Thursday, April 30, 2009

Home vacancies up during first quarter

From Bloomberg:
A record 19.1 million homes stood unoccupied in the first quarter and the U.S. homeownership rate fell as the recession sapped demand for real estate.

The number of vacant homes, including foreclosures, properties for sale and vacation properties, jumped from 18.6 million a year earlier, the U.S. Census Bureau said in a report today. Households that own their own residence declined for the third straight quarter to 67.3 percent.

The U.S. financial crisis and falling home prices have shattered the confidence of homebuyers. The percentage of people who said they plan to buy a home in the next six months dropped to a 26-year low in March, according to the Conference Board in New York. Job losses will continue to erode real estate demand, according to an April 23 report by Mark Fleming, chief economist for First American CoreLogic Inc. in Santa Ana, California.

"We expect home prices to continue to decline into 2010 as economic conditions and excess housing inventories dampen prices," Fleming said in the report. "Decreases are now being driven by rising unemployment and a high volume of distressed home sales."

Wednesday, April 29, 2009

Mortgage cram-downs unlikely to be part of homeowner bailout

Good news from the U.S. Senate:
Legislation to give bankruptcy judges the power to reduce home mortgage debt–by “cramming down” the principal–doesn’t appear to have enough votes and will be stripped out of a broader housing bill in the Senate.

The cram-down effort is a major plank of President Barack Obama’s housing rescue, which also offers financial incentives to mortgage servicers to modify loans and allows some homeowners with little to no equity to refinance. ...

Monday, Dow Jones reported that the Senate will instead vote on the cram-down legislation as an amendment to the rescue bill, with all Republicans opposing the provision together with at least a couple of Democrats.

Elizabeth Warren, who heads a watchdog panel for the Troubled Assets Relief Program, told a financial regulation forum on Monday that failure to include the measure would blunt the Obama administration’s housing recovery efforts.
I wouldn't mind if cram-downs became law for future mortgage contracts, but politicians shouldn't be arbitrarily changing the terms of existing contracts. In the long run, government meddling is harmful to the economy.

U.S. economy still shrinking rapidly

From CNN Money:
The U.S economy shrank at [an annualized] pace of 6.1% in the first quarter — almost as much as it did in the fourth quarter of 2008, according to a government report Wednesday.

The drop was much worse than expected. ... The first quarter decline was the second biggest drop recorded in 26 years, behind only the fourth quarter reading.

Tuesday, April 28, 2009

Case Shiller Price Index February 2009

The Case Shiller Price Index results for February 2009 have been reported. in most of the 20 cities in the index steep prices continue. On a year over year basis (YoY) the price declines have been dramatic in many major metropolitan areas:

  • Chicago: -17.6%
  • Detroit: -23.6%
  • Miami: -29.5%
  • San Francisco: -31.0%
  • Washington: -19.2%
  • Seattle: -15.4%

In Washington, DC prices are down 19.2% from February 2008 till February 2009; and from peak price, prices are down 33%. Expect further prices declines during 2009 in the Washington metropolitan area.

The housing bubble won't be coming back

According to The Business Insider, "house prices may never recover":
House prices will eventually stop falling, probably in about two years. But will they ever recover to the levels we saw during the heights of boom? In some areas, prices might climb that high again. But for most markets, such a recovery will probably never happen, and would take decades it were to occur.
On the whole, I have to agree with this in inflation-adjusted terms. In nominal terms, it will take decades (plural). To make things simple, I will define "never" as within our lifetimes.

Monday, April 27, 2009

NY Times: For Housing Crisis, the End Probably Isn’t Near

From The New York Times:
The glut of foreclosed homes creates a self-reinforcing cycle. Falling prices lead to more foreclosures. Foreclosures lead to an excess supply of homes for sale. The excess supply then leads to further price declines. Jan Hatzius, the chief economist at Goldman Sachs, says that the “massive amount of excess supply” means that home prices nationwide will probably fall an additional 15 percent. ...

They don’t have as far to fall today [compared to a year ago], but the great real estate crash is not over, either. So if you are part of the 30 percent of American households who rent and you’re trying to decide when to buy, relax.
Then entire article is interesting, although their measure of home price to median income seems messed up. They say it is 1.9 in the D.C. area. However, the median house price in the area is just shy of $295,100 and the median condo price is $242,100 according to NAR, while the median household income in the wealthiest jurisdictions is just over $100,000. (Median household incomes: $107,207 in Loudoun County, $105,241 in Fairfax County, $94,876 in Arlington County, $91,835 in Montgomery County, $54,317 in Washington, DC.)

Friday, April 24, 2009

Who is to blame, bankers or economists?

From Slate:
Which profession bears more blame for the global credit meltdown and its ensuing gazillion-dollar bailouts: bankers or economists?

This isn't a trick question.

So far, bankers have been getting most of the opprobrium. ... But they couldn't have created the Dumb Money debacle without a substantial assist from economists. Toiling in government and academia, at trade groups and Wall Street firms, practitioners of the dismal science provided the intellectual ballast and justification for much of the insanity of this past decade. At every step of the way, as an Era of Cheap Money devolved into an Era of Dumb Money and then into an Era of Dumber Money, Ph.D.s led the cheers. And when things started to go bad, they failed to grasp just how bad things would get.

Bankers have clearly suffered more financial damage—they had a lot more to lose. But when it comes to reputation, I think it's a draw.
I primarily blame the economists—not all of them, but many of them. There are many banks, but only one Federal Reserve. The Fed had the ability to stop the bubble. Bankers did not. If banks A, B, and C decided not to jump on the bandwagon, they simply would have seen bank D grow much faster than them. By the time the bubble peaked, bank D would have a much larger share of the economic pie. Countrywide, for example, was minuscule a decade ago. The reason it got big was because it embraced the bubble. Banks that didn't embrace the bubble remained small.

Thursday, April 23, 2009

Housing bubble could have ended in 2003

Economist John Taylor, inventor of the Taylor Rule, has a new book blaming the Federal Reserve for stoking the housing bubble. He says the bubble could have ended in 2003 if the Fed did the right thing:
The crisis that began in 2007 and worsened in 2008 was caused, Taylor says, because the Fed abandoned the [Taylor] rule earlier in the decade. Between 2002 and 2004 interest rates were cut even though the rule required them to be raised. In 2004 and 2005 the gap between the actual and the recommended interest rate was between two and three percentage points. Taylor describes a model simulation in which interest rates followed the Taylor-rule path during this period instead of diverging from it so markedly. The housing boom would have ended in 2003 instead of 2006, he says; house prices and levels of mortgage debt would not have risen so high. In short, monetary policy was the primary cause of the boom and subsequent bust.
We already had a sizable bubble in 2003, but it got much bigger in the following three years.

Wednesday, April 22, 2009

Interesting poll results

Click on the image to see it full-size:

Hat tip: News N Economics.

Why bankers assumed U.S. housing prices couldn't fall

From The Economist:
Alex Pollack reckons finance professionals did believe housing prices could fall, but just not on a national level. The data used to stress test mortgage assets was based on the experience of Texas and other oil-patch states in the 1970s and 80s. It provided an instance of a housing bubble that led to falling house prices. The problem was, since the Depression, house prices had never fallen on a national level. There existed no data that contained a large and positive correlation of home price across different regions and also had prices falling. This is the limitation of historical data; you use the past to predict the future. When you enter a new regime you are left with your own ad-hoc judgement. Rather than take on that sort of responsibility, most prefer to base their assumptions on historical data.
All the bankers had to do was look at Japan.

Tuesday, April 21, 2009

Fed Presidents: Maybe Fed should pop bubbles

It appears that members of the Federal Reserve are beginning to realize that asset bubbles can be dangerous:
San Francisco Federal Reserve President Janet Yellen said late Thursday that central banks need to deal with bubbles in asset prices before they get too big, although monetary policy may not be the best tool for the job.

Letting them go unchecked "can lead to grave consequences," she said in prepared remarks for a conference held in honor of economist Hyman Minsky in New York.

"Episodes of exuberance, like the ones that led to our bond and house-price bubbles, can be time bombs that cause catastrophic damage to the economy when they explode," said Yellen, a voting member this year of the Federal Open Market Committee. ...

"I would not advocate making it a regular practice to use monetary policy to lean against asset-price bubbles," she said. "However, recent experience has made me more open to action."
Boston Fed President Rosengren seems to agree:
[Rosengren] also says the “starting point” for a systemic regulator would be to monitor rapid appreciation of asset classes, financial institutions or financial markets. The first task would be developing “a plausible fundamentals-based explanation of the rapid rise in prices.”

Translation: Spot the bubbles and decide whether to do something about them. In the past, almost every government agency has struggled to deal with the what-to-do-next question. Would a systemic regulator have more success? Mr. Rosengren thinks so.
It's good to see that members of the Federal Reserve are beginning to change their mind on this. They could have acted to prevent our current economic troubles seven years ago or so, but they chose not to and many Americans are now feeling the pain caused by the Fed's inaction.

Bernanke: Long-lasting damage to home prices

From Bloomberg:
Federal Reserve Chairman Ben S. Bernanke said the collapse of U.S. lending will probably cause “long-lasting” damage to home prices, household wealth and borrowers’ credit scores.

“One would be forgiven for concluding that the assumed benefits of financial innovation are not all they were cracked up to be,” the Fed chairman said today in a speech at the central bank’s community affairs conference in Washington. “The damage from this turn in the credit cycle — in terms of lost wealth, lost homes, and blemished credit histories — is likely to be long-lasting.”

Monday, April 20, 2009

Foreclosure filings up substantially

March foreclosure filings are up 46% year-over-year:
Foreclosure activity skyrocketed in March and the first quarter of 2009 to their highest levels on record as banks lifted moratoria on filings.

Total foreclosure filings — which include default papers, auction sale notices and repossessions — reached 803,489 in the first quarter, according to a report released Thursday by RealtyTrac, on online marketer of foreclosed properties. That is a 24% jump over a year earlier and a 9% increase compared to the previous quarter.

Of those filings, 341,180 happened in March — a 17% increase from February and a 46% jump from March 2008.

The March and first quarter numbers were the highest monthly and quarterly totals since RealtyTrac began reporting in January 2005.
In February, several large banks halted forecloses until March, so the surge of foreclosure filings in March is probably a result of this.

Housing starts down during March

Housing starts fell month-over-month in March:
Initial construction of U.S. homes fell more than expected in March, sinking to the second lowest level on record, according to a government report released Thursday.

Housing starts fell to a seasonally adjusted annual rate of 510,000 last month, down nearly 11% from a revised 572,000 in February, according to the Commerce Department. February starts were originally reported at 583,000.

Starts have not been this low since January, when they fell to an annual rate of 477,000, which was the lowest since the government began keeping records in 1959. The March total was below the 540,000 rate economists surveyed by had forecast.

Tuesday, April 14, 2009

Recession over? Not!

The rumors of the recession's death have been greatly exaggerated:
Retail sales in the U.S. unexpectedly fell in March as soaring job losses forced consumers to pull back.

The 1.1 percent decrease followed a 0.3 percent gain in February that was stronger than previously estimated, the Commerce Department said today in Washington. Auto dealers, electronics stores and restaurants led the decline.

Less consumer spending heading into the second quarter means the recession is likely to persist. Incentives and promotions by car dealers and clothing stores such as Gap Inc. failed to draw customers hurt by a lack of credit and the highest jobless rate in 25 years.

Monday, April 13, 2009

Financial Bloggers Gain Recognition Amid Turmoil

CNN: Financial Bloggers Gain Recognition Amid Turmoil.

The quality financial blog such as Calculated Risk, Big Picture, Mish's Global Economic, and the housing bubble blogs were years ahead of the game while the MSM, US Treasury and Wall Street. As someone commented at the Big Picture "these groups could not see the oncoming freight train until it squashed them like a bug on a speeding car windshield." Funny!

Why foreclosure mitigation has been failing

Now we know why government efforts to prevent foreclosures have been having only a temporary effect:
Policies aimed at easing home loan terms for troubled borrowers may not be as effective in preventing foreclosures as more direct aid to homeowners, Federal Reserve economists have found.

Job losses and falling home prices have a bigger effect on delinquencies than mortgage terms, and modifications aren't necessarily a better deal for investors than foreclosures, two current and one former economist at the Boston Fed Bank and one Atlanta Fed researcher say in a paper posted Friday on the Boston Fed's website.

Friday, April 10, 2009

U.S. apartment rents are falling

...because the vacancy rate is increasing:
The vacancy rate for U.S. apartments hit a three-year high in the first quarter and asking rents dropped the most in at least 10 years as the number of excess apartments on the market ballooned, according to real estate research firm Reis Inc.

And the figures are forecast to get even worse as more apartment buildings are expected to open this year, increasing supply, and as the U.S. employment picture gets uglier, Reis said. ...

"Given that things are weakening right now, any new buildings that come on will add additional pressure to landlords," Victor Calanog, Reis director of research, said.

Wednesday, April 08, 2009

Too many Anonymouses

I have changed the blog's settings so only registered users can comment. You can create a Google/Blogger account here. Readers who have an AOL, TypePad, WordPress, or LiveJournal account can use that existing account by selecting "OpenID" when posting their comment.

WSJ article on bubbles

From a very interesting article on bubbles in the Wall Street Journal:
Earlier, during the downturn in the equities market between December 1999 and September 2002, approximately $10 trillion of equity was erased. But a measure of financial system performance, the Keefe, Bruyette, & Woods BKX index of financial firms, fell less than 6% during that period. In the current downturn, the value of residential real estate has fallen by approximately $3 trillion, but the BKX index has now fallen 75% from its peak of January 2007. The financial sector has been devastated in this crisis, whereas it was almost completely unaffected by the downturn in the equities market early in this decade.

How can one crash that wipes out $10 trillion in assets cause no damage to the financial system and another that causes $3 trillion in losses devastate the financial system?

In the equities-market downturn early in this decade, declining assets were held by institutional and individual investors that either owned the assets outright, or held only a small fraction on margin, so losses were absorbed by their owners. In the current crisis, declining housing assets were often, in effect, purchased between 90% and 100% on margin. In some of the cities hit hardest, borrowers who purchased in the low-price tier at the peak of the bubble have seen their home value decline 50% or more. Over the past 18 months as housing prices have fallen, millions of homes became worth less than the loans on them, huge losses have been transmitted to lending institutions, investment banks, investors in mortgage-backed securities, sellers of credit default swaps, and the insurer of last resort, the U.S. Treasury.
Not only were homeowners effectively buying on margin, but banks also effectively lend on margin (i.e. home buyers borrow from bank; bank borrows from depositors or bond investors).

Tuesday, April 07, 2009

Meredith Whitney: Home prices to fall another 30%

Star bank analyst Meredith Whitney has become even more bearish on housing. She now says home prices have fallen 30% since the peak, and will fall another 30%, for a total decline of 50%. (For those of you confused by the math, you should be using multiplication instead of subtraction. 100% x 70% x 70% = 49%)

From CNBC:
[Meredith Whitney] also said she expected home prices to fall another 30 percent, contrary to some predictions that housing may have bottomed.

"Home prices cannot bottom while liquidity is still contracting from the economy," she said.
She discusses housing in the video from the 5:00 mark to 6:15:

Friday, April 03, 2009

Don't trust the Realtors' affordability index

Wise advice from CalculatedRisk regarding the Realtors' affordability index:
Ignore all the affordability nonsense. That just tells you interest rates are low.
The price you pay for a home is far more important than the prevailing mortgage interest rate, yet Realtors would love for you to believe the opposite. In general, low interest rates simply mean there is low expected inflation. (Financial institutions aren't going to lend at 5% annual interest if they expect money to lose purchasing power at 7% annually.)

Imagine buying a $100,000 house under two different scenarios. In the first scenario, you pay 15% interest when inflation will be 12% annually during the duration of the mortgage. Your real interest rate will be 3% (because 15% - 12% = 3%). Sure, the nominal interest rate is high, but your house will also gain value at 12% per year. By the time you pay off your 30-year mortgage, the house will be worth $3 million.

In the second scenario, you pay 5% interest when inflation will be 2% annually during the duration of the mortgage. Your real interest rate will again be 3% (because 5% - 2% = 3%). Sure, the nominal interest rate is low, but your house will only gain value at 2% per year. By the time you pay off your 30-year mortgage, the house will only be worth $181,000.

Right now the Realtors want you to believe that somehow the second scenario is better for buyers than the first, but it is not. What's worse is that the Realtors actually want you to think that in the second scenario you should be willing to pay substantially more for a home than you would in the first. That's salesmanship.

To paraphrase Warren Buffett, "The price you pay determines your (real) rate of return."

Thursday, April 02, 2009

WSJ: Home prices "still no bargain"

Wall Street Journal columnist Brett Arends says home prices still have a long way down:
Homeowners are watching anxiously for any signs of housing market stabilization. So, too, are all those who believe the market may hold the key to the economy.

And yet the most recent data makes for more gloomy reading.

The closely watched Case-Shiller index, which tracks prices across twenty major cities, shows that through January the crash was getting worse, not better. ...

How much further will prices fall across the country? Nobody knows, of course. But history says the bigger the bubble, the bigger the crash.

Those "professionals" in the market continue to be wrong-footed. Early last year I wrote that even though prices in Florida and California had collapsed, those markets were still overvalued. Naturally I was on the receiving end of lots of angry emails from real estate brokers who told me I was an idiot (or worse). Events since then have borne out my analysis. ...

Even today, prices overall have only reverted to levels seen in late 2003. Yet by that stage the bubble was already well inflated. You would expect a crash of this scale to retrace its steps much further. To find pre-bubble prices you have to go back to about 2000 – when values overall were about a third lower than they are today.

It's true that mortgage rates, now at 4.5% to 5%, are currently very low. But relying just on that is far too simplistic. Rates were also low from 2003 through 2005 – as many pointed out, disastrously, at the time. ...

Over the long term, average home prices have tended to track average earnings. And by this measure the market may have much further to fall.

I looked at Case-Shiller's index back to 1987 and compared it to federal data on average earnings. ... By this (admittedly very simple) measure, today's home prices are actually more expensive, in relation to average earnings, than at the peak of the 1989 property bubble.

Equally noteworthy is that when the last property bubble burst, it took about eight years before the market showed really strong signs of revival. This bubble was far, far bigger.

Wednesday, April 01, 2009

Obama to halt foreclosures

President Obama has announced a plan to slow the slide in home prices by suspending all foreclosures for 12 months. This is a really stupid plan. It means irresponsible homeowners could live rent-free for a year.

House prices still plunging in January

The S&P/Case-Shiller 20-City Home Price Index continued to fall rapidly in January:
Home values in 20 major U.S. cities fell at the fastest rate on record in January and are now down a record 19% in the 12 months ending in January, Standard & Poor's reported Tuesday.

The Case-Shiller 20-city home price index fell a record 2.8% in January ...

Prices are down 29% from the peak in mid-2006, according to Case-Shiller. Prices have fallen to September 2003 levels. ...

With prices still falling at a rapid pace, millions of homeowners are finding themselves owing more on their house than it is worth. They cannot sell for what they owe, and they cannot refinance their loan. They cannot borrow against their home to finance their consumption. ...

Here are the price declines in each of the 20 cities over the past year:
Phoenix, down 35%; Las Vegas, down 32.5%; San Francisco, down 32.4%; Miami, down 29.4%; Los Angeles, down 25.8%; San Diego, down 24.9%; Tampa, down 23.3%; Detroit, down 22.6%; Minneapolis, down 20.4%; Washington, down 19.3%; Chicago, down 16.4%: Seattle, down 15%; Atlanta, down 14.3%; Portland, down 14%; New York, down 9.6%; Charlotte, down 8.2%; Boston, down 7.3%; Cleveland, down 5.2%; Denver, down 5.1%; and Dallas, down 4.9%.
From S&P's press release:
"Home prices, which peaked in mid-2006, continued their decline in 2009," says David M. Blitzer, Chairman of the Index committee at Standard & Poor’s. "There are very few bright spots that one can see in the data. Most of the nation appears to remain on a downward path, with all of the 20 metro areas reporting annual declines, and nine of the MSA’s falling more than 20% in the last year."
For the Washington, D.C. metro area, house prices have fallen 31.5% since the peak in May 2006, and are still falling. House prices fell 19.3% year-over-year. Month-over-month, seasonally-adjusted house prices fell 1.6% (a 17.7% annual rate). D.C. metro area house prices are back down to the March 2004 level.