of mortgages and mortgage-related securities at financial institutions, and resulting financial turmoil.
Regarding the housing bubble:
Monetary excesses were the main cause of the boom. The Fed held its target interest rate, especially in 2003-2005, well below known monetary guidelines that say what good policy should be based on historical experience. Keeping interest rates on the track that worked well in the past two decades, rather than keeping rates so low, would have prevented the boom and the bust. Researchers at the Organization for Economic Cooperation and Development have provided corroborating evidence from other countries: The greater the degree of monetary excess in a country, the larger was the housing boom.

The effects of the boom and bust were amplified by several complicating factors including the use of subprime and adjustable-rate mortgages, which led to excessive risk taking. There is also evidence the excessive risk taking was encouraged by the excessively low interest rates. ...

Other government actions were at play: The government-sponsored enterprises Fannie Mae and Freddie Mac were encouraged to expand and buy mortgage-backed securities, including those formed with the risky subprime mortgages.
Regarding the financial crisis:
A third policy response was the very sharp reduction in the target federal-funds rate to 2% in April 2008 from 5.25% in August 2007. This was sharper than monetary guidelines such as my own Taylor Rule would prescribe. The most noticeable effect of this rate cut was a sharp depreciation of the dollar and a large increase in oil prices. After the start of the crisis, oil prices doubled to over $140 in July 2008, before plummeting back down as expectations of world economic growth declined. But by then the damage of the high oil prices had been done.

After a year of such mistaken prescriptions, the crisis suddenly worsened in September and October 2008. We experienced a serious credit crunch, seriously weakening an economy already suffering from the lingering impact of the oil price hike and housing bust.

Many have argued that the reason for this bad turn was the government's decision not to prevent the bankruptcy of Lehman Brothers over the weekend of Sept. 13 and 14. A study of this event suggests that the answer is more complicated and lay elsewhere.

While interest rate spreads increased slightly on Monday, Sept. 15, they stayed in the range observed during the previous year, and remained in that range through the rest of the week. On Friday, Sept. 19, the Treasury announced a rescue package, though not its size or the details. Over the weekend the package was put together, and on Tuesday, Sept. 23, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson testified before the Senate Banking Committee. They introduced the Troubled Asset Relief Program (TARP), saying that it would be $700 billion in size. A short draft of legislation was provided, with no mention of oversight and few restrictions on the use of the funds.

The two men were questioned intensely and the reaction was quite negative, judging by the large volume of critical mail received by many members of Congress. It was following this testimony that one really begins to see the crisis deepening and interest rate spreads widening.

The realization by the public that the government's intervention plan had not been fully thought through, and the official story that the economy was tanking, likely led to the panic seen in the next few weeks. And this was likely amplified by the ad hoc decisions to support some financial institutions and not others and unclear, seemingly fear-based explanations of programs to address the crisis.
His conclusion:
It did not have to be this way. To prevent misguided actions in the future, it is urgent that we return to sound principles of monetary policy, basing government interventions on clearly stated diagnoses and predictable frameworks for government actions.

Massive responses with little explanation will probably make things worse. That is the lesson from this crisis so far.
One problem with this narrative is that we were already well into the housing bubble by 2003. Many economists say that the housing bubble was initially caused by excessive savings in China and the Middle East, which resulted in ultra-low interest rates in the U.S. Rather than creating the housing bubble, it is much more likely that the Federal Reserve poured gas on an already burning fire.

John Taylor has a new book about the financial crisis coming out soon.

Are we all socialists now?

From Newsweek:
Whether we like it or not—or even whether many people have thought much about it or not—the numbers clearly suggest that we are headed in a more European direction. A decade ago U.S. government spending was 34.3 percent of GDP, compared with 48.2 percent in the euro zone—a roughly 14-point gap, according to the Organization for Economic Cooperation and Development. In 2010 U.S. spending is expected to be 39.9 percent of GDP, compared with 47.1 percent in the euro zone—a gap of less than 8 points. As entitlement spending rises over the next decade, we will become even more French. ...

The architect of this new era of big government? History has a sense of humor, for the man who laid the foundations for the world Obama now rules is George W. Bush.... Bush brought the Age of Reagan to a close; now Obama has gone further, reversing Bill Clinton's end of big government. ... Polls show that Americans don't trust government and still don't want big government. They do, however, want what government delivers, like health care and national defense and, now, protections from banking and housing failure.

Wednesday, February 11, 2009

Fifteen companies that may go under this year

From Yahoo! Finance:
Rite Aid. This drugstore chain tried to boost its performance by acquiring competitors Brooks and Eckerd in 2007. But there have been some nasty side effects, like a huge debt load that makes it the most leveraged drugstore chain in the U.S.

Claire's Stores. Leon Black's once-renowned private-equity firm, the Apollo Group, paid $3.1 billion for this trendy teen-focused accessory store in 2007, when buyout funds were bulging. But cash flow has been negative for much of the past year and analysts believe Claire's is close to defaulting on its debt.

Chrysler. Of the three Detroit automakers, Chrysler is the most endangered, with a product portfolio that's overreliant on gas-guzzling trucks and SUVs and almost totally devoid of compelling small cars.

Dollar Thrifty Automotive Group. This car-rental company is a small player compared to Enterprise, Hertz, and Avis Budget. It's also more reliant on leisure travelers, and therefore more susceptible to a downturn as consumers cut spending. Dollar Thrifty is also closely tied to Chrysler, which supplies 80 percent of its fleet.

Realogy Corp. It's the biggest real-estate brokerage firm in the country, but that's a bad thing when there are double-digit declines in both sales and prices, as there were in 2009. Realogy, which includes the Coldwell Banker, ERA, and Sotheby's franchises, also carries a high debt load, dating to its purchase by the Apollo Group in 2007 — the very moment when the housing market was starting to invert from a soaring ride into a sickening nosedive.

Station Casinos. Las Vegas has already been creamed by a biblical real-estate bust, and now it may face the loss of its home-grown gambling joints, too. Station — which runs 15 casinos off the strip that cater to locals — recently failed to make a key interest payment, which is often one of the last steps before a Chapter 11 filing.

Loehmann's Capital Corp. This clothing chain has the right formula for lean times, offering women's clothing at discount prices. But the consumer pullback is hitting just about every retailer, and Loehmann's has a lot less cash to ride out a drought than competitors like Nordstrom Rack and TJ Maxx.

Sbarro. It's not the pizza that's the problem. Many of this chain's 1,100 storefronts are in malls, which is a double whammy: Traffic is down, since consumers have put away their wallets. Sbarro can't really boost revenue by adding a breakfast or late-night menu, like other chains have done.

Six Flags. This theme-park operator has been losing money for several years, and selling off properties to try to pay down debt and get back into the black.

Blockbuster. The video-rental chain has burned cash while trying to figure out how to maximize fees without alienating customers. Its operating income has started to improve just as consumers are cutting back, even on movies. Video stores in general are under pressure as they compete with cable and Internet operators offering the same titles.

Krispy Kreme. The donuts might be good, but Krispy Kreme overestimated Americans' appetite — and that's saying something. This chain overexpanded during the donut heyday of the 1990s — taking on a lot of debt — and now requires high volumes to meet expenses and interest payments.

Landry's Restaurants. This restaurant chain, which operates Chart House, Rainforest Café, and other eateries, needs $400 million in new financing to finalize a buyout deal dating to last June.

Sirius Satellite Radio. The music rocks, but satellite radio has yet to be profitable, and huge contracts for performers like Howard Stern are looking unsustainable.

Trump Entertainment Resorts Holdings. The casino company made famous by The Donald has received several extensions on interest payments, while it tries to sell at least one of its Atlantic City properties and pay down a stack of debt. But with casino buyers scarce, competition circling, and gamblers nursing their losses from the recession, Trump Entertainment may face long odds of skirting bankruptcy.

BearingPoint. This Virginia-based consulting firm, spun out of KPMG in 2001, is struggling to solve its own operating problems. The firm has consistently lost money, revenue has been falling, and management stopped issuing earnings guidance in 2008.
A lot of teenage girls will be disappointed if Claire's goes under. A lot of fat people will be disappointed if Krispy Kreme goes under. Sbarro makes great pizza and salad. I'd be disappointed if they go out of business, but I can't say I go there very often. Perhaps you should rent your movies from Blockbuster this year, hoping that if they close their doors while you've got the DVD checked out, it's yours to keep!

Get your Sbarro pizza, Krispy Kreme doughnuts, Blockbuster movies, and Six Flags amusement park rides this year before they're gone.

Tuesday, February 10, 2009

CNN Video: Lessons from the Great Depression

I can't embed videos from CNN/Money, but here is a video discussing lessons from the Great Depression.

A key quote from the video:
The one lesson we learned was never allow the banking system to collapse.
Milton Friedman made roughly the same argument here.

Where the foreclosures are

Click on the map to see a larger image.

Yun Takes 'Full Responsibility' For His Actions

Lawrence Yun takes full responsibility for everything he does. The Orange County Register reports:

“Whatever I say, I take full responsibility for everything I do,” Yun said moments before addressing more than 200 people at the Orange County Association of Realtors headquarters in Laguna Hills.

Are you going to take responsibility and resign? You are a discredited shill for the Realtors and have been made many predictions that were way off. For example in July 2008 Yun stated "I think we are very near to the end of the housing downturn," Yun said (AP News).

Monday, February 09, 2009

Buffett's and Shiller's stock valuation methods agree

Carol Loomis of Fortune has a new article out saying that Warren Buffett's valuation metric says it's time to buy stocks. I decided to compare Warren Buffett's stock valuation metric with Robert Shiller's. They both compare nicely.

Warren Buffett's stock valuation metric: Total stock market value as a percent of GNP.

Yale economist Robert Shiller's stock valuation metric, based on Benjamin Graham's advice in Security Analysis: S&P 500 10-year price/earnings ratios.

Robert Shiller doesn't compare the S&P 500 only to its current year earnings. Instead, he compares it to the average of the past ten years, adjusted for inflation. This way, he avoids getting fooled when single-year corporate earnings rise and fall with the business cycle.

Although Warren Buffett's and Robert Shiller's valuation methods are entirely different, they both seem to track each other fairly nicely. Knowing what happened in 1929, however, it looks like Robert Shiller's valuation method is slightly better than Warren Buffett's.

Saturday, February 07, 2009

Japan as an example of Keynesian fiscal stimulus

From The New York Times:
Japan’s rural areas have been paved over and filled in with roads, dams and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s. During those nearly two decades, Japan accumulated the largest public debt in the developed world — totaling 180 percent of its $5.5 trillion economy — while failing to generate a convincing recovery.

Now, as the Obama administration embarks on a similar path, proposing to spend more than $820 billion to stimulate the sagging American economy, many economists are taking a fresh look at Japan’s troubled experience. ...

It matters what gets built: Japan spent too much on increasingly wasteful roads and bridges, and not enough in areas like education and social services, which studies show deliver more bang for the buck than infrastructure spending.

“It is not enough just to hire workers to dig holes and then fill them in again,” said Toshihiro Ihori, an economics professor at the University of Tokyo. “One lesson from Japan is that public works get the best results when they create something useful for the future.” ...

In the end, say economists, it was not public works but an expensive cleanup of the debt-ridden banking system, combined with growing exports to China and the United States, that brought a close to Japan’s Lost Decade. This has led many to conclude that spending did little more than sink Japan deeply into debt, leaving an enormous tax burden for future generations.

In the United States, it has also led to calls in Congress, particularly by Republicans, not to repeat the errors of Japan’s failed economic stimulus. ...

Economists tend to divide into two camps on the question of Japan’s infrastructure spending: those, many of them Americans like Mr. Geithner, who think it did not go far enough; and those, many of them Japanese, who think it was a colossal waste. ...

Most Japanese economists have tended to take a bleaker view of their nation’s track record, saying that Japan spent more than enough money, but wasted too much of it on roads to nowhere and other unneeded projects.

How Republicans view the stimulus package


Friday, February 06, 2009

The Republicans' stupid mortgage plan

Republican economist Ed Glaeser says Republicans have a stupid mortgage plan:
It is particularly disappointing to see Senate Minority Leader Mitch McConnell embrace "providing government-backed, 4% fixed mortgages to any credit-worthy borrower" as his alternative to the Barack Obama/Nancy Pelosi stimulus package. ...

Since lenders have recovered their sanity and are once again requiring appropriate down payments, buyers are more constrained by the need to come up with 20% of the purchase price than they are by interest rates. Today's down-payment requirements and low interest rates suggests that mortgage markets are working well and have little need for governmental "help." ...

Subsidizing mortgages is an idea from the New Deal, not the Republican playbook. Fannie Mae and the Federal Housing Administration were set up by liberal Democrats to encourage borrowing. Subsidizing interest rates appealed to big-government interventionists because the expense is kept off federal balance sheets, at least for a while. The true costs of Fannie and Freddie were long shrouded, despite the efforts of some Republican senators. Likewise, the full costs of subsidizing 4% mortgages will appear only over time, as the government is put on the hook for default after default. ...

We are in the ruins of a housing market made worse by subsidized lending. The government has no business egging people on to borrow as much as possible to bet on housing prices. There is plenty of room to criticize the current stimulus plan, but Republicans need to adopt Ronald Reagan or Dwight D. Eisenhower, not Harold Ickes, as their intellectual role model.

The paradox of debt

From Princeton University economist Paul Krugman:
Consumers are pulling back because they’ve realized that they’re too far in debt. The economy is shrinking in large part because consumers are pulling back. And the result, almost surely, is to leave household balance sheets worse than ever. I can’t do this accurately until the Federal Reserve’s flow of funds data have been updated, but almost without question the ratio of household debt to personal income has been rising, not falling, as consumers try to save more.

Thursday, February 05, 2009

Graphs: Home prices falling in Maryland's DC suburbs

Back in September, I posted graphs showing home prices falling in Northern Virginia. Now, here are graphs showing prices finally falling in Maryland's DC suburbs.

Montgomery County, Maryland:

Prince Georges County, Maryland:

Anne Arundel County, Maryland:

Howard County, Maryland:

Frederick County, Maryland:

Charles County, Maryland:

Note that most of these counties were stagnant for two or three years before beginning to decline in 2008.

Source: Zillow.

Update: By request, Calvert County, Maryland:

Luxury homes feeling the pain

CNBC reports that sales of high-end homes are declining faster than most:
For wealthier Americans, the free-fall in stocks is not only ravaging their portfolios—it's taking a huge bite out of the value of their homes.

"The high-end market relies on equities," says Walter Molony, spokesman for the National Association of Realtors. "If stocks are doing well, so too does high-end housing."

Though only 2 percent of the overall housing market, high-end home volume sales have seen a dramatic drop, according to Molony. Homes valued at $750,000 or more plunged a whopping 47 percent in the year ended in November. By comparison, sales of homes valued at $400,000 or less fell by only 3 percent during the same period.

A look at the markets during the same time period ... the S&P shows a 37.5 percent drop in value.

Real estate professionals agree that sliding markets and a ravaged economy are hurting prospective high-end buyers and sellers. And that means prices will likely decline even more before there is any recovery. ...

While equities and the economy are reasons for slower sales, the rise in jumbo loan rates is another, says Greg McBride, Senior Financial Analyst at "More money down is the big reason people aren't taking them out," McBride says. "It takes good credit but you need 30 percent down or more and even those people are paying an interest rate of more than 7 percent." ...

In the past, foreclosure rates have been much lower on jumbo loans in comparison to conforming loans. But jumbo's are a higher risk for lenders, because if the jumbo loan defaults, it's harder to sell a home, especially a luxury home, for its full price.

Republicans vs. Republicans on housing

Republican Michelle Malkin hates Republican Senator Mitch McConnell's proposal to effectively have taxpayers pay people $15,000 each to buy a house.
The problem is too much borrowing, too much artificial inflation of home prices.

On what planet should the Republican/conservative alternative be to encourage more borrowing and to prop up prices so they don’t fall “too much?”

This is more of the same old, same old: Kicking the can down the road. Real change — fiscally repsonsible change — means sucking it up, allowing housing prices to fall, and getting the government out of the home-lending business.
Meanwhile, GMU economist Tyler Cowen says the free money won't do what Senator Mitch McConnell hopes it will do:
The tax credit will subsidize the new buyers without propping up the price of homes. Demand will go up, supply will go up, price will stay more or less on the same trajectory, and banks won't be any healthier.

Wednesday, February 04, 2009

More homes underwater; distress sales mounting

Almost a third of all home sales are foreclosures, REOs, and short sales:
Real estate values around the nation have collapsed, and sales of foreclosed and "underwater" homes now dominate many housing markets, according to a report released Tuesday.

The report, from, a real estate Web site, revealed that with foreclosures soaring, nearly 20% of the nation's home sales in 2008 were of bank-repossessed properties. Another 11% were short sales, in which homeowners owed more in mortgage debt than their homes were worth. ...

"As more markets turn down and markets that were already down go deeper, the pace at which value is being erased from the U.S. housing stock is rapidly increasing," said Stan Humphries, Zillow's vice president in charge of data and analytics.

"More value [was] wiped out in the fourth quarter of 2008 than was eliminated in all of 2007," Humphries said.

About $3.3 trillion in home equity was erased in 2008, with $1.4 trillion of that wipeout coming in the fourth quarter alone, according to Humphries. More than $6 trillion in value has been lost since the market peaked in 2005. ...

In the United States, 17.6% of all homes are now underwater, according to Zillow, as are 41.2% of all mortgages for homes bought in the past five years.

Senator Chris Dodd is still a crook

U.S. Senate Banking Committee Chairman Christopher Dodd got a special deal on mortgages from Countrywide Financial in 2003. Now he's playing games with reporters regarding the issue. From The Wall Street Journal:
Connecticut Senator Chris Dodd has finally, sort of, kind of, ended 193 days of stonewalling about his sweetheart loans from former Countrywide CEO Angelo Mozilo. At least he did if you were a fast reader and were one of the few reporters he invited to his Hartford office yesterday to review — but not copy or take — more than 100 pages of documents related to his 2003 mortgage financings through Countrywide's "Friends of Angelo" program.

These are the files that Mr. Dodd pledged to make public after the news broke last summer that the Chairman of the Senate Banking Committee had received preferential treatment from Countrywide. At first, Mr. Dodd denied everything. Later, he conceded that he'd been given special treatment but thought it was "more of a courtesy."

Heck, we'd all love the kind of courtesy that would have saved Mr. Dodd $75,000 over the life of the two loans he refinanced to the tune of $800,000, according to an analysis by Portfolio magazine. The savings came from rock-bottom interest rates and a free "float-down" — the right to borrow at a lower rate if interest rates fall before you've closed on the loan.

On Monday, with interest rates — even for non-VIPs — near historic lows, Mr. Dodd announced that he would refinance the sweetheart loans with another lender. ...

We don't know whether the documents Mr. Dodd briefly showed yesterday illuminate this mystery or not, because he didn't release them to us, or to the public or his constituents.
Update: I've covered Senator Dodd's "Friends of Angelo" loans in the past here. Wikipedia has details here, here, and here.

Tuesday, February 03, 2009

Reecon Advisort Report

David Lereah, the former chief economist of the National Association of Realtors, has gone independent and created his own company called The Reecon Advisory Report. Recall, Mr. Lereah was a prominent cheerleader of the housing bubble.

The Reecon Advisory Report can by yours for $295 for six months or $495 for a full year. No, I am not endorsing his product.

How can Mr. Lereah be trusted after his dismal record of predicting the real estate market during the bubble years? A much better idea is to read the housing and economic blogs.

Graphs: The U.S. money supply

M2, the broadest measure of the money supply currently tracked by the Federal Reserve:

M1, a narrower measure of the money supply:

M0, the monetary base (currency plus central bank reserves), the portion of the money supply directly controlled by the Federal Reserve:

Monday, February 02, 2009

New homes are being built smaller

These days, a bigger home isn't always a better one: Recent research suggests that homes being built today are getting smaller.

The average size of homes started in the third quarter of 2008 was 2,438 square feet, down from 2,629 square feet in the second quarter, according to the U.S. Census Bureau. Similarly, the median size of homes started in the third quarter was 2,090, down from 2,291. The statistics confirm what the housing industry has suspected for a while. ...

According to the Better Homes and Gardens study, top priorities in a new home include an affordable price, natural light and comfortable family gathering places. The era of super-sizing may be ending, Butler said, with buyers looking for a home that is "right-sized, organized and economized."